What will inflation do to the advertising industry?

Ashley Regan
By Ashley Regan | 8 June 2022
Credit: Piotr Dhrobot via Unsplash

War in Ukraine, supply chain squeezes, interest rate rises, COVID-19, increased petrol costs and localised wage pressures are all driving inflation.

After decades of low price rises, The Reserve Bank of Australia advises that high inflation is well established and warns households to get ready for cost pressures and repeated interest rate hikes.

Typically, when inflation surges and costs rise, businesses tighten spending to ensure profit margins are maintained.

Will marketing budgets also be shaved?

Not yet and perhaps not at all. Media agencies see the market running high to the end of the year and into 2023.

Consumers are still spending and brands are chasing them. But as inflation rises faster than wages, many will switch to cheaper brands.

Unlike the panic-buying in response to COVID-19, consumer spending is tightening with eight in ten making changes to purchasing habits and consumer confidence is astoundingly 20 points lower than during the most severe part of the COVID pandemic.

Zenith's latest forecasts note that ad spend has remained on track despite the macroeconomic headwinds that emerged this year: "For now, consumer spending continues to grow, as consumers demonstrate their strong appetite for the travel and entertainment experiences that were denied to them over the pandemic. Business confidence is generally high, and corporate investment is rising, and there is little evidence of widespread cost-cutting."

Nancy Lan, national MD, Starcom told AdNews: “The colliding and concurrent impact of inflation and the increasing cash rate will be an influencing factor on consumers’ purchasing decisions, and as a flow-on effect – advertising, for the rest of the year. 

“Inflation will force companies to reassess their business and pricing models, and their ability to maintain profitability, with rising costs and their customers re-evaluating what they buy. 

“Companies that have spent time, resources and focus on building brand equity prior to and through COVID may see the benefit of that investment, as they seek to convince customers they are a worthy contender for their diminishing discretionary income. 

“As agency partners to many of these companies, we need to broaden our aperture and not lose touch with the daily realities of Australians, who on average earn an annual salary of $68,000. 

“Brands that meet these average Australians with greater empathy may just come out better. Collectively, we can all hold firm to the hope that the RBA threads the needle of releasing inflationary heat without plummeting us into recession as we head into 2023.” 

Even though the price of everyday household essentials continues to rise - with groceries being the most impacted with a 5.3% increase over the past year - consumers are still spending;

Sophie Ayles, strategy partner at M&C Saatchi, told AdNews: “What we are seeing is a shift in buying behaviour as customers are looking for new and different ways to save. In the grocery category we see a rise in home brand purchases, shopping in season, and looking for deals through loyalty programs.

“Despite the [inflation] increase, the focus on price is reluctant to sacrifice on things like quality, customers are looking at value beyond price for ways to save.”

“Quality in fresh food is paramount, convenience and broader healthier and sustainable range are important. Consumers get that price fairness is not just about what they are paying, but what’s happening at the other end with suppliers and farmers."

For example, while Aldi claims to have the cheapest deals and can save an average Australian family $1,555 a year, few customers in this inflationary period are switching supermarkets since Woolworths (37% market share) and Coles (28%) continue to dominate the grocery scene by providing value-added services beyond price, while Aldi accounts for 11%.

Are businesses tightening their marketing budgets?

Despite lower consumer confidence and changed spending habits, most agencies say brands are staying consistent.

Sam Cousins, chief strategy officer at iProspect, told AdNews: “We have not seen any pullbacks in budgets this year. If anything we have seen the opposite, with clients knowing it's important to remain consistent to stay in the top three in their category, especially when consideration sets may be smaller.”

Businesses who have a solid understanding of their industry will already know how to adjust marketing according to economic changes. 

Many agencies have seen lifts in spending across travel, entertainment, food and alcohol, even with the current economic rises.

Ayles at M&C Saatchi said: “We’re seeing a huge commitment from businesses doing everything they can to help customers and their own team members – including listening and monitoring customer needs, keeping costs down and being as transparent and honest as possible when they can.

James Walker-Smith, general manager at Leo Burnett Sydney, told AdNews: “One of the things we learnt during the last global recession - which mostly skipped Australia - was that the impact was uneven. 

