Total advertising spending in the US was down 0.4% in the first quarter of 2002 according to CMR, an ad-tracking unit of Taylor Nelson Sofres Co. The performance would have been even worse except for the boost in spending by advertisers during the Olympics in Salt Lake City this year. Ads on TV for the Olympics generated an extra $5.5 billion, or 6.2% of total television revenue. A specific breakout of spending for outdoor media was not available, but CMR reported cable TV ads were off 16%, newspapers fell 9.3%, and on-line advertising was down 14%.
The reasons for declining ad revenue in a recovering economy were analyzed by Zenith Optimedia Group, the world’s fourth largest global media services agency. Zenith Optimedia reported their analysis of worldwide ad spending in a recent press release.
The advertising recession has been caused by a collapse in corporate confidence and profits. Consumer expenditure normally correlates closely to ad expenditure, but this time consumers have continued to spend throughout the downturn, as their confidence has been buoyed by cheap credit and rising house prices (except in Japan). But advertisers have had their margins eroded by fierce price competition, and in many cases by the need to write down assets that have fallen sharply in value, so they have cut back on advertising as well as other expenses to protect reported earnings.
It is striking that ad markets are becoming more gloomy just as economists have started to revise their forecasts upwards.
[w]e are forecasting decline in ad expenditure in 2002, and at least another two years when advertising growth will under perform GDP.
This is precisely what happened in the previous recession. Then, ad expenditure suffered a much sharper downturn than the wider economy in our top seven markets, and took longer to recover. This is the price ad markets pay for outperforming the economy during periods of confidence and growth; they are paying it again now…
Zenith Optimedia is forecasting a decline of 1.8% in advertising revenue in 2002 for the US. This will be followed by a rise of 2% in 2003, and growth of 4.2% in 2004. Advertising media companies will welcome the return to normal growth rates by 2004 if the forecast is realized. The expected advertising revenue of $140.9 billion in 2004 will still be short of the $144.4 achieved in 2000. That record level was set by two non-recurring forces. Dot.com ad spending had not entirely collapsed by that time, and the telecom companies were still spending with abandon. Advertising today is much more balanced across industry segments.
Billboard companies have seen a larger decline in spending by national advertisers than by local and regional businesses. This is due partly to the need by local businesses to let travelers know where they are located. Restaurants and motels depend on their freeway billboards for customers and they do not cut back on this type of spending unless absolutely necessary.
Some of the billboard companies that courted the large and profitable national accounts in the late 1990s are shifting gears and going after more local accounts. They have redirected their sales forces to fill blank faces with ads from local merchants. Local and regional sign operators that never abandoned the smaller advertising accounts are now in a better position to hold their customer base.
Lower ad revenue tends to mean lower billboard values. Since most buyers and sellers establish a price for a billboard plant based on its revenue, lower revenue means lower value. If sellers know that their plant is worth six times revenue, and revenue is lower than in previous years, the effect on price is obvious. In addition, some acquirers set their purchase price according to expected revenue and earnings in the forward 12 months. With revenue expected to decline, pricing models are coming up with lower prices. There are always exceptions, but in general lower revenue means a tendency toward lower billboard values.