Dan Knapp looks ahead at the digital new normal and how we should try to interpret the coming situation.
In its April 2020 forecast, the IMF predicts that Covid-19 and the global lockdown will spark the worst economic recession since the Great Depression of the 1930s. It expects the global economy to shrink by 3%, with many Western markets expected to post declines of 6% or more. This compares to a 0.1% contraction of the global economy during the financial crisis of 2008/09, whose shock sat so deep for the advertising economy that leading industry commentators have termed the following decade of advertising investment as ‘Post-Lehman’.
The coming years will thus be measured as another distinct era, shaped by the events in 2020. Short-term, this is due to the severity of the advertising contraction in full shape right now. Mid-term, this era will be associated with 2020 as an accelerant of latent and incremental trends towards more digital consumption, commerce and thus advertising.
Yet such an outlook appears esoteric right now. Experts struggle to even quantify the exact impact of Covid-19 on the ad market for 2020. The basic dynamics are known. Advertising expenditure does not just follow economic trends – it amplifies them. This is particularly the case if economic growth is flat or negative.
All three advertising recessions in Europe over the past 20 years – the dot com crash and 9/11 in 2001, the financial crisis in 2008/2009 and the Eurozone crisis in 2012 showed this dynamic. However, history is not always a good guide. The current situation lacks precedent in its combination of factors from epidemiological to policy and economic issues, all while embedded in a global environment that is impossible to control in a purely local setting.
The potential pace of change is immense. Whereas previous recessions saw a gradual decline of ad spend, market behaviour in 2020 was abrupt. Q1 data from local sources (e.g. IREP in France), and company reports across the board from TV to digital showed how after a stable January and February, ad markets in Europe suddenly collapsed in the second half of March without much warning.
Even the economic outlook itself is far from clear. For instance, The Economic Policy Uncertainty Index, an alternative economic metric that tracks sentiment in news reports to infer economic outlook, is on a record high since its inception in the 1990s. Unlike the IMF statement, this index does not tell us how bad the recession is, but that even economists cannot agree on the shape of the decline, its magnitude and recovery scenarios.
The IMF itself has developed several additional GDP growth scenarios based on further waves of Covid-19 outbreak. This high volatility of the macro environment stresses the limits of existing forecasting methods. Ad forecasters live dangerously right now, and the end of year will look different than any current prediction. Constant revision is critical, which reduces the half-life of forecasts, degrading them to meditations on the present and broad signposts for the future.
Nevertheless, macroeconomic indicators, paired with industry data, are the best modelling ingredients we have. A regression model based on IMF data for GDP and other macro-economic indicators provides us with an estimated decline of the total UK ad market of 13.3%, and 16.3% for all of Europe (including the UK).
This forecast, conducted in May, is more optimistic than our April forecast. We have factored in the easing of lockdown restrictions (Government Response Stringency Index, University of Oxford) and additional signal from Q1 company reports. Crucially, especially the walled gardens reported better than expected results and indication of a bottoming out of ad declines in April with signs of slowing year-on-year declines in May.
This improved outlook from some companies may suggest that as in 2009, digital will fare better than traditional media. Indeed, we currently expect digital ad spend to decline by -5.5% in 2020 in Europe compared to a stronger contraction (-21.3%) for other media. However, the dualism of digital versus traditional media is overly simplistic. The switch-on/switch-off nature of biddable media means that parts of digital advertising were often more immediately impacted than other media channels that have higher advance commitments. But these same properties, paired with lower production costs, also means that it can recover more quickly.
Moreover, trajectories between direct response and branding within digital vary vastly. The function of a medium matters more than its label – does it drive immediate and measurable ROI? Fuelled by the explosion of e-commerce, gaming and other indoor activities during the ‘great lockdown’, direct response channels are advantaged in the current climate. But there are exceptions to the rule.
Some FMCG brands who advertise anti-cyclically and digitally native brands who want to broaden awareness are taking advantage of low rates on TV. We believe branding will come back at a larger scale in Q4, particularly in digital video. Based on current information, we have provisionally modelled the impact trajectory of different (digital) advertising channels on a monthly basis for 2020 and can see stark differences in depth of impact and recovery patterns.
Exhibit 1: Europe: Ad Spend growth forecast by month (2020)
The shape of the recovery has been compared to nearly every letter in the alphabet, with ‘V’ being our preferred option. But it is likely that the rebound will look different across media, across advertiser categories and across individual brands. Our own channel checks suggest that assuming no change in economic outlook, the worst is over and that June ad spend may look more like a reversed March.
Easing of travel restrictions, re-openings of business and the continuation of the Bundesliga in Germany are encouraging signs. But any stabilisation is built on quicksand. If current (encouraging) company outlooks falter and an April-like situation drags into Q3, we may be approaching a -20% ad market scenario for Europe.
Crucially, the marketing response to the pandemic to date was rooted in the lockdown and the inability of businesses to operate, paired with risk mitigation. It was a supply-side issue. However, rising unemployment and squeezed personal expenditure can turn the ad downturn into a crisis of consumer demand, even when the lockdown is lifted and businesses can operate again.
In particular for digital, SMBs are essential for advertising recovery. Should government support schemes work as intended, these companies will be some of the earliest to return – marketing sits high on their balance sheet as a cost of sales – imperative for doing business in the first place.
Early experience in China has also shown that some sectors, like fashion, are set for a V-shaped recovery. Yet many clients cannot return over night. When production has been dormant for weeks and months, it takes time to recover. Key advisers in large segments such as travel are facing existential threats.
We expect a phased market recovery. It will take the overall ad market about three years in total to recover from this downturn, with a 12 to 14-month time-frame for digital. But the post-pandemic advertising world will look different from today’s market. We expect more consolidation in digital and agency-side and budgets cut from traditional media in particular will not fully return.
Paid-media itself has been under-performing investments in broader communication activities based on data and digital services. These areas will continue to capture marketing budgets at a faster rate to help businesses navigate deeper structural changes in the ‘new normal’.
Mid-term, the prized question is to what extent consumer behaviour established during the lockdown will solidify into long-term change and become institutionalised. There is no shortage of news and statistics about new heights in media consumption and communication, from video calls over connected TV viewing, e-sports and gaming to an explosion of e-commerce. This is echoed by companies fast-tracking their digital offerings and trying to close innovation gaps that business as usual could cover up for too long. These data cast Covid-19 as an accelerant for digital change. Some might conclude that the current new normal will also inevitably be the long-term new normal.
However, change is hard. Economic and behavioural studies paint a more complex picture on whether traumatic experiences or recessions lead to long-term behaviour change, as a New York Times article from the 2009 financial crisis illustrates (‘Recession Resolutions, Like New Year’s, May Be Hard to Keep’, Alina Tugend, 4 Dec 2009).
For instance, post 9/11, church attendance was up, but a religious reawakening of America was stifled by levels dropping back to normal in 2002. While past recessions triggered short-term changes in the savings rate, these were blips as rates reverted to pre-recession levels quickly. But other evidence also suggests a recession can have a life-changing outlook in formative years.Whether our pandemic consumption patterns will stick is a productive field for futurists, pundits and academic researchers alike. But let’s get our ad spend forecasts for 2020 right first.