The results are in on the UK’s landmark EU Referendum. Article 50 may not yet have been triggered, but all signs point to a long period of instability and uncertainty for the UK.
With both the FTSE and the Sterling falling considerably, the banks have been hit badly and the impact has been felt across the global market. Goldman Sachs economists Hatzius and Sven Jari Stehn wrote in a note for clients that the UK is predicted to have a mild recession in 2017, with risks of deteriorated trade terms, scaled back investment, and tightened financial conditions.
Plenty of doom. But what does it mean for the advertising industry and brands investing in campaigns?
This crisis is unlikely to impact advertising immediately, or at the levels seen during the 2008 financial crash; but now is a time when advertisers will be closely assessing budgets and potentially putting delays on their investment.
Sir Martin Sorrell’s response reinforces that sentiment. He said: “The resulting uncertainty, which will be considerable, will obviously slow decision-making and deter activity.”
Following a Brexit, the UK will have to re-negotiate a trade deal with the EU, potentially changing procedures, and the EU could impose tariffs on goods being exported from the UK. These tariffs, combined with a fall in the value of the Sterling, could have a heavy impact on manufacturers and retailers in the short to medium term. Any rise in the cost of goods and food prices would then hit an already fragile consumer confidence and reduce spending.
- UK economic instability and potential recession;
- Advertisers reviewing budgets and delaying investments;
- Potential increase in cost of goods and reduction in consumer spending.
These risks are likely to influence any advertiser’s outlook and decision-making when it comes to setting budgets and making further investments. However, research has shown that cutting advertising during a recession can significantly damage a brand and market share.
A study by Stephen King found that advertisers who cut their spending lost an average of 0.1% of the total market, while those that made a significant increase in advertising spend saw their market share rise by an average of 0.5%: “Businesses yielding to the natural inclination to cut spending in an effort to increase profits in a recession find that it doesn't work." - Stephen King, The Center for Research & Development, 1990
Drop in ROI?
With that in mind, is it time for advertisers to invest? In the short term, PIMS data reveals that an aggressive increase in advertising is associated with a drop in ROI of 2.7%.
However, there is still potential to increase ROI. During a recession, media owners will generally lower their costs faster than any drop in sales. Meanwhile, lowered investment in ad tech companies is likely to force them to offer their technologies and services at a lower cost. Programmatic for example would then see a reduction in inventory and technology costs, greatly increasing ROI for advertisers.
Ultimately, this a perfect time to reassign any budgets which have been cut from other channels into higher ROI opportunities, and away from lower and more difficult to measure channels.
eMarketer research has shown that UK programmatic digital display ad spending will grow by 66.2% to reach £1.80 billion in 2016, accounting for more than half (59.0%) of the UK display advertising market for the first time.
Focus on Consumers
During Q1 and Q2 of the 2008 crash, UK households reduced non-essential purchases by nearly 9% - Office for National Statistics. When consumer confidence is low businesses must focus on developing loyalty as well as delivering value.
Value can be communicated by ensuring that advertising is personalised, delivered to the right audience, and with relevance. An Infosys study found that 78% of UK consumers would be more likely to buy from retailers if they were served with targeted, relevant offers.
Where traditional channels such as print, radio, and TV offer only limited opportunities to measure consumer engagement, social media is an example of a channel that allows advertisers to both measure and build engagement with their consumers, connecting, and further developing loyalty.
By combining personalisation and new measures of consumer engagement, businesses can build high levels of trust and confidence in their consumers.
- Increasing advertising spending during a recession can increase market share;
- Lower media costs, and new technologies present higher ROI opportunities;
- Combine personalisation and new measures of consumer engagement to build high levels of trust and confidence with consumers.
A Brexit presents risks to the economy, consumers, and the advertising industry. Advertisers and agencies should look for and exploit the resulting opportunities and always look to gain market share in a time of uncertainty.