Generation Media's Thomas Jameson talks us through the concerns, the stats and the early conclusions we can draw as the UK's toy ad market awaits the Brexit fall-out.
The result of the EU referendum on June 24th shocked financial markets.
The FTSE 250 index fell by almost 14 per cent. Sterling lost around 10 per cent of its value over the following two days of trading and has continued to plummet; reaching a six year low against the Euro in October, and a 31-year low against the dollar in the same month.
GfK, Germany’s largest market research institute, saw the core index of consumer confidence fall eight points to -9.
That said, the short term effect to date has been somewhat negligible.
Five months on, the economy is performing better than had been previously predicted. There has been a rebound in consumer confidence post Brexit. Monitors have found that September saw a six point increase; restoring the Index to pre-Brexit levels. The UK unemployment rate fell to 4.8 % in the three months to September – the lowest level since 2005, while UK retail sales increased at their fastest annual rate in 14 years in October.
But is this set to change?
Inflation has begun to seep back into the economy, rising to 1 per cent in September, up from 0.6 per cent in August. Although at low levels, any increase over c. 2 per cent will see real wages fall. The Consumer Price Index, a measure of inflation, is likely to hit 3 per cent in 2017.
More disturbingly, the higher inflation coupled with lower wage growth has led the Institute for Fiscal Studies to say that real wages would be below their 2008 level in 2021 – the so called ‘lost decade’.
One of the most notable effects of Brexit will be its influence on currency markets. This impacts all businesses and their bottom line and in turn will begin to impact the cost of goods in retail. A recent example of this can be seen through the Unilever and Tesco Price war in which Unilever increased prices by 10 per cent on a number of familiar household goods to recoup such losses.
Although not explicit stated as a consequence of Brexit, Mondelez International has increased the space between the peaks on its Toblerone bars as a cost-saving measure.
This trend is set to continue into 2017 with manufacturers and distributers looking to offset their increased costs from 2016 forward at the till point. Any such increase in price directly hits the consumer and those on lower incomes are the first to feel the effect, reducing their disposable incomes.
But what does this mean for marketing and toys?
With vast quantities of toy and games products being produced overseas, it is not unreasonable to expect that this industry will be hit by the increases in cost of sales.
Budgetary pressures will also result in a review of internal costs resulting in potential reviews and cuts to marketing expenditure. Retail price increases combined with reductions in ad spend could be a potentially volatile mix.
Looking back at the last recession we noted the toy industry was somewhat protected from household expenditure cuts, with parents going without before allowing the effect to be felt by their children. We therefore saw advertisers who maintained and increase spend benefiting from a deflated advertising market within which they built sustainable brands and drove sales, the effects of which they benefitted from over a prolonged period beyond the market stabilising.
This is backed up by the IPA report, ‘Learnings for the next recession,’ which emphasises this need for brands to, ‘reinforce the emotional bond with the consumer.’ (IPA, 2010).The idea of ‘heritage’ and nostalgia was a key theme back in late 2008 and 2009, seen through many campaigns involving Guinness, Colgate, Milky Bar etc. either by rebroadcasting old ads or relaunching old products.
Successful brands also demonstrated value in the recession without compromising their premium brand values. Examples can be seen with Waitrose launching their ‘essential range.’
With the kids commercial TV market seeing no slowdown in 2016 in terms of demand and current forecasts for 2017 showing another potential rise we do not currently predict a reduction in ad spend for this category.
It begs the question, what effect have we seen in the general advertising market place in 2016?
Since the decision to leave the EU, reports have suggested that the UK is set to continue to experience strong spend growth. The Advertising Association and Warc collaborative, ‘Advertising Expenditure Report’ was released in late October for Q2 data.
The original total growth forecast for 2016 has been revised up to 5.2 per cent. Growth is skewed depending on the type of media. Significantly, however there has been a 0.5 percentage point downgrade in its 2017 forecast.
The short term effect has been exiguous. This in spite of the uncertainty created by Brexit; which has since been exacerbated by the election of Donald Trump in the US.
Although the full data for 2016 won’t be available until April 2017, TV advertising spend is still projected to exceed 2015 levels by 2.4 per cent (however this has been forecast downwards from 3.6 per cent). It does have to be noted that within this broadcaster VOD is projected to grow by over 17 per cent while spot advertising sees a more modest projection of 1.5 per cent growth.
Digital marketing is forecast to be the least affected medium in terms of ad spend, with double digit percentage growth expected for 2016. Mobile sees the biggest growth sector; 45.6 per cent for 2016. Investigating the Radio market, there has been a downgrade to 1.6 per cent for 2016 and 0.8 per cent 2017 respectively.
Examining the impact on Cinema advertising spend, there is still growth projected of 3.5 per cent. National, regional and magazines all saw a yoy reduction in ad spend from 2014 to 2015; the only mediums to register a fall. This is set to continue for 2016.
The recent release of ITV’s latest trading results, in which they have announced that Q4 advertising revenues will be down 7 per cent YoY, contributing to a full year decline of 3 per cent could be an indicator of things to come.
So, what do we forecast for 2017?
Looking to 2017 all major media have projected ad spend growth bar press: TV (2.6 per cent), Digital (9.5 per cent), Cinema (2.6 per cent) and radio (0.8 per cent) (Warc 2016). The majority of growth is heavily fuelled by digital advertising, more traditional media owners may continue to experience tough market conditions. Total UK ad spend is forecast to grow 3.3 per cent.
The IPA’s quarterly Bellwether survey released in October, showed that around 13 per cent of marketers increased spend during Q3 of 2016, but around 12 per cent revealed they were pessimistic over the future.
This sums up the short term vs long term incongruity within the industry and indeed the wider economy at present. Beyond 2017, Bellwether is projecting growth of 0.2 per cent in ad spend for 2018 with more substantial growth expected to return in 2019 (+2.4 per cent) and 2020 (+2.7 per cent).
We must also remember that Brexit itself, of course, is still to come and the full impact of the decision to leave the EU on the advertising industry and indeed the economy as a whole will remain to be seen. Perhaps the consequences of Brexit will not start to be felt until well into 2017, even early 2018.
The past tells us that the health of the advertising industry is linked to that of the overall economy. Tellingly, the International Monetary Fund has revised down its growth expectations for the UK economy in 2017 to 1.1 per cent. Of course any growth projections are heavily influenced by new data and events and so could change significantly.
With that said, what can we conclude?
Brexit had a profound effect on the economy and consumer confidence in its immediate aftermath. Almost six months on however there is no current indication that either an economic or advertising recession is looming.
Uncertainty has led to revised projections of ad spend figures for Q4 2016 and beyond. However there is still growth projected as a whole for the ad sector.
Advertisers are at a key juncture in budget setting for 2017 and it is yet to be seen if they will invest in the short term for long term gain or allow internal budgetary pressure to force them to pull back.
Experience has proven those brands/products who choose to maintain and increase investments reap the rewards both in the short and long term; increasing market share and gaining consumer trust and loyalty.