- Growth in UK marketing budgets maintained…
- …but uncertainty and cost pressures weigh on budgets
- Internet remains best performing sub-category but main media underperforms
- Company financial prospects positive, but concerns over wider industry performance
- UK adspend growth shows resilience in 2017, but set to slow markedly in 2018
Weakest rise in budgets since Q1 2016
The marketing budgets of UK private sector companies continued to be expanded during the final quarter of 2017, reveals the Q4 2017 IPA Bellwether Report, out today (17 January 2018).
Latest data showed that 23.9% of marketing executives raised their budgets during the latest survey period, generally as part of efforts to support brands, aid the launch of new products or in response to greater competition. However, cost pressures led in some cases to budget realignments as part of wider company efforts to protect profitability. There were reports of client caution and ongoing economic uncertainty weighing on sales, and these factors led to 15.2% of panellists reporting a cut to their total marketing budgets.
The resulting net balance of +8.6% was down from +9.9% in the previous quarter and the lowest since the start of 2016. Although growth has weakened for a second successive quarter, marketing budgets have been continuously expanded since the end of 2012.
Internet marketing records robust, but much slower, growth in Q4
Anecdotal evidence indicated that the recent trend towards greater digital marketing continued in the fourth quarter, with a number of respondents commenting on making greater usage of search/SEO and social media tools. Some panellists reported refreshing and re-launching their websites.
The net result was a further increase in overall internet marketing spend, extending a run of growth in this Bellwether category to eight-and-a-half years. However, the respective net balance of +10.9% was notably down on the previous survey’s +17.0% and the lowest recorded since Q3 2016.
Other Bellwether categories to register expanded budgets during the latest survey period were events and main media advertising.
Events budgets were raised for the seventeenth successive quarter, with companies noting the positive sales impact of direct client engagement. However, the net balance of +5.5% was down from +9.4% to signal a slower rate of expansion in the latest survey period.
Meanwhile, main media advertising returned to growth after the previous quarter’s stagnation. However, at +1.7% (from 0.0%), the net balance was indicative of only modest growth. Moreover, with internet a sub-component of the main media category, latest data implies a disappointing quarter for spending on the ‘big-ticket’ marketing areas of TV, press, cinema and radio.
Marketing budgets for all other Bellwether categories were reduced during the final quarter of 2017. PR recorded the lowest net balance (-6.6%, down from +7.2%), followed by other (-5.8%, from +2.3%) and market research (-5.4%, compared to Q3’s -2.4%). Meanwhile, direct marketing (-4.5%) and sales promotions (-3.0%) both returned to contraction territory following stagnations in the previous survey period.
Financial prospects continue to underwhelm
The Q4 2017 Bellwether survey indicated that company financial prospects remained in positive territory, with a net balance of +10.6% of panellists more optimistic than three months ago. That said, the latest reading was slightly down on the previous quarter’s +11.1% and remained below the average for the survey to date.
Companies remained pessimistic about wider industrial prospects, with a net balance of -12.1% of companies becoming less confident when compared to three months ago. That compared to a net balance of -8.2% in the preceding survey.
2018 adspend growth predicted to be 0.3%
With business investment – and for that matter the wider economy as a whole – showing some unexpected resilience last year, the Bellwether Report has revised up its adspend growth forecast for 2017 to 1.4% (previous 0.6%).
However, with the Bellwether showing a loss of growth momentum in budget setting during the second half of 2017, we expect this to spillover into 2018.
With consumer spending set to remain under pressure from an ongoing real wage squeeze in 2018, adspend is set to rise by just 0.3%. Subdued growth occurs in spite of the positive tailwind to adspend that will emanate from the staging of the football world cup during the summer.
Adspend growth picks up in 2019, but remains weak at just 0.7% before improving to 1.0% in 2020. In line with forecasts of improved economic growth, adspend is set to rise by 1.4% and 1.6% during 2021 and 2022 respectively.
Commenting on the latest survey:
Says Paul Bainsfair, Director General, IPA: “Looking at quarter-on-quarter results it is clear that uncertainty from the wider geo-political situation continues to affect a cautious approach from marketers regarding their budgets.
“That having been said, we must take comfort in the fact that budgets have been revised up overall in Q4 and that as ever the ability for advertising to drive business growth cannot be underestimated.”
Says Dr Paul Smith, Director at IHS Markit and author of the Bellwether Report:
“A relatively lacklustre fourth quarter ensured that 2017 proved to be a year of two halves. After a strong first half, marketing budget growth was notably slower in the final six months of 2017 culminating in Q4 with the weakest upward revision to budgets since the start of 2016.
“Whilst fears of a sharp deterioration in the UK economy following the surprising EU referendum result in 2016 have so far proven to be unfounded, the current trend in growth signalled by the Bellwether survey is nonetheless consistent with an economy undermined by ongoing Brexit uncertainty and an increasingly common “wait-and-see” attitude amongst businesses and consumers alike.
“Companies have subsequently adopted a similar attitude towards their marketing budgets. Whilst willing to expand in perceived cost-value areas such as digital they continue to do so by weighing down on budgets related to traditionally bigger-ticket main media campaigns.”
Battling Covid collateral damage, Renault says 2021 will be volatile
By Gilles Guillaume
PARIS (Reuters) – Renault said on Friday it is still fighting the lingering effects of the COVID-19 pandemic, including a shortage of semiconductor chips, that could make for another rough year for the French carmaker.
Renault reported an 8 billion euro ($9.7 billion) loss for 2020 which, combined with gloomy take on the market, sent its shares down more than 5% in late morning trading.
