Advertising Cuts Are Coming As China, Ukraine, Drag Down Growth


Digital ad sellers — from tech giants to media companies and the agencies and vendors who serve them — are bracing themselves for an impending advertising downturn.

Yet while some companies are signaling a gloomy outlook, most players in the space still have little visibility about where the cuts will come from, how deep they will be, and how long they will last. And some experts question whether there will even be an advertising slowdown at all.

WPP’s GroupM, Morgan Stanley, and Publicis Groupe’s Zenith have all revised down their global ad spending forecasts for 2022 in recent weeks.

The uncertainty in the ad market is compounded by a confluence of macroeconomic factors. High interest rates and inflation, concentrated in essential areas like gas and food, are forcing customers to reprioritize their spending. Retailers like Target and Walmart have been walloped by a combination of higher fuel costs and an abundance of products consumers aren’t buying. Elsewhere, Russia’s invasion of Ukraine and COVID-related shutdowns in China are putting strains on the global supply chain.

“The macroeconomic issues we’re dealing with can’t be overstated,” said Michael Kassan, CEO of the consultancy MediaLink. “I think we’ll start to see contraction in a few places in Q3. There are some rough waters ahead.”

Consumers are still spending

At the same time, many consumers are still spending on the travel and entertainment experiences that were denied to them over the pandemic — and advertisers in those sectors are responding accordingly. Expedia CEO Peter Maxwell Kern said on the booking site’s May earnings call that it was “spending into that recovery” to attract vacation-starved consumers its way.

“Clearly the sentiment is negative around inflation, but just because we don’t like what we’re seeing doesn’t mean we’re not still buying,” said Brian Wieser, global president of business intelligence at GroupM, which trimmed its global ad growth forecast June 13 to 8.4% from its 9.7% forecast in December, citing slowing growth in China.

GroupM predicts the US, which represents 39% of the global ad market, will grow 10% this year, excluding political ads.

Some industry experts hold the view that some slowdowns in ad spending could just mark a return to normal after an unusual couple of years. GroupM, for example, expects the ad growth of pure-play digital platforms to slow to 12% in 2022 from 2021’s 32% growth rate, when consumers spent more time online and e-commerce exploded.

Snap gave the digital ad market early jitters in May when its executive chief Evan Spiegel warned that macro conditions had deteriorated “further and faster” than the company had expected. Earlier that month, BuzzFeed’s CFO Felicia DellaFortune said the digital publisher expected its ad revenue growth “to soften somewhat” amid pullbacks in programmatic ad spending and supply chain disruptions. Car companies slashed spending 27% in March due to the supply chain squeeze.

Just this month, Jellysmack, a startup that identifies creator content that can be distributed on social media to make ad revenue, laid off 8% of staff in anticipation of a decline in ad spending.

Where ad dollars could go

One industry view is that ad dollars won’t evaporate but will instead shift into different areas.

L’Oréal, for instance, is adjusting to inflation by optimizing promotions and tweaking which marketing formats to use, while passing cost increases to consumers. Microsoft just hit the brakes on its TV advertising, putting a potential $300 million in annual outlay in jeopardy, though it still plans to continue spending on performance marketing.

Other brands, like McDonald’s, anticipate ad spend adjustments around specific products. CFO Kevin Ozan said during the company’s March earnings call that if consumers start worrying about inflation, it’ll increase demand for breakfast, which McDonald’s markets on a local basis because tastes vary by region.

“I don’t think the real cutting has begun and the cutting will be sporadic when it occurs,” Bernard Urban, CEO at Silverblade Partners, a finance company that works with advertising agencies and media companies.

Advertising is still due to grow, even if less than previously expected. GroupM expects the digital platforms will still have a robust year, driven by the boom in e-commerce advertising. TV spending is set to grow 4%, helped by the critical role it plays for big brands and the buoying effect of


streaming

video, which Zenith expects to overtake social media over the next three years. Outdoor advertising is also poised to jump 14.3%, excluding China, as people return to pre-pandemic activities.

Harder hit will be audio, whose local-advertiser base is eroding; and print, which has long been in a steady decline.

Still, periods of uncertainty can work to the favor of ad agencies, who can offer themselves as guides to help clients navigate their way through.

“Having lived through the early 2000s


recession

in a senior role at a global agency, we saw spend shift more so than cut,” Urban said. “Don’t get me wrong, there were many cuts and some downsizing, but a lot of spend shifted around and we were busy accommodating these shifts.”

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