UK marketing budgets continue to contract markedly amid impact of COVID-19

The Q3 2020 IPA Bellwether Report indicated that a net balance of -41.0% of panellists saw their marketing budgets cut in the third quarter (up from -50.7% in Q2). The result represented the second-quickest decline since the survey’s inception in 2000, only superseded by the reduction in the second quarter of this year. In Q3, over half of respondents (52.6%) recorded a decrease in budgets from three months ago, compared to only 11.6% that saw an increase.

When explaining falling marketing budgets panellists often cited reduced revenues as a result of the COVID-19 crisis, and the need to cut costs in order to maintain profitability. Ongoing social distancing measures meant that many firms were still operating below full capacity in the third quarter, particularly some services companies that rely on face-to-face client engagement.

Reductions to marketing budgets in every category

Faced with reduced cashflow, businesses reported lower budgets in each of the seven monitored marketing categories. Events remained the hardest hit type of advertising, with a net balance of -64.1% of firms registering downward revisions compared to last quarter (up from -76.6% in Q2). Overall, just 3.8% of panellists saw an increase in available spend for events, while over two-thirds (67.9%) recorded a decline.

At the other end of the spectrum, direct marketing and main media advertising saw the softest budget cuts. However, with a net balance of -25.3% of firms recording downward revisions in both categories, declines were again historically marked in both cases (-41.6% and -51.1% respectively in Q2). Underlying data for the main media category signalled that funds available for ‘other online’ campaigns (-6.5% from -35.1% in Q2) were the least affected of the five sub-categories, followed by video (-16.1% from 39.3% in Q2), audio (-32.0% from 50.0% in Q2), published brands (-38.5% from 49.2% in Q2) and out of home (-50.0% from 61.2% in Q2) respectively.

Each of the other four broader categories posted softer, albeit still marked, downward revisions in the third quarter. The ‘other’ category (-40.2%, up from -59.2% in Q2) saw the second-steepest reduction of all categories after events, followed by sales promotions (-36.0% from -51.2% in Q2), market research (-32.6% from -42.2% in Q2) and public relations (PR) (-31.4% from -41.6% in Q2) respectively.

Sentiment on financial prospects trends towards stabilisation but remains negative overall

Sentiment towards both own-company and industry-wide financial prospects remained in negative territory during the third quarter. However, both trends began to move towards stabilisation following the sharp declines in expectations seen in the second quarter.

As has been the case since the start of 2016, Bellwether panellists were pessimistic towards industry-wide financial prospects. This was reflected by a net balance of -31.3% of firms that were downbeat, with only 16.8% of firms reporting an optimistic view compared to exactly 48% that were pessimistic. Nonetheless, the degree of negativity softened from the second quarter (net balance of -66.0%), when the global economy was severely hampered by coronavirus-related lockdowns. Although downbeat overall, the net balance for the third quarter was the highest since the fourth quarter of 2019.

When reporting on own-company financial prospects, firms were also pessimistic during the third quarter. Only 30.7% of panellists were more optimistic compared to three months ago, while 34.6% had a more negative view on financial prospects for their companies. That said, the resulting net balance of -3.9% was the least downbeat so far this year after severely pessimistic readings in both the first (-26.0%) and second (-55.1%) quarters.

Robust recovery in adspending forecast for 2021

The COVID-19 outbreak and resulting restrictions on businesses have led IHS Markit, the Bellwether authors, to forecast steep declines for a number of key economic indicators during 2020. Following temporary closures for many firms during the second quarter of the year, as well as ongoing capacity constraints due to social distancing measures, it foresees a -11.2% contraction in GDP during 2020 as a whole. The threat of a widespread second wave of infections also poses a significant downside risk to this forecast. A further sharp increase in case numbers could lead to a fresh lockdown and additional economic hardship unaccounted for by our current estimate.

Assuming restrictions remain at their current level of stringency, it foresees a -13.2% reduction in consumer spending and a -20.0% decline in business investment during 2020. These figures correspond to a Bellwether forecast of a -23.3% fall in adspending for the year as a whole.

Looking forward, IHS Markit anticipates a robust recovery in economic conditions during 2021, as firms continue to adapt to a ‘new normal’. This would translate to a +4.6% expansion in GDP and a Bellwether forecast of a +11.3% rise in adspending during 2021, followed by a steady trend towards long-term growth rates. These outcomes, however, hinge largely on positive outcomes regarding the evolution of the pandemic and the development of Brexit negotiations before the end of the transition period at the end of this year.

Commenting on the latest survey:

Paul Bainsfair, Director General, IPA:

“While Q2 marked the nadir for UK marketing budgets, we had hoped for a slightly sharper rebound to UK marketing budgets this quarter than we see here. With a second wave of COVID-19, coupled with ongoing Brexit negotiations, including bracing for no-deal, I think green shoots in the immediate term are increasingly unrealistic. We are at the mercy of these macro trends and we can’t know for sure right now whether it will be a V-shaped, U-shaped or perhaps a W-shaped recovery. What we do know, however, is that the evidence proves that those who can invest in marketing during the downturn will reap rewards in both the short and longer term. They will increase their brand recognition, strengthen their brand positioning and get ahead of the competition. In fact, because many advertisers do not heed this advice, just maintaining spend at normal levels leads to a greater share of voice and in turn greater brand share.”

