Adland can do more to convince boards about value of advertising

Investing in advertising is a sure-fire way to fuel the economic recovery but it requires CMOs to talk the language of the boardroom, this longstanding City analyst argues.

Imagine companies had, within their control, a mechanism to boost significantly their top-line and earnings growth, and which added hundreds of millions, or even billions, to their overall market value.

Imagine also that all that was needed to unlock this value was proper analysis of what the company currently spent and for that analysis to be communicated in a way that CEOs, CFOs and boards understood and grasped.

That mechanism is advertising spend, which is intangible capital expenditure. Just as companies build physical capital expenditure such as factories to boost sales, so investing in advertising similarly builds long-term value. Yet the way advertising is treated currently ignores that crucial fact.  

That is the most important message from my new report, The Pandemic: Pause or Play, which was commissioned by JCDecaux.

It forecasts a V- or K-shaped recovery in UK advertising spending, with 12.6% growth in 2021, bringing advertising spend above pre-pandemic levels.

Two factors will drive this. One is advertisers taking advantage of consumers who, as the Bank of England states, are primed to spend.

The second is powerful structural forces – the rise of new companies, the shifting of budgets from areas such as travel and property to advertising, as Mondelez has done, and, above all, the rise of e-commerce, which will force brands to maintain more direct connection with customers.

The report’s main purpose is a call to boards, CEOs and CFOs to take advertising more seriously and grasp the opportunity to reimagine their advertising spend.

According to my analysis, around £4.6bn, or 20%, of UK advertising spending is unoptimized. That equates to significant reduction of shareholder value, an estimated nearly £90bn over the forecast period - which only covers the UK. It is also conservative because it does not include missed revenue opportunities. 

For those advertisers that get it right, the benefits are huge. P&G is one example. In 2019, chief brand officer Marc Pritchard talked about “placing media where it is most effective and efficient”, optimising spend and reducing inefficiencies.

Since then, P&G’s organic revenue sales and earnings growth have accelerated, with another two consecutive upgrades in recent quarters. Its share price is up 60% in three years, adding over $110bn in market capitalisation, and outperforming several peers by 30%+.

Importantly, it indicated it is reinvesting savings (and more) into advertising, suggesting it is delivering results. 

The main issue revolves around digital. According to the Advertising Association/Warc, 66% of UK advertising spending is digital and, according to theory, that should lead to better outcomes given its greater efficiencies but it is not borne out by results.

Kantar’s annual brand survey shows UK brands amongst the worst global performers, falling relatively and, in 2019, absolutely.

I analysed ONS data on household spend on food and non-alcoholic drinks over the past 20 years and the evidence suggests no evidence of better outcomes from growing digital spending. 

Some of the problem relates to leakage. As last year's ISBA/PwC report showed, 15% of digital ad spend is unaccountable. However, the main issue is an imbalance between brand and activation.

Les Binet and Peter Field state the optimal ratio is 60% brand, 40% activation.

In the UK advertising market, adjusting for spend called brand but actually activation, the ratio is more like 40% brand and 60% activation. 

Search is the primary driver of the imbalance. According to AA/Warc, it was 31% of 2019 UK ad spending. Search is the new Classified Directories, or Yellow Pages, where people look, often knowing what they want but not knowing how to get there.

Directories were incredibly useful in certain circumstances but were never a brand building tool, In 2000 they only represented 6% of UK advertising spending.

In my optimal scenario, search is 18% of UK advertising spend.

The misalignment of search and brand spending was demonstrated by Adidas. When its spend on Google AdWords went down, the company realised it had no impact on traffic or revenues from SEO.

On investigation, Adidas realised brand spending drove 65% of sales across categories, far more than previously thought, and not from search.

Of note is that Adidas used four attribution models to judge spending, two provided by Google, which raises questions over the skewing of results. 

To deliver this message, CMOs need to speak the language of boards, CEOs and CFOs.

One key factor is proper in-depth analysis of advertising spend to back their strategy.

However, top-tier management and boards need to take advertising more seriously as an investment and, when used correctly, a powerful mechanism to deliver significant top-line and earnings growth, and literally tens of billions of pounds in extra shareholder value. 

Ian Whittaker is an independent analyst and a consultant to JCDecaux. He was head of media and equity research at investment bank Liberum Capital until 2020. His report, The Pandemic: Pause or Play, is available here

Photo: City of London with Bank of England in foreground (Alexander Spatari/Getty Images)

Subscribe today for just $116 a year

Get the very latest news and insight from Campaign with unrestricted access to , plus get exclusive discounts to Campaign events

Become a subscriber


Don’t miss your daily fix of breaking news, latest work, advice and commentary.

register free