Aug 1, 2023 - Economy

Signs of optimism shine through the bleak ad market

Percentage change in advertising growth
Data: GroupM; Note: U.S. excludes political advertising; Chart: Kira Wang/Axios Visuals

Following a year of historically slow growth, analysts believe the ad market is finally beginning to improve.

Why it matters: The slowdown in the ad market contributed to a massive sell-off across the media, entertainment and technology sectors last year.

  • That resulted in a record number of layoffs and various cost-cutting measures at media and tech companies in 2022 and early 2023.

Driving the news: Analysts are optimistic that advertising growth will improve in the second half of the year, with data showing the economy moving in the right direction.

  • "We think the underlying tone is positive," Tim Nollen, Macquarie senior media tech analyst, wrote in an analyst note.
  • Nollen pointed to a newly-released second quarter GDP report that showed while consumer spending has slowed to +1.6%, business investment spending popped to +7.7%.
  • "We have found this to be the most relevant leading indicator of ad spending historically," he added.

Between the lines: Brian Wieser, a top advertising analyst, wrote in a blog post Saturday that last week's earnings were "an affirmation that the advertising industry expanded solidly in the second quarter of 2023, and at a better pace than what we saw in the first quarter, albeit on easier comparables vs. the year-ago period."

  • Wieser argues much of the sentiment around the ad market slowdown failed to consider that the double-digit growth levels the industry saw during 2021 and early 2022 were not sustainable.
  • "You were always going to see some deceleration," he said in an interview.
  • He noted that record levels of inflation coming out of the pandemic contributed to strong ad growth, because inflation — so long as the economy is stable — tends to lead to an increase in advertising spend.
  • Unilever, for example, was forced to increase its marketing spend last year to justify inflation-related price hikes.

Yes, but: So far in 2023, the recovery hasn't been felt equally amongst all companies.

  • For example, while Meta issued strong guidance for its ad growth next quarter during its earnings report last week, Snap's stock plunged in response to weak forecasts.

Be smart: In times of economic uncertainty, companies tend to allocate more of their marketing budgets to performance advertising, or ads meant to push direct sales.

  • As a result, premium publishers that rely on brand advertising, or ads that seek to improve a company's reputation, can face challenges.
  • Roku, for example, said last week that its brand advertising business "remained pressured" last quarter compared to the same quarter the year prior in verticals like technology, media and entertainment.

The intrigue: The sectors reliant on advertising revenue for their own businesses are the ones pulling back most significantly compared to early last year.

  • Many tech firms pledged to become more efficient after heavy spending in 2021. The ongoing Hollywood strikes are impacting ad spending from companies within the media sector.
  • Global ad agencies like IPG and Omnicom both cited declines in spend from tech clients last quarter.

The big picture: In a normal advertising economy, "there are usually six or seven categories that are increasing, a couple that are kind of flat and a couple that are down," Wieser told Axios. "So what we're seeing is not unusual. It's just a normal ad market."

  • Last quarter, ad declines from some sectors were offset by an increase in spending from categories like consumer packaged goods (CPG), health and wellness.
  • Nestle and PepsiCo, for example, both said last month during their earnings calls they plan to increase their ad spend in the second half of 2023.
  • Auto advertisers are increasing their ad spend compared to 2022, when supply chain issues limited their inventories.

Of note: Traditional publishers in print, television and radio continue to face weaker prospects compared to digital publishers, but those losses will continue to be offset by strong digital gains, contributing to overall positive growth in the U.S. and global ad markets this year.

  • "There will always be sector-specific and company-specific factors that affect individual performance. In general, we think linear TV remains weak, but CTV (connected television) looks stronger, and social media is rebounding," Nollen wrote.

By the numbers: The global ad market is expected to grow 5.9% this year, according to the latest mid-year estimates from GroupM, one of the largest global ad agencies.

  • Those numbers are in line with the firm's projections from last December.
  • The digital ad market is expected to grow at its slowest rate this year since the financial crisis in 2009. But that growth rate is mostly a result of maturation in the industry.
  • Retail media will grow faster than digital media this year, as more traditional retailers invest in building their own digital marketplaces.

What to watch: Certain cyclical events, like the 2024 election and the Summer Olympics, may help boost advertising growth for local broadcasters and national outlets, respectively, as it does every election and Olympics cycle.

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