Written evidence submitted by the Advertising Association (COV0133)

About the Advertising Association

1. The Advertising Association promotes the role and rights of responsible advertising and its value to people, society, businesses and the economy. We bring together companies that advertise, their agencies, the media and relevant trade associations to seek consensus on the issues that affect them. We develop and communicate industry positions for politicians and opinion-formers, and publish industry research through advertising’s think-tank, Credos, including the Advertising Pays series which quantified the advertising industry’s contribution to the economy, culture, jobs and society.

Context

2. The membership of the Advertising Association is very broad and includes the associations representing industry sectors, such as the advertisers (through ISBA), the agencies and advertising production houses (through the IPA and APA), all the media (from broadcasters and publishers, cinema, radio, outdoor and online), market research (through MRS) and marketing communications services such as direct marketing and data analytics, as well as promotions.

3. Advertising is important. It plays a crucial role in brand competition, drives product innovation and fuels economic growth. It also provides revenues to fund a diverse and pluralistic media enjoyed by all.

4. Our industry is a catalyst for growth, competition and employment, with around 1 million jobs across the whole of the UK being dependent on advertising. Every £1 spent on advertising generating £6 of GDP. Ad spend across the whole of the UK was £25.4bn in 2019, meaning the industry was worth around £152bn to the wider economy.

5. Most of the UK’s advertising workforce is located outside London. Despite the global reputation of the capital’s advertising market, most people who work in the industry in the UK aren’t based in London. More than half (57%) work in the regions and cities outside of the capital. Outside the capital, Manchester is the largest of the city hubs in terms of the number of workers employed in the industry.

6. Advertising is one of Britain’s leading service exports, with nearly £8bn of export earnings according to latest figures.

7. According to Deloitte research carried out on behalf of the Advertising Association, the one million jobs supported by advertising can be broken down as follows:

• 350,000 jobs in advertising and the in-house (brands) production of advertising
• 76,000 jobs in the media sectors supported by revenue from advertising
• 560,000 jobs supported by the advertising industry across the wider economy.

8. Please contact Mark Johnson (mark.johnson@adassoc.org.uk) for further information on any of the points raised in this submission.

Executive Summary

• COVID-19 has had a serious impact on the UK advertising industry with forecasts indicating that advertising expenditure will be down 16.7% this year.
• Reduction in ad spend is a result of the damage done to those industries which are unable to sell such as hospitality, retail, travel and tourism sectors and those companies which have cut budgets as a result of the wider economic downturn.
• All parts of the advertising supply chain have been impacted by the crisis and resultant reduction in ad spend.
• While the Government acted swiftly to support jobs and businesses through policies such as the Coronavirus Job Retention Scheme and the Coronavirus Business Interruption Loans, more can be done to support the UK advertising industry.
• The advertising industry will play an important role in the UK’s economic recovery, driving the growth of British businesses in domestic and international markets.

Our response

The immediate impact of Covid-19 on the advertising industry

Collapse in ad spend

9. This has been a difficult time for the advertising industry. Revenues and ad spend continue to decline as lockdown continues, with advertising inventory being cancelled across different media sectors. Full year forecasts for ad expenditure in 2020 have been revised downwards and we expect a 16.7% decline compared to 2019[1]. The deterioration of advertising trade, we believe, will be focused primarily in the second and third quarters of this year with falls of 39% and 24% respectively, though the aftershocks are likely to last into the fourth quarter and early 2021. Companies have rushed to cut expenditure to protect their cash positions, meaning that advertising campaigns are being deferred or cancelled, with a serious ‘knock-on’ effect throughout the industry supply chain, including advertising agencies and production companies.

10. Despite strong pre-crisis growth forecasts, the crisis has created significant challenges and uncertainty for the advertising and media industries. While the full impact of the COVID-19 outbreak on the UK economy is still to be understood, it is clear is that this current crisis is like no other recession, in that we are facing simultaneous demand and supply shocks.

11. The disruption can be broadly split into two categories: those who are unable to sell such as hospitality, retail, travel and tourism sectors; and those hit by the wider economic downturn. Severe declines in revenues persist across all business types. Advertising of products and services has become much harder now that consumers are either unable or unwilling to spend. The postponement of the Tokyo Olympics 2020 and the UEFA European Championships will be felt by the advertising industry as the sponsorship of major events often contributes to a large part of a brand’s overall marketing strategy and budget. Uncertainty as to when the climate returns to ‘business as usual’ has also meant that ad spend has stalled.

12. Publishers with events and exhibitions as part of their business models have seen a 90% decline in revenue for live events for Q2 and a 50% decline in revenue over next 12 months. For consumer events businesses and B2B exhibition businesses, this revenue will not be coming back. There are also long planning times for events, meaning a return to normality will take longer than for other businesses.

13. Despite increased listener figures, radio is expecting a 40% year-on-year drop in advertising revenues in Q2. Smaller local stations are seeing even greater declines than this due to their reliance on local SMEs, which have cancelled advertising at short notice. These stations are at an immediate risk of going off-air. To add to this pressure, fixed costs, such as the high transmission fees, remain.

14. The AA/WARC Expenditure Report, which measures spend on advertising, forecasts that the TV ad market will be down 19.8% and VOD (video-on-demand) by 6.3% in 2020[2]. Broadcasters are taking a range of steps to protect their businesses and jobs, including cutting content budgets, suspending dividends, conserving cash, instituting pay freezes and halting recruitment.

15. Online advertising has also seen losses despite the increase in media consumption and traffic. Advertisers have reduced spend and revenues are forecast to be down 30-40% in Q2. When compared to 2019, 53 surveyed IAB UK members saw a 32% decline in forecasts for Q2 in 2020 vs Q2 2019.

16. Cinemas have been closed since mid-March and are not due to re-open until July with social distancing implemented. Film releases have been postponed, hence, the advertising that has been booked to accompany major film releases like James Bond has been moved.

17. Reduced outdoor footfall has meant that advertisers are finding it harder to justify advertising on out of home formats. Outsmart, the out of home advertising body, said its members had stood down their poster billing and logistics teams as they had lost their outdoor audience. Smaller media owners have turned off their digital screens and one large media owner said it would have to reduce working hours by 50% from June. Revenues were down approximately 90% year on year, but business rates were still being paid on 158,000 out of home sites. On average, more than half of their members’ staff had been furloughed.

Challenges to producing advertisements

18. During lockdown, advertising production has stopped completely, with ramifications felt across the supply chain. Social distancing requires a new way of working, using visual effects, editing and animation. The Advertising Producers’ Association has now published their own guidance on safer video production. The rapid decrease in advertising commissions has hit agencies hard, with significant loss of revenue and mounting cash flow problems, particularly for smaller agencies and those outside of London. We understand from the APