NewsLine Column: Behind The Bellwether

The marketing recovery continued apace during the third quarter of this year despite high oil prices, rising interest rates and economic worries. Christopher Williamson, economist at NTC Research and author of the IPA’s latest Bellwether Report, takes a look at what lies in store for advertisers over the coming months…

The Q3 2004 Bellwether report suggests that UK advertising and marketing spend continues to rise. In fact, 2004 is turning out to be the best year for the industry since the dot-com boom years.

At the start of 2004, marketing budgets were set higher than 2003 on average. However, such an initial increase had been seen in each of the previous three years, only to be whittled away as budgets were steadily revised down as each year progressed. As a result, in each of the past three years, actual spend at the end of each year came in below the growth that had been heralded at the start of the year. In the case of media adspend, the situation was even worse, with initial increases in budgets turning to contractions in spend (with the exception of a modest rise in 2003).

So far, 2004 appears to be different. The initial buoyant budget setting at the start of the year has been revised up, not down as in the previous three years. Furthermore, in Q3, the magnitude of the revision was even slightly greater than that seen in Q2. Even media adspend budgets were revised up for the third successive quarter in Q3, pointing to the longest period of improved confidence among advertisers since the survey began at the start of 2000.

In this respect, the Bellwether survey findings sit well against other data that are available for the industry. According to the Advertising Association’s latest quarterly survey, for example, the latest available data for which shows media adspend growth up to Q2, advertising spend in the main media in real terms (i.e. after allowing for inflation) rose 5.1% on a year ago, which was the fastest rate of growth since 2000 (see www.warc.com).

The acceleration in adspend growth, as indicated by both the Bellwether and Advertising Association data, is being driven by buoyant corporate profits, which have a close historical link to marketing spend. UK profitability in Q2 was the highest for five years, boosted by still strong consumer spending and export-led growth of manufactured goods.

Will such strong growth in profits, and therefore marketing spend, persist? Probably not. High oil prices – crude oil costs have increased by over 50% so far this year – are likely to spoil the party. Costs have risen sharply in energy dependent sectors (including manufacturing – which is already showing signs of cutting back on marketing spend – and transport). But, at the same time, global demand for goods and services has started to cool (illustrated well by the Purchasing Managers Surveys – see www.ntc-research.com). This means that, rather than being able to pass higher costs onto customers in the form of higher prices, companies are having to offer discounts and other sales incentives to stimulate sales.

Profitability is therefore likely to have slipped in the second half of 2004 and growth of advertising spend will probably ease too. The Q3 Bellwether survey in fact already showed signs of this occurring, with media adspend budgets revised up to a lesser extent than in Q2, and to a lesser extent than sales promotion budgets.

For further information about the Bellwether survey please visit www.warc.com/bellwether.

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