Eliot Kerr, Economist at IHS Markit and author of the Bellwether Report:

“With UK businesses continuing to adjust to a ‘new normal’ amid the coronavirus pandemic, marketing budgets remained under severe pressure in the third quarter of 2020. The broad-based decline across all types of marketing budgets highlights the negative impact that the public health crisis is continuing to have on business conditions. Unsurprisingly, events remained the hardest-hit category, with social distancing measures limiting the viability of such spending, although reductions in every other monitored area were also substantial. Looking forward, if the UK can avoid another large-scale coronavirus outbreak and achieve a smooth exit from the European Union, we should see an improvement in economic conditions as firms learn how to better operate in this new business environment.”

Michelle Wright, MD, Gough Bailey Wright and IPA Chair for England & Wales:

"The latest report reflects the turbulent period we are experiencing as a result of COVID-19, with marketing budgets continuing their decline, albeit at a slower rate than earlier in the pandemic. Ad spend has reduced across all platforms which is understandable. As the virus continues to disrupt markets, it is important for all businesses to consider their local situation and the likely impact it will face. Reducing marketing spend during a downturn is known to be a risky strategy and ultimately stunts future growth, so brands revising their marketing budget should act with caution and remain flexible."

Valerie Ludlow, CEO, ASG & Partners and IPA Chair for Northern Ireland:

"As we entered Q3 clients restarted previously abandoned projects or asked that we replan their campaign approach to ensure it would withstand a second lockdown (should it be required). We hope this reignited desire to commit to marketing spend is the beginning of recovery for the industry in NI, but I am cautious right now.

"COVID-19 has shown the strengths and weaknesses that devolved decision making across the four regions can bring. The exit from the EU is also looming, and recent news to prepare for a no-deal scenario will have especially challenging consequences for Northern Ireland. As a Regional Head, I am hoping that any negative consequences from both these issues can be avoided to allow our local industry to start on the road to recovery and growth in 2021."

Mark Howley, COO at Publicis Media and Interim Chair of the IPA Media Futures Group:

"The report is broadly in line with expectations. There are two known-knowns of downturns; cashflow is King, and we can see 39% of companies reported a reduction in main media budgets with an eye to cashflow. But equally, there is never a better time to win new customers and build market share, advertising is at its most elastic in downturns. 14% of companies surveyed are seeing opportunity and spending more on main media. The other pandemic effect is the accelerated shift to digital customers, for the average business one-in-five customers were digital at the end of 2109, this is now one-in-three. This shift is reflected in the relative buoyancy of online media spend."

Sean Feast, Director and Co-owner of Gravity Global:

"The statistics of course reflect our own experiences in relation to PR, with some businesses either reducing their overall spend or stopping PR altogether. But the figures do not perhaps tell the whole story. There are also many examples of businesses that have, in fact, increased their spend in recent months and not only among the challenger brands (where you might expect it) but also within major corporates. Spend is very much dependent on the sectors in which your clients operate, and for every loser there is more often than not a winner, and a winner happy to invest. New business volumes have also increased substantially, so any reports that the industry is dead on its feet are a little wide of the mark!"

Patrick Reid, Group CEO, Imagination:

"Whilst it is no surprise that the events industry continues to feel the shockwaves of the pandemic, it has clearly shown the opportunity for experiences to reach outside of the communications’ silo of marketing, beyond the stunts and spectaculars that have become the playbook of comms-driven experiential, and into product and proposition. We anticipate an eventual positive recovery, and already see more brands leaning on businesses like ours to help design valuable new customer experiences. Ultimately this approach leads to an increase in the lifetime value of current customers and underpinning next-generation products, services and business models that will be built on the new consumer behaviours and expectations that emerge in the years to come."

David Fletcher, Chief Data Officer, Wavemaker UK:

"With almost all ventures now looking to dig in for a longer haul, then it comes as no surprise that research investments are carrying their share of any decline. As with all crises, COVID should present an opportunity for research practitioners to innovate and reinvent to help advertisers best navigate choppy waters now and better drive growth as recovery inevitably follows. If nothing else, the near daily presentation of data on regional COVID trends - including some excellent visualisations - should inspire all researchers to look again at the importance of data story-telling."

For additional information, please purchase the full Q3 2020 report (£99+VAT for IPA members, £140+VAT for non-members) that also has content detailing threats and opportunities facing marketers and their companies over the coming 12 months. The report includes charts comparing business confidence amongst survey panellists to wider economic output, which depicts how views on financial prospects are a function of the current business environment. Annual subscription is available by contacting economics@ihsmarkit.com