Digital media continues to put the squeeze on ad spending

250817 digital deflation

Digital media continues to put the squeeze on ad spending

As traditional media users and advertising spending shift to digital platforms, it’s causing advertising budgets to shrink. This effect has been called digital deflation. And it’s causing massive headaches for traditional media, advertising  and marketing businesses worldwide.

Just look at the experience of WPP – the world’s leading advertising and marketing services company, with US$18 billion of revenue – which cut its 2017 guidance for the second time this year.  Revenue growth is now expected to be non-existent and the trajectory may be deteriorating with July 2017 “like-for-like” net sales falling by 2.6 percent.  2017 is on track for its worst result for WPP in terms of “revenue growth” since 2009, when it declined by 8 percent during the depth of the GFC.

WPP’s share price is off by 26 percent from GBP19 to GBP14 in the past six months.

Owner of hundreds of businesses including Ogilvy & Mather, J Walter Thompson, Young & Rubicam, Grey Global Group and Hill &Knowlton, WPP has good transparency on the state of the world economy via the breadth of its clientele.  Founder, Sir Martin Sorrell, commented on the pressure from client spending, “particularly in the fast-moving consumer goods or packaged goods sector”.

Proctor & Gamble, Nestle, Unilever and Anheuser-Busch are putting additional pressure on advertising and marketing service firms to reduce the fees they pay for their services.  In the world of digital deflation and the growing dominance of Amazon, these large clients have relatively less pricing power in the developed economy markets and their marketing and procurement departments are very focused on costs.

WPP singled out a decline in advertising spending on items such as laundry detergent and toothpaste and Unilever said in its June half-year earnings report that it plans a “step up” in brand and marketing investment in the December half-year.  Earlier this year, the company said it planned to cut the number of advertisements it created by 30 percent and reduce the number of creative agencies it works with by half to 1,500.

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Chief Executive Officer of Montgomery Investment Management, David has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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2 Comments

  1. Hi David and Roger,

    Do you see the digital media influence negatively affecting the outlook for the likes of APN Outdoor (APO) that operate in the semi digital space? You have previously been cautiously positive on the likes of APO, but the market continues to punish them for the second earnings season in a row.

    Regards,

    James

    • Hi James, I believe the most negative influence on Outdoor advertising in the foreseeable future is the ramp up of capacity from each of the competitors which will likely pressure yields. Accordingly, we exited APO some months ago. The trend for advertising dollars to move away print media and free to air television to semi-digital and digital will take longer to play out.

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