“We are in the midst of a battle to try to manage a difficult year in terms of supply chains, of components,” Chief Executive Luca de Meo told reporters. “This is all the collateral damage of the Covid pandemic… we will have a fairly volatile year.”
De Meo, who took over last July, is looking at ways to boost profitability and sales at Renault while pushing ahead with cost cuts. There were early signs of improving momentum as margins inched up in the second half of 2020.
The group gave no financial guidance for this year, although it said it might reach a target of achieving 2 billion euros in costs cuts by 2023 ahead of time, possibly by December.
Executives said they were confident the carmaker could be profitable in the second half of 2021, but that they lacked sufficient market visibility to provide a forecast.
Renault struck a cautious note, saying it was focused on its recovery but warned orders had faltered in early 2021 as pandemic restrictions continued in some countries.
The group is facing new challenges as the European Union tightens emissions regulations and after rivals PSA and Fiat Chrysler joined forces to create Stellantis, the world’s fourth-biggest automaker.
The auto industry endured a tough 2020 but a swift rebound in premium car sales in China helped companies such as Volkswagen and Daimler to weather the storm.
Auto companies globally have since been hit by a shortage of semiconductors that has forced production cuts worldwide.
“The beginning of the year has shown some signs of weakness,” De Meo told analysts, but added the chip shortage should be resolved by the second half of 2021. “We have taken the necessary measures to anticipate and overcome challenges.”
Renault estimated the chip shortage could reduce its production by about 100,000 vehicles this year.
The group was already loss-making in 2019, but took a sharp hit in 2020 during lockdowns to fight the pandemic, which also hurt its Japanese partner Nissan.
Analysts polled by Refinitiv had expected a 7.4 billion euro loss for 2020. The group posted negative free cash flow for 2020.
The 2018 arrest of Carlos Ghosn, who formerly lead the alliance between Renault and Nissan, plunged the automakers into turmoil.
In a further sign that the companies have been working to repair the alliance, De Meo told journalists that Renault and Nissan will announce new joint products together in the coming weeks or months.
Renault has begun to raise prices on some car models, and group operating profit, which was negative for 2020 as a whole, improved in the last six months of the year, reaching 866 million euros or 3.5% of revenue.
Analysts at Jefferies said the operating performance was better than expected. Sales were still falling in the second half, but less sharply.
Renault is slashing jobs and trimming its range of cars, allowing it to slice spending in areas like research and development as it focuses on redressing its finances. It is also pivoting more towards electric cars as part of its revamp.
It was already struggling more than some rivals with sliding sales before the pandemic, after years of a vast expansion drive it is now trying to rein in, focusing on profitable markets.
De Meo told journalists on Friday that the French carmaker will make three new higher-margin models at its Palencia plant in Spain, where manufacturing costs are lower, between 2022 and 2024.
($1 = 0.8269 euros)
(Reporting by Gilles Guillaume and Sarah White in Paris, Nick Carey in London; Editing by Christopher Cushing, David Evans and Jan Harvey)
UK delays review of business rates tax until autumn
LONDON (Reuters) – Britain’s finance ministry said it would delay publication of its review of business rates – a tax paid by companies based on the value of the property they occupy – until the autumn when the economic outlook should be clearer.
Many companies are demanding reductions in their business rates to help them compete with online retailers.
“Due to the ongoing and wide-ranging impacts of the pandemic and economic uncertainty, the government said the review’s final report would be released later in the year when there is more clarity on the long-term state of the economy and the public finances,” the ministry said.
Finance minister Rishi Sunak has granted a temporary business rates exemption to companies in the retail, hospitality, and leisure sectors, costing over 10 billion pounds ($14 billion). Sunak is due to announce his next round of support measures for the economy on March 3.
($1 = 0.7152 pounds)
(Writing by William Schomberg, editing by David Milliken)
Discounter Pepco has all of Europe in its sights
By James Davey
LONDON (Reuters) – Pepco Group, which owns British discount retailer Poundland, has targeted 400 store openings across Europe in its 2020-21 financial year as it expands its PEPCO brand beyond central and eastern Europe, its boss said on Friday.
The group opened a net 327 new stores in its 2019-20 year, taking the total to 3,021 in 15 countries. The PEPCO brand entered western Europe for the first time with openings in Italy and it plans its first foray into Spain in April or May.
Chief Executive Andy Bond said its five stores in Italy have traded “super well” so far.
“That’s given us a lot of confidence that we can now start building PEPCO into western Europe and that expands our market opportunity from roughly 100 million people (in central and eastern Europe) to roughly 500 million people,” he told Reuters.
To further illustrate the brand’s potential he noted that the group has more than 1,000 PEPCO shops in Poland, which has a significantly smaller population and gross domestic product than Italy or Spain.
The company, which also owns the Dealz brand in Europe but does not trade online, has already opened more than 100 of the targeted 400 new stores this financial year.
Pepco Group is part of South African conglomerate Steinhoff, which is still battling the fallout of a 2017 accounting scandal.
Since 2019 Steinhoff and its creditors have been evaluating a range of strategic options for Pepco Group, including a potential public listing, private equity sale or trade sale.
That process was delayed by the pandemic, but Steinhoff said last month that it had resumed.
“The business will be up for sale at the right time. It’s a case of when, rather than if,” said Bond, a former boss of British supermarket chain Asda.
Pepco Group on Friday reported a 31% drop in full-year core earnings, citing temporary coronavirus-related store closures.
Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) were 229 million euros ($277 million) for the year to Sept. 30, against 331 million euros the previous year.
Sales rose 3% to 3.5 billion euros, reflecting new store openings.
($1 = 0.8279 euros)
(Reporting by James Davey; Editing by David Goodman)
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