Despite Brexit, Ad Spend Keeps Growing, But Companies Must Still Future-Proof Themselves

If the daily headlines serve as a snapshot of the current economic and political landscape, one could be forgiven for thinking that we are living through rather dark times. The UK’s referendum vote to leave the European Union shook the country and stunned financial markets, consequently causing the value of the pound to plummet. The shock had knock-on effects in all areas of the economy, particularly for those businesses that relied on a strong pound for keeping the cost of imported raw materials low (Johnston Press reported that the fall hiked the cost of imported paper and ink, for example). As Christopher Vogt, co-founder and managing director of working capital solution for digital media companies, BillFront, explains to ExchangeWire, the advertising and media industry as a whole is one which appears to be far from struggling, or downbeat in its outlook, as we head into 2017.

According to the Advertising Association’s bellwether WARC report, total UK advertising spend in the third quarter of 2016, the quarter immediately following the referendum vote, actually grew by 4.2%, versus the previous year. Annualised spend is expected to have grown by around the same proportion.

Against the current tumultuous backdrop, this is very welcome and heartening news. After all, the UK advertising industry contributes £120.4bn to GDP and helps support some 555,000 jobs, according to a report from Credos and Deloitte.

Although the above data was compiled in the early days after the vote, with many commentators saying that it is still too early to make a clear judgement on what Brexit’s effects will be and the ramifications that it will have for the UK economy in the longer term, there are some clear indicators for why confidence in the industry remains strong.

Firstly, is the ongoing level of growth seen within digital channels. Q3 internet ad spend grew by 15.3% year-on-year, predominantly driven by mobile growth, which clocked in at an impressive 45.6%. Growth rates such as this are akin to those seen during the early years of the internet boom. Mobile and video channels in particular continue to fuel greater investment from brands, as well as established staples, like TV, where spend levels remain strong with no indication of a slowdown.

Secondly, there has been no notable slowdown in the rate at which companies are seeking new hires. Economic shocks and downturns are often characterised by companies pulling back on expanding their workforce, with the existing headcount often contracting. However, early indications would intimate that the media industry remains bullish in its outlook and that companies are continuing to expand their teams to help them better service the market.

However, this isn’t to say that there couldn’t be some possible bumps down the road. The uncertainty of what Brexit looks like and how this will play out in reality is still anyone’s guess. In a recent optimism survey by Credos and Deloitte, only 23% of business owners polled said they saw an opportunity in Brexit, and that the uncertainty has given rise to a significant challenge from a planning and strategy perspective.

One of the key challenges is that, whilst the macro momentum of advertising spend will continue to be pulled forward by digital evolution and the general pioneering spirit of the industry as a whole, the experience on the ground can translate rather differently.

Before that money can be finally booked, it has to be received. Whilst companies with steady cashflow and available capital will be able to respond more easily and readily to unexpected events, others may find themselves hampered.

For example, when Japan experienced stagflation in the 1990s, and when a number of the West’s major economies came close to collapse in the midst of the 2008-9 financial crisis, many companies pulled back their advertising spend. The consequences for spend recipients in the media value chain in this scenario is a rapid and ongoing contraction in the expected amounts that they can expect to book ahead, regardless of the position they occupy on a brand’s plan.

This is a particularly acute problem in advertising and media. Our industry is notorious for working with deleteriously long payment terms. Agencies, and the brands that they represent, typically lay down 90-100-day windows for the payment of inventory and services. For a large publisher, ad network, or DSP with an adequate capital buffer, terms of that duration (although certainly less than ideal) can be managed from a working capital perspective. However, for smaller and emerging outfits that are reliant on a relatively liquid flow of cash to fuel their growth and development, terms of this duration can often have a significant effect on the company’s future trajectory. Many take on dilutionary equity financing (although equity money for ad tech seems in short supply at the moment) or expensive debt financing, that often comes with overly restrictive conditionalities, hampering the future direction in which the business can go; models which BillFront aims to challenge.

The range of possible outcomes of Brexit are still too opaque to make out clearly. A downturn in the UK’s economic fortunes, or further prohibitive changes in the value of the pound, could cause ad buyers to potentially pull back. We would expect digital channels (with the greater transparency and accountability they offer brands) to maybe suffer less in this scenario than some of the more traditional analogue channels that are, by their nature, more difficult to measure an immediate and tangible ROI from.

The takeaways are clear. Companies should be looking to future-proof themselves in the light of Brexit. As the Prime Minister has urged, rather than viewing the future pessimistically, companies should look at Brexit as an opportunity to take stock, stabilise themselves, and ensure that their core business model is one that is resilient (and one that will remain relevant) in the years of relative uncertainty ahead. Two key components of this will be a focus on digital (as a scalable and accountable channel) and ensuring that payment terms with key partners don’t place them in a position where they are vulnerable in the event of another unexpected shock.

Tags

Comments