What do city investors think about brands, ad spend and media? Take outs from the Citi Research paper at the @Newsworks_uk Shift conference

pexels-photo.jpgThe Newsworks Shift 2018 conference began with a particularly interesting, scene setting presentation from Citi Research’s Catherine O’Neill.   It was billed as, “what investors really think about brands, advertising and marketing.”

Below I’ve listed what, to me, were the key points and quotes. Against a dark sky of short termism there are rays of hope for ad spend and the established media.

Advertising hasn’t been seen as appropriate in the current, low growth economic climate. “A&P is generally linked to sales growth and since the recession advertising as a proportion of GDP has been falling… The low inflation environment has also put the emphasis on promotion, i.e. price discounting [rather than advertising]”

Their faith in advertising has been eroded. “There have been market share gains made by new entrants with limited traditional marketing support”, “Advertising is not seen as the barrier for entry that perhaps it once was for new entrants. So if advertising is a cost and sales growth is slow does that mean advertising isn’t working anymore?

The practice of zero-based budgeting has reduced ad spend and focussed companies on the short term. “In the past two years specifically we have seen cuts to advertising in one of the largest advertising category – consumer staples – and it has come by the adoption of what they call zero based budgeting which basically means they start the budgeting process from scratch every year, they don’t just carry on doing what they were doing in previous years.”

The lever companies are using to preserve their margins is advertising spend. “In the first half of last year 90% of the margin improvement of consumer staples came from a cut to brand support and a reduction of A&P as a percentage of sales. At the same time you can see falling growth for that industry.”

The Internet is responsible for a significant amount of money leaving advertising altogether. “In the US we estimate the rise of the Internet has led to $100bn of advertising spend coming out of the market. If the Internet had not been invented advertising spend would have been a lot higher than it is now and digital has been the answer to cutting costs, pushing down the pricing.”

Advertising has been repositioned in their minds as a different sort of outgoing. “Advertising was once seen as an operating expense but it has increasingly become a cost of sale, which means it has become more performance driven, more measurable and ROI has to be assured.”

They are slowly realising that advertising was doing a job after all. “The evidence suggests that brands cutting investment is not necessarily the right decision and we might be reaching that realisation now. There is a correlation between brand support and market share and we think this has strengthened since 2014.” “The reason the market struggles with brands is that it isn’t tangible; it isn’t easy to put into their financial models so it is very hard to put a value on it. But the share prices of the top brands tend to outperform. Brand Z data plotted against the share price performances of the market show the top 30 global brands have doubled their returns against the market.”

New entrants to markets might establish themselves with little traditional marketing support but investors are now realising it isn’t a reason for incumbent companies to cut ad spend. “Cuts to brand support may have exacerbated the structural erosion they’re facing and allowed new entrants in more easily… Underinvestment in brands, we think, risks long-term volume declines as new entrants get footholds in the market.” “If barriers to entry are lower for new brands then brand support does become more important over time.”

Companies have been able to cut ad spend but still deliver for shareholders – but their ad spend may return. “Organic sales growth for US food companies [some of the first to cut advertising two or three years ago] pretty much slowed to zero over the last couple of years. At the same time they were delivering the best bottom line earnings per share growth of all of the consumer staples sub sectors. That is because they implemented very large cost cutting programmes and a very extensive brand rationalisation process. Investors are all too aware that cutting costs is not a sustainable long-term strategy and at some point the company has to look at creating growth again… We have seen some of the US food companies talking of increasing their share of A&P again.”

They are realising the importance of context for digital advertising. “It has become clear that not all digital is equal. The concerns about reputational risk and brand safety have definitely reached the boardroom.”

GDPR is changing their view of established media brands. “GDPR and the consent needed for consumers to be tracked could benefit traditional media. We do think that companies with a strong relationship with consumers will find it easier when GDPR comes in… It’s a chance to clean up websites, in terms of all of the trackers that are on there. Use it to prove the effectiveness of the media.”

The Direct to Consumer trend will increase the relevance of B2C media. “We expect to hear more and more about Direct to Consumer. Brands or products that have not had a direct relationship with consumers in the past will be reviewing and repositioning their model. Some will have to move from a B2B to a more B2C type business and therefore communications will become more important and they will need a strong brand to ensure they don’t get lost”

You can read more about the Newsworks Shift conference here

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