Investor view: Reasons to be optimistic about advertising in 2023

One of the great debates of 2022 was the resilience of global advertising spending. That expectation of resilience has continued.

WPP’s Group M expects global advertising to rise 5.9% in 2023 while Magna is predicting 5% growth. This expectation of healthy growth contrasts with a more uncertain macroeconomic outlook. Can it last?

A lot will depend on the health of the corporate sector. Perhaps the key factor helping advertising spend is that corporate profitability is holding up well generally. That is far more important to whether advertising spending is cut or not than consumer confidence (that makes sense – it is companies who ultimately decide how much is spent on advertising, not consumers).

A fascinating study by German broadcasting group ProSieben Sat 1 several years ago highlighted how those advertisers whose financial performance was in line with expectations continued to spend on advertising while those who faced a declining financial outlook cut their TV advertising by about 10%.  

Much of this goes back to the accounting treatment of advertising. Unlike capital expenditure (“capex”), advertising is expensed through the profit and loss account. For those firms who need to quickly protect their earnings, cutting advertising spending is an “easy” win (in their minds) as such “savings” can be made quickly and thus have an immediate effect.

There is a more fundamental question here as to whether the accounting treatment of advertising spending should not be changed. It is one I have explored in great detail with Sam Tomlinson, media and entertainment leader at PwC UK, but – for now – the accounting standards remain as they are. That accounting treatment explains why much depends on the profitability of the corporate sector.

Client spend is likely to hold up

Nevertheless, there are several reasons to suspect why the more optimistic take on advertising spending into 2023 may be the correct one.

First is the importance being placed by many companies, especially in the consumer packaged goods space, of brand strength on helping to push through price increases to consumers.

While inflation should abate in 2023 – the cost of many commodities in underlying terms is declining and the US dollar’s strength is abating, the latter which has also fuelled inflation globally – the underlying message from many corporates is that rising costs will continue into 2023, although at a slower rate. That is likely to precipitate brand building spend.

Second, consumers continue to spend. The message from the Q3 results season was that wealthier consumers still continue to spend on luxuries – big or small – to treat themselves. While this continues, and there is still the opportunity for firms to get consumers to spend, advertising spend is likely to remain elevated.

As I have mentioned before, if this is a recession, it is a strange one given high employment levels and an outlook that more broadly favours workers over corporates. Governments are also showing a greater willingness to support poorer households in particular, as the UK government’s £900 support to eight million lowest-income households shows. 

There are also more “structural” reasons for thinking spend is likely to continue.

The first is the blurring of the lines between advertising and IT budgets as corporates spend on consumer facing digital technology. Capex spending remains elevated and some of these budgets are likely to “leak” into advertising.

The rise of environmental, sustainability and governance (ESG) spend will also help. A survey of UK CFOs by Deloitte in 2021 found that the number one perceived benefit of ESG for CFOs was in improving the brand and reputation of their companies. That naturally requires advertising spending to fully utilise.

We will soon find out what happens in 2023. Few would have predicted what 2022 would have brought and 2023 is likely to be the same. However, there are reasons to be cautiously optimistic. Let’s hope that is the case.

Ian Whittaker is founder and managing director of Liberty Sky Advisors