“High end and luxury generally held their position or even grew. The same happened for value and budget, but the ‘middle’ fell away as it became increasingly difficult for consumers to justify the additional or discretionary spend. 

“In the end, if you want people to spend their money on your brand versus another, there needs to be more clarity on why. The question across all categories needs to be the same… how can we meet consumer needs and are we doing enough?”

Iona Macgregor, chief strategy officer, Saatchi & Saatchi Australia: “There’s also some anecdotal evidence that the ‘lipstick effect’ holds true and segments that may be considered ‘small indulgences’ perform better as consumers hold back spending on big ticket luxury items'” 

However, the impact of inflation has not come into full effect yet…

Some say the full effects of inflation will come later this year, creating a highly aggressive and competitive sales environment, with predictions that 2023 will be tougher than the last three years.

With the average age of a marketing professional being 34, very few have experienced large scale inflation in their careers.

Media analyst Steve Allen, director of strategy & research at Pearman Media, told AdNews: “We do not think the strong January to May period of advertising investment will continue. However, these are more connected to the larger issues in the economy rather than specific inflation fears. 

“Historically, inflation has boosted advertising spend, as inflation was often factored in for marketer’s marketing budgets and the media in pricing. This will not be the case today.

“We predict the opposite will occur now. While some economic sectors will benefit from inflation, the overall effect will be harmful to the advertising and media industries and will cause a deleterious effect on advertising media budgets.”

Walker-Smith at Leo Burnett Sydney said: “We’ve seen so much disruption [in the marketing industry] that we’re now accustomed to constantly reworking plans - but indeed, the gloomy expectation is that the worst is still to come.

“While consumers will be spending less, they still have the same needs; they’ll just be looking for more affordable and reliable solutions to do the job. 

“Often, this means that the bigger, more familiar brands win, with less switching and more desire to keep things simple. 

“However, with the complexity of supply and logistics adding availability challenges, there is still opportunity for smaller and more agile local brands and plenty of challenges for the big brands to navigate to remain on top.”

Kieran Antill, co-founder & director of brand at Big Space Agency, told AdNews: “Inflation will split the field, as some companies will try to weather the storm or at least brace for it by attempting to reduce spending, with the thinking that less revenue will be coming through their doors. 

“Others who view advertising as an investment that has a positive ROI will spend more and get great value from it.”

How is the marketing industry preparing?

Olly Taylor, chief strategy officer at Havas Labs & Havas Creative Group Australia: “Beyond the doom, perhaps the inflation crisis is an opportunity for brands and our industry to get back to what consumers want us to do - which is to provide information to make better purchase decisions.”

In a context where brands have to fight far harder to offer consumers the best benefits and value, strategy professionals note that due to the unclear future of consumer behaviour, marketing campaigns are returning to basics with a heavy focus on price efficiency and providing the best possible value.

“Momentum is on unlocking meaningful value for customers beyond price, pointing out that value is broader than price among all segments,” said Ayles at M&C Saatchi.

“[Businesses must] ‘do the right thing’ by customers on price – whether that is being transparent and honest about price rises, demonstrating greater empathy to what Australians are going through by acknowledging the cost of living pressures, or dropping prices on relevant occasions.”

When businesses go above and beyond to show empathy and better value, consumers notice.

For example, as a reaction to the 2010 global economic crisis, Sainsbury’s created the popular ‘Feed the family for a Fiver’ campaign which helped bring price perceptions in line with price reality. Over its two years, the idea delivered £540m in direct sales with a payback of £5.55 profit for every £1 spent and overall helped improve Sainsbury’s’ price perception.

“We’re certainly seeing more focus on lower-funnel activity and their associated mediums,” said Walker-Smith at Leo Burnett Sydney.

“One of the challenges that our clients face is that own-label or ‘value’ brands, with no price premium tend to take share, with often that behaviour then ingrained when the tough times have passed. 

“There are always exceptions to the rule and analysis from IPSOS show that price elasticity is not linear, so finding segments within a user base where there is more flex is worth investigation. 

“Most of our clients are sensibly reviewing their portfolios and looking at where best to defend and where, in some cases, to attack, which requires even more careful understanding of consumer sentiment, behavioural data and which brands can best meet consumer needs at this time.”

Businesses should look to modern marketing avenues to maximise budget value

Many experts say video has never been a more important in challenging times thanks to its ability to deliver both shoppable and brand moments.

Corinne Heffernan, GM of ARC worldwide, told AdNews: “The priority for most of our clients is demonstrating genuine value to their customers - while we haven’t noted a significant reallocation of media spend to shopper marketing for example, clients are taking advantage of the ways in which digital can make more channels shoppable.”

Lee Stephens, CEO of Switch Digital: “Fortunately, we are not in the same position as previous media industry recessions with BVOD, connected TV, native advertising, and the role of AI in driving quality consumer connections in a way never imagined five years ago.” 

Commenting on a consumer spending survey James Bayes, general manager at The Trade Desk Australia and New Zealand, said: “Brands are embracing programmatic advertising as it allows marketers to be flexible and agile in uncertain times, [as they can] launch and pause campaigns in real-time, adjust the scale of spend and changeover creative on the fly.”

From video to programmatic, agencies urge businesses to aim to increase their marketing across multiple channels to flex value across different mediums and ensure their efforts won't be missed by consumers.

More urgently the concerns are elsewhere

Even though inflation is making headlines, there are many other issues for Australians. Between the recent federal election, a rapid rise in COVID case numbers and the flu resurgence due to a cooler than average winter, the impact of rising inflation on consumer sentiment continues to be muddled.

“Inflation, and a downturn in consumer spending, has not impacted any of our clients yet - the current issues for many clients are more complex,” said Stephens at Switch Digital.

“Home building clients have severe supply chain issues resulting from an inability to complete contracts. Geo-political tensions are slowing down the delivery of key components and chemicals, such as urea for our agricultural clients. Our mid-tier banking clients have been impacted with the inability to offer discounted long term fixed rates.

“While inflation may become more of an issue later in 2022, I think it is being crowded out a bit at the moment.”

Allen at Pearman said: “Supply chain issues and the price of petrol have greater effect [than inflation], which has a direct effect on consumer confidence, and that in turn on attitude to spending.

“The more important consequence of rising inflation is rising interest rates. With the level of both household debt, mainly through mortgages and credit card debt, this will have a direct effect on consumers' propensity to spend and their ability to do so.

“The Labour Government is already painting a picture of much worse economic challenges and conditions they have inherited - this will do little to breed widespread consumer or business confidence.”

Michelle Tempest, Business Director, Half Dome: "I’ll start by saying this is a meaty topic with many factors at play, and in no way am I, someone who’s been in media their entire life, an expert when it comes to the economy. But you don’t need to be an expert to know that the cost of living is on the rise. You can see it when you fill your petrol tank or do your weekly grocery shop.
"For a lot of consumers, particularly millennials like myself entering the housing market for the first time, inflation isn’t something they’ve had to think too much about thanks to the low, steady inflation over the past several years. But with consumer prices rising at the fastest rate in a decade, this has changed.

"When it comes to the impact inflation has on consumer spending, it’s no surprise that consumers are tightening their wallets or at the very least re-evaluating where their discretionary spending goes.

"Most clients that operate in the retail vertical, and particularly those in e-commerce, could see this was coming – the retail spending wave that surged through the pandemic had to slow at some point – although the speed at which we’ve arrived here has certainly been faster than expected thanks to the impact of inflation.

"That said, I think this opens the door for deeper, more meaningful conversations for marketers and media professionals alike. In particular, it brings opportunity to demonstrate the impact brand equity has in influencing a consumer’s willingness to pay.

"In a time where consumers will be more selective and thoughtful than ever with where their (limited) spending goes, I believe brand equity will become an ever-more important topic of conversation, a conversation we should all want to have."
John Vlasakakis, Founder, Next&Co, says inflation has had varying effects but for some consumers this is going to be an issue and brands need to adapt to incentivise and win new customers.
"We are advising our clients to be creative and think outside the box in categories where people are feeling the pinch.

"Our agency serves a goal to make the world measurably better and our clients need to adapt to increase share of wallet from existing customers and work harder to win new ones."

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