NewsLine Column: Bellwether Signals Bounce Back?

As the outlook finally begins to improve for UK advertisers, Christopher Williamson, economist at NTC Research, digests the findings of the IPA’s latest Bellwether Report and discusses what lies in store for the industry over the coming year…

The latest Bellwether report from the IPA shows a rising tide of corporate optimism, which is in turn set to feed through to increased marketing and advertising expenditure.

The survey, which is based on a 250-strong panel of the country’s top advertisers, found that companies setting new budgets for marketing spend in 2004 were raising their spend on 2003 levels on average. Moreover, the anticipated increase was higher that signalled a year ago.

The data are valuable as being forward looking, but budgets can of course be revised down as the year proceeds, as was the case last year. New budget setting at the start of last year was buoyant, as companies looked forward to a short and successful Iraq war with a subsequent rapid improvement in consumer and business confidence.

While the war was certainly short (and successful from at least some perspectives), the “Baghdad Bounce” after the war was a longer time coming than many had anticipated. This meant that marketing budgets were revised down as sales and revenue growth disappointed. Although the latest Bellwether report shows that marketing spend rose last year, the increase was less marked than data at the start of the year suggested it would be.

The same could therefore apply for 2004, with unforeseen events causing a down-grade to an initial buoyant outlook for budgeted marketing spend. However, some important differences exist between now and a year ago, which suggest that downward revisions to budgets are less likely than a year ago.

First, the latest Bellwether showed that current marketing budgets were revised up in Q4 to the greatest extent since the survey began four years ago, boding well for future quarters.

Second, the geopolitical environment is far more stable than it was a year ago.

Third, and perhaps most convincingly, new budget setting a year ago appears to have reflected expectations of accelerating sales growth after the Iraq war, not the hard reality of good recent sales performance. The current picture appears to be quite different. In particular, corporate profitability, changes in which are a key advance indicator of changes in advertising expenditure, rose in the third quarter of 2003 at the fastest rate for four years.

Profits were driven principally by rising sales, as shown by the highly regarded JP Morgan Global Purchasing Managers’ Index, which shows that global manufacturing and service sector order books are growing at the fastest pace for five-and-a-half years.

Meanwhile, a second important indicator of future adspend, consumer spending, continues to hold up well and, according to City analysts, is expected to rise further over the coming year. Citibank economist Michael Saunders, for example, estimates that personal wealth rose by 10% last year, up from just 1% in 2002.

The improved outlook for marketing spend signalled by the Bellwether therefore appears to be based on more solid foundations than a year ago, having occurred after companies have felt some confidence that sales and profits have at last assumed an upward trend, rather than just in the expectation of such growth.

The Bellwether data also highlight an important trend in the pattern of spend between marketing activities which further encourages the expectation that marketing spend has finally turned the corner. The fourth quarter survey showed that growth of marketing spend has shifted away from sales promotions and price discounting – activities which saw an increased share of spend over the previous two years and which tend to grow in popularity during a downturn as companies strive to maintain sales levels – towards advertising in the main media, such as TV and press.

This switch reflects the growing number of companies found to have been planning new product launches and embarking on aggressive marketing campaigns in the latest survey, behaviour which is consistent with a period of expansion following recent profits growth and an optimistic economic outlook. Viewed overall, the data suggest that marketing and advertising spend may see the best year since the bursting of the dotcom bubble.

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