The crunch in global supply chains has clouded the outlook for the advertising industry as companies that are struggling to source products and components rethink plans to spend big on promotional campaigns.
Toy makers, car dealers and furniture suppliers are among the businesses taking a more cautious approach to ad expenditure as disruption to ports and factories drags on, according to industry executives and analysts.
The bottlenecks meant advertisers in “a wide variety of industries and geographies” may “slow their marketing spend, given the diminished need to drive incremental demand”, Jeremi Gorman, chief business officer of social media group Snap, said in an earnings presentation last week.
It is the latest sign that supply logjams are having a ripple effect, beyond the industries immediately dealing with shortages. Ad agencies have bounced back from the depths of the pandemic, when lockdown restrictions prompted clients to slash spending, yet the supply chain problems threaten to stymie the recovery — at least among particular client sectors and certain types of work.
“Performance” advertising — tactical promotions that try to drive sales directly — was more vulnerable to a slowdown than “brand” advertising, or longer-term efforts to build consumer awareness, analysts said.
The fourth quarter was traditionally a particularly important period for performance advertising, said Steven Cahall at Wells Fargo, as retailers and suppliers promote products to deplete inventory in the run-up to Christmas.
“Marketing has been held back,” said James Zahn, senior editor at the Toy Insider industry publication. “You can’t market a toy that you don’t know is actually going to be on the shelves.”
For now, there is little sign that the shipping delays are having a discernible financial impact on the world’s biggest advertising groups. Results released in recent days showed third-quarter revenues rose 7 per cent year-on-year to $3.44bn at Omnicom, 12 per cent to €2.62bn at Publicis and 16 per cent to $2.26bn at Interpublic. WPP is scheduled to report this week.
While the pandemic has distorted the year-on-year comparisons, organic revenues at both Publicis and Interpublic were higher in the most recent quarter than the same period in 2019, according to Citigroup. Omnicom’s remained lower than the pre-pandemic total, however.
For the final three months of the year, Citigroup is forecasting the rate of organic revenue growth to slow at all three companies: from about 111 per cent of 2019 levels in the third quarter to 103 per cent in the fourth at Interpublic, from 105 per cent to 102 per cent at Publicis and 99 per cent to 95 per cent at Omnicom.
Noting “mounting supply chain issues”, Steve King, Publicis’ chief operating officer, said there was potential for performance advertising to “suffer if stocks or goods start to run out or fall low. At the moment, it’s a small risk, but we’re obviously paying very close attention to this”.
John Wren, chair and chief executive of Omnicom, called the impact of supply chain disruption “the great unknown,” adding the issue was tempering optimism among corporate clients about consumer spending and the return of employees to the workplace.
Discussing the fourth quarter on a call with analysts, Philippe Krakowsky, Interpublic’s chief executive, highlighted the spread of the Delta coronavirus variant, not supply chain problems. “The tone of the business is solid, but Delta has definitely created some uncertainty at the macro level,” he said.
Cahall added that the “brand” work that the world’s largest advertising groups do should help shield them if clients cut “performance” budgets.
“Auto is the most notable weak category, and furniture may be as well, but there are other categories that are well above 2019 levels,” he said, citing high demand for ads in sectors including sports betting and legal.
Additional reporting by Andrew Edgecliffe-Johnson in New York