MASTERCLASSING

IPA Bellwether Report - budgets still in decline but the trend is softening

David Murphy

The latest IPA Bellwether Report, published today, contains some cheer for advertisers and economists. For while it reveals a further decline in UK marketing budgets in the opening quarter of 2021, as Coronavirus lockdown restrictions continued to hinder economic activity and businesses looked to reduce costs. the downward trend softened for the third quarter in a row, in a sign that business conditions were beginning to stabilise after a year of turmoil in 2020.

A net balance of -11.5 per cent of panellists reported a contraction in total marketing budgets during the first quarter of 2021. Although the rate of decline remained historically marked, it eased substantially from the final quarter of 2020’s net balance of -24 per cent). Overall, just over a quarter (25.7 per cent) of surveyed businesses saw a decrease in available ad spend in the latest survey period, while 14.2 per cent recorded an increase.

Unsurprisingly, restrictions related to COVID-19 continued to act as the main drag on marketing budgets, according to anecdotal evidence. Amid softer demand conditions and ongoing closures in some sectors, businesses mentioned cost-cutting programmes which had weighed on ad spending in the latest survey period.

Budget decline
Each of the seven monitored marketing categories saw a further decline in budgets at the start 2021, the sharpest of which was seen in Events. Although the net balance of firms reporting a contraction eased to -43.2 per cent from -62.9 per cent at the end of last year, the pace of reduction was among the quickest ever recorded.

Cuts to budgets were also seen in Market Research (net balance of -17.8 per cent, up from -25 per cent in 2020 Q4); Sales Promotions (-16.2 per cent, from -26.5 per cent); Other (-14.7 per cent, from 29.6 per cent); Direct Marketing (-11.8 per cent, from -13.9 per cent); Main Media (-8.2 per cent, from -21.8 per cent); and Public Relations (-8 per cent, from -8.5 per cent). Underlying data for Main Media indicated that the decline in this category was driven by lower budgets for Out of Home advertising (net balance of -24.1 per cent, from -36.7 per cent in 2020 Q4), Published Brands (-22.2 per cent, from -29.0 per cent) and Audio (-9.0 per cent, from -21.6 per cent). At the same time, Other Online spending budgets stabilised (0.0 per cent, from +0.7 per cent), while Video ad spending returned to growth in the first quarter (+3.3 per cent, from -3.5 per cent).)

Looking forward
Forward looking data regarding ad spending in 2021/2022 suggests that budgets could recover in the next financial year. A net balance of +17.4 per cent of firms expect their total marketing budgets to increase over the next 12 months. This signals the strongest growth expectations for ad spending since 2018, with the latest figure having been upwardly revised from a preliminary estimate of +12 per cent in the previous report.

Of the seven broad marketing categories, expectations for the coming year remain strongest in Main Media Advertising, where a net balance of +10.1 per cent of firms anticipate higher expenditure. Marketing executives also anticipate a rise in budgets related to Public Relations (net balance of +7.4 per cent) and Direct Marketing (+6.8 per cent), while expectations were neutral regarding Sales Promotions (0 per cent). The other three types of marketing were forecast to experience further cuts, with the sharpest reduction expected in Events (-28.4 per cent), followed by Other marketing (-5.4 per cent) and Market Research (-4.9 per cent) respectively.

Financial prospects improving
Both industry-wide and own-company financial prospects improved significantly in the opening quarter of 2021, following a year of subdued expectations during 2020.

Bellwether panellists were optimistic regarding industry-wide financial prospects for the first time since the end of 2015 in the latest survey period. In fact, the net balance of firms that were more confident than three months ago was +26.2 per cent, up sharply from -5.8 per cent in the fourth quarter of 2020, and the highest since the start of 2015. Overall, 41.2 per cent of firms were more optimistic on industry-wide financial prospects compared to three months ago, while only 15.0 per cent were less so.

When questioned on own-company financial prospects, panellists were also more upbeat than three months ago. The result followed the first positive reading for a year in the final quarter of 2020. In the first quarter of this year, the degree of confidence strengthened markedly, with a net balance of +36.6 per cent of firms more confident of an improvement in their own financial prospects. This marked the strongest level of optimism for six years, with almost four times as many companies reporting improved sentiment compared to those recording a deterioration (+49.5 per cent versus 12.9 per cent).

Recovery set to gather pace 
With COVID-19 restrictions having been in place throughout much of the year, Bellwether author IHS Markit forecasts a -9.9 per cent contraction in UK GDP for 2020. The sharp downturn in activity was predominantly driven by severe economic disruption in the second quarter of the year, when the lockdown restrictions caused many firms to temporarily close.

Although the reopening of businesses during the summer months provided a boost to GDP in the third quarter, this was not enough to offset the earlier decline. Consumer spending and business investment are estimated to have fallen by -11  per cent and -8.7 per cent for the year as a whole. These figures point to a decline of approximately -15.7 per cent in ad spending during 2020.

However, amid the ongoing rollout of COVID-19 vaccines and the planned relaxation of UK restrictions later this year, the outlook is set to improve. IHS Markit expects a +3.7 per cent expansion of GDP in 2021, followed by an even quicker rise of +5.8 per cent in 2022. Assuming that the economic recovery progresses as expected, it foresees a 3.5 per cent increase in ad spend during 2021, followed by a further acceleration to +6.9 per cent in 2022, before stabilising nearer the long-run trend. The principle downside risks to these forecasts include the emergence of new vaccine-resistant strains of the virus and the delay of vaccine rollouts in other countries that act as key trading partners to the UK, such as those in continental Europe.

“Although marketing budgets continued to decline at a marked pace amid ongoing COVID-19 restrictions, it was positive to see a further trend towards stabilisation,” said Eliot Kerr, Economist at IHS Markit and author of the report. “Meanwhile, upbeat forecasts from UK marketers for the coming financial year, after the marked reduction in budgets through 2020, bolsters expectations for a post-pandemic recovery and bodes well for the UK economy. Without a doubt, the improvement in budget plans from the previous survey period will have been supported by the release of the UK governments roadmap to relaxing restrictions. It has allowed businesses to look beyond the current climate and begin to build towards a time when demand will recover. If all goes to plan, a strong economic recovery should see adspending rise sharply in the second half of the year.”

IPA Director General Paul Bainsfair noted that with almost three quarters of UK companies either revising their marketing budgets upwards or keeping them the same this quarter versus last, the trajectory is moving in a positive direction and at a good pace. “As the nation comes out of lockdown consumers will be actively seeking out new products, experiences and entertainment, for which it will be more important than ever for companies to build and rebuild their brand awareness,” he said.