Rising raw material costs and credit crunch threaten TV ad budgets

by Jeremy Lee, Marketing 08-Apr-08, 08:45

LONDON - Are fears that TV adspend will be an inevitable casualty of rising raw material costs well-founded?

Barely a week goes by without another advertiser announcing that the rising cost of raw materials, while artificially lifting sales figures, is adversely affecting their projected profits.

Initially, the problem was limited largely to commodities in the food sector such as wheat, milk and cocoa, and prompted by a perfect storm of increased demand from growing economies such as India and China, a change in their diets, increased use of foodstuffs for biofuels, and poor harvests.

However, the trend has subsequently extended to steel, rubber, plastics and gold. Coupled with rising energy prices, this has meant that few sectors of the economy are no longer affected.

Early evidence is that brands are trying to make up for the shortfall by cutting adspend, despite the IPA's pre-emptive strike against an ad recession through the launch of an initiative -dubbed the Little Book of Growth -showing how advertising has a positive effect on the bottom line, and urging chief executives to be bold.

Anecdotal evidence also suggests that retailers are putting pressure on suppliers to keep costs down to prevent them having to pass on price increases to their customers. In this climate, advertising budgets are among the first to be slashed.

Early figures from media agencies suggest that the TV ad market is set to take a hit of about £100m - a decline of 3% on last year - as buyers scale back their plans for 2008. This contradicts a relatively positive report from the Advertising Association that claimed TV would post modest year-on-year growth. Agencies are not yet sure whether these cuts will spread to other sectors, but a downturn in TV is clearly causing them, and broadcasters, concern.

Martin Sambrook, managing partner at management consultancy Billetts, acknowledges that the advertising industry is going through uncertain times, but says it is too simplistic to ascribe the downturn in TV spend solely to rises in raw material costs in the food sector.

'The evidence from our view of the market, based on 40% of TV budgets, is mixed,' he says. 'Some budgets are down - though for quite varied reasons, other than raw material costs - and many are actually up year on year, even in the food sector. If we are to go through this period of economic uncertainty with a consequential downturn in TV budgets, there are other compelling candidates for cause and effect than raw material costs.'

Sambrook believes the budgets of advertisers in the finance sector will be of greater concern, given its continued losses and the dry-up in the UK mortgage market. He adds that macro-economic factors, such as the 15% depreciation of sterling for those advertisers reporting and budgeting in the eurozone, is also having a downward effect on budgets in all sectors.

So it seems that, ultimately, wider economic issues will decide what happens to budgets. However, if the worst comes to the worst, should it be the TV budget that is cut first? We asked Rupert Howell, managing director, brand and commercial, ITV, and Marco Scognamiglio, chief executive of WWAV Rapp Collins.

Should TV budgets be cut?

Marco Scognamiglio chief executive, WWAV Rapp Collins

Yes

Brands may be reducing TV spend, but I guarantee that their audience and profile targets will not change, so they will continue spending elsewhere. The money is likely to shift into below-the-line media, as it is so targeted.

In what has been called the 'attention economy', where consumers are finding themselves the target of so many different messages, the importance of creating engaging communication has grown.

ith developments in technology, direct marketing is now more targeted and engaging then ever. It also offers endless possibilities for ongoing communication, as it is all about engaging with a brand. We are already seeing evidence of this, and it seems certain we will benefit.

Rupert Howell managing director, brand and commercial, ITV

Research on marketing in a recession shows that cutting TV spend is damaging. The argument is irrefutable, but the reasons that some advertisers still reduce spend are often based on short termism and shareholder ignorance of how marketing works. Sometimes this is induced by the City, because cutting the marketing budget is an obvious way to reduce over-heads, but it costs a fortune to recover afterwards.

Smart businesses recognise that this is no way to manage a brand. Maintaining TV spend gives huge benefit during a down-turn, and pays off when in an upturn. If you have to cut any marketing budget, choose anything but TV, as TV is the best medium for building brands.