Be it oil, houses, pasta or coffee, the cost of living is going up. Some companies plan to cut their ad spend to push costs down – but is this a wise money-saving measure, or a false economy?
Inflation is now running at 30-year highs, forcing companies to either absorb increased costs and reduce their profit margins, or raise their prices. As can be seen from the increase in costs of everyday items, many are opting for the latter, though it’s a risky move for brands when consumer spending is being squeezed.
How marketers are responding to inflation
What should marketers do during periods of economic turmoil? Reducing ad spend is an option, though some view this as detrimental over the long-term. Take Unilever, for example. As inflation hit 5.5% in January, the company behind brands like Marmite, Magnum and Dove committed to maintain its €7bn (about £5.8bn) in global advertising spend as it pushes through price rises.
“We would certainly not trim BMI [brand marketing investment] if we felt that it was going to compromise the health of our brands,” chief executive Alan Jope told investors. Procter & Gamble – which makes products like Ariel, Gillette and Pampers – is also maintaining its $8.2bn (around £6.2bn) worldwide ad spend as it increases the price of some products.
However, coffee chain Starbucks takes a different view. It’s raising the price of many of its products despite a 31% rise in profits for the last three months of 2021, saying its profit margins are under pressure from the effects of rising costs. It will reduce advertising and marketing spend this year in response.
Advertisers will have to adapt their approach to maintain return on investment for their marketing
City analyst Ian Whittaker works as a consultant at outdoor ad company JCDecaux. He thinks the right strategy is to invest. Brands need to trumpet their quality credentials and set out to persuade people to pay extra for products rather than switch to cheaper, own-label alternatives, he argues. Those that shrink pack sizes will need to restate their appeal with bigger, bolder advertising campaigns.
“If you look across the board at companies, they are trying to push through significant price increases at the moment, in some cases quite healthy double-digit increases,” he says. “In order to get those price increases through, you have to persuade consumers of the need to buy your particular product.”
Why rising competition should make brands nervous
The rise of new competitors – often digital – should also make companies wary of cutting their ad spend. From food delivery brands like Getir and Gorillas to home delivery meal kits, internet pharmacies and online used car sellers, these startups are investing heavily in advertising, forcing incumbents in a range of sectors to hit back with their own campaigns.
A powerful example of the inflationary effect is the UK’s used car market, where prices rose 28% in the first 11 months of 2021, the highest in Europe, according to INDICATA. Used cars are in high demand as new car production falls due to a shortage of semiconductors. This has driven strong sales at online second-hand car brands like Cazoo and Cinch, which have been heavy advertisers over the past year.
Lucas Bergmans, brand marketing director at Cazoo, says inflation hasn’t impacted the company’s advertising strategy in the short term and that demand for used cars is strong, despite rising prices. “We are a disruptive brand looking to transform how people buy cars, so our messaging focuses on explaining the benefits of buying online from Cazoo rather than focusing on price,” he says.
However, he worries the inflationary environment could damage consumer confidence and make life tough for advertisers. “If inflation is here to stay, both in terms of consumer prices and media, we could see reduced consumer demand and higher prices for advertisers to reach smaller audiences,” he says. “Advertisers will have to adapt their approach to maintain return on investment for their marketing, both in terms of what channels they invest in and how they evolve their messaging and overall offering.”
Is the advertising industry really in trouble?
The outlook for advertising spending in the coming years is strong, according to forecasts by media agency Zenith. The company forecasts a 6.3% rise in UK ad spend to a record £29.5bn in 2022, following a 26.2% rise last year and a 3.2% decline in 2020. By 2024, total ad spend is predicted to reach £32.4bn.
If you can’t spend more then the answer is to invest better in the features of your brand that really cut through
This is partly down to startup brands advertising heavily, says Zenith head of forecasting Jonathan Barnard. It’s also due to the switch to digital marketing, which requires brands to advertise throughout the customer journey, influencing research and consideration, as well as final purchase.
This heightened interest in advertising is leading to media price inflation, making it more expensive to advertise. For example, airtime prices are rising for commercial TV (up by 5% according to Zenith) despite a drop in viewers, making it costlier to reach the same number of eyeballs.
How to make ad budgets go further
One response is simply to spend more, says Charles Vallance, chairman and founding partner of the advertising agency VCCP. But if that isn’t an option, there are more creative ways to make your advertising spend work hard.
“If you can’t spend more then the answer is to invest better in the features of your brand that really cut through,” he says. He calls these features distinctive brand assets (DBAs) and says they are “marketing’s new gold standard”.
DBAs can be graphic, such as the blue and bubbles of O2. They could be linguistic, as with Compare the Market’s ‘Simple’s’ line or a jingle like McDonald’s I’m lovin’ it. They could also include a brand mascot like Kellogg’s Tony the Tiger or spokespeople such as Gary Lineker for Walkers Crisps.
“They ensure true productivity of investment,” says Vallance. “Without them, even if you spend tens of millions, all your brand will leave behind is a trail of communication rubble. With them, you’ll build a communication wall, even if your budgets are modest or threatened by inflation.”
Creating these powerful advertising symbols enables brands to cut through the clutter of media saturation and promote their quality credentials in a world of rising prices.
Previous eras of high inflation during the 1970s and 1980s were considered a golden age for advertising, with exciting product launches, audiences eager to receive new messages and an economy buoyed by rising wages. With today’s inflationary environment, combined with the promise of digital media, the expansion of online startups and a renewed creative focus, the building blocks could be in place for a new golden age.
Be it oil, houses, pasta or coffee, the cost of living is going up. Some companies plan to cut their ad spend to push costs down – but is this a wise money-saving measure, or a false economy?
Inflation is now running at 30-year highs, forcing companies to either absorb increased costs and reduce their profit margins, or raise their prices. As can be seen from the increase in costs of everyday items, many are opting for the latter, though it’s a risky move for brands when consumer spending is being squeezed.
