Credit risk in the advertising and media sector may soon heighten as advertising spend comes under pressure from Brexit and digital disruption.
The advertising industry’s fortunes are very much tied to the wider UK economy, and those of its underlying customer base. So, given the uncertainties of Brexit and the sluggish UK economy, it is somewhat surprising that advertising sales have remained resilient in 2018.
According to the latest ad spend data from the Advertising Association, businesses are expected to spend £6.5bn on advertising in the run up to Christmas, a 5% increase on the previous record amount in 2017. The industry posted its 20th consecutive quarter of growth in the second quarter of 2018 and the strongest first half since 2014, says the association.
As a result, the full-year outlooks for advertising spend in 2018 and 2019 have been upgraded to 6.3% and 4.9% growth respectively, with ad spend forecast to reach £23.5bn for 2018. However, these upbeat predictions are dependent on a positive outcome from Brexit negotiations and clarity on what the future will look like.
Brexit has been top of the agenda for the advertising industry. Leaving the EU raises questions in a number of areas, such as future access to EU markets, data protection laws and broadcast regulation. Perhaps of most concern is the industry’s access to talent – London is a global hub for the advertising industry and a magnet for creative talent. A 2017 survey by Credos into the impact of Brexit on the advertising sector found that 69% of firms employ staff from outside the UK - on average, just under one-fifth of company workforces are non-British EU nationals.
Access to EU markets is also an issue - – some 61% of advertising services exports head to Europe. The recently agreed draft Declaration on the Future Arrangement suggests that the UK and EU aim to negotiate “ambitious, comprehensive and balanced arrangements on trade in services” that would seek to “deliver a level of liberalisation in trade in services well beyond WTO commitments”. However, in the absence of clarity a number of companies have taken steps to offset a potential Brexit impact – for example, Total Media and Germany's Mediaplus launched a joint venture with hubs in London and Munich.
On a more positive note, there are likely to be opportunities to export more widely and build on the UK’s reputation for creative industry leadership. The UK advertising industry - which employs one million people and accounts for 6.4% of GDP – exports some £4.1 billion of services worldwide, including North America and Asia.
With support from the Department for International Trade, the Advertising Association launched its ‘Promote UK’ campaign earlier this year. The campaign aims to secure more international work and spread awareness on the UK’s advertising industry, with target markets of North America, China, India, Japan, the Middle East, Germany, France and Hong Kong.
If government can secure a good outcome from the Brexit negotiations and introduce a business-friendly immigration policy, the advertising sector could see sustained UK market growth and continued export success.
However, Brexit, in particular a no-deal scenario, could have negative implications for the UK economy, with a potential knock-on effect for advertising spend. Credit rating firm S&P recently warned that a no-deal Brexit would most likely trigger a recession, with falling house prices, rising unemployment and lower household incomes.
Unsurprisingly, these concerns are reflected in key metrics for the industry. The CBI Business Optimism indicator decreased to -16 in the last quarter of 2018 from -3 in the previous three-month period, the lowest reading since the Brexit referendum in 2016. Another CBI survey found that eight out of ten firms say Brexit has had a negative effect on investment decisions.
The most recent Institute for Practitioners in Advertising (IPA) Bellwether Report found that UK marketing budgets are growing at their slowest rate since 2015. The estimates that advertising spend will rise just 1.1% in 2018, as a lack of clarity over the UK’s future relationship with the EU, alongside rising cost pressures, act as drags on marketing expenditure.
Many of the sectors most exposed to an economic downturn are also important sources of advertising spend, such as retail, travel, automotive and construction. As concerns for the outcome of Brexit negotiations have grown, shares in banks, retailers and housebuilders have come under pressure. Kingfisher, owner of DIY stores B&Q and Screwfix, for example, has seen its shares fall almost 20% this year as UK sales have fallen.
UK business insolvencies are already running at elevated levels – they increased 19.3% between July and September, the largest increase since 2009, according to the Insolvency Service. The construction industry and retail sectors led with the highest number of insolvencies, with the likes of Carillion, Toys R Us and Maplin closing their doors in 2018.
Retailers, in particular, have seen credit quality deteriorate, as the sector adapts to structural changes and the slowdown in consumer spending. Retail sales cooled in the year to October 2018, according to the latest data from CBI and the ONS. Some 2,692 stores disappeared from Britain's high streets in the first six months of 2018, the biggest net decline in five years, according to accountancy firm PwC. Closures were prevalent in areas most affected by online shopping, such as electronics and clothing, and the restaurant trade, as more people dine at home, it says.
The advertising sector is also undergoing a period of disruption. Competition is increasing as advertising agencies and media bookers are squeezed by technology firms like Facebook and Google, while public relations companies have been looking to expand into advertising.
Traditional advertising media, such as print and billboard advertising, has been in decline, while online and mobile advertising continues to grow rapidly. Internet advertising is expected to grow 13.3% in 2018 to £13bn - mobile advertising accounted for over half of search spend for the first time in 2018 while other display formats are also growing strongly – online video attracted half a billion pounds during the three months to end-June.
The TV market is also under pressure, although sales have held up in 2018 – it is expected to grow 1.4% in 2018, although TV advertising spend fell by 3.2% in 2017. In contrast print advertising is in decline – national, regional and magazine advertising fell 5.5%, 13.1% and 11.5% respectively in 2017, with further reductions predicted for 2018 and 2019.
The shift towards online advertising was said to be behind a decline in revenues at WPP, one of the world’s largest advertising groups. Reflecting falling sales and disappointing results, WPP’s market value has halved in the past 18 months. The company says it is adapting to “structural change” in the industry, including competition from platforms like Facebook and Google, as well as the impact of Amazon and Netflix on traditional TV channels. Google and Facebook now control 57% of the online advertising market in 2018, according to according to EMarketer.
Credit risk in the advertising sector in the next twelve months is likely to be driven by the fortunes of the sector’s underling client base. Insolvencies are already rising for retailers and construction, sectors that are particularly vulnerable to potential economic turbulence in the months ahead. Other sectors are also under pressure - a number of airlines have failed (most recently Primera Air and Monarch in 2017) while the leisure and food & drink sector has also witnessed insolvencies as some firms struggle with rising costs and weak consumer demand.
A positive Brexit outcome could help lift the economy, but if the UK economy struggles in 2019, companies may look to rein in any discretionary spend. Advertisers will want more return for their spend and more targeted campaigns. Successful advertisers will be those that are able to communicate that increasing advertising spending during a recession can increase market share.
Trade credit insurance is a valued tool in the sector, and is widely purchased by media outlets and media bookers looking to protect themselves from the risk of non-payment. When it comes to credit insurance, QBE has long standing experience and knowledge of key sectors for advertising and media, including retail, food and drink, and travel. We have an appetite for credit risk in this sector and are able to support clients as they trade through times of increased risk and as they invest for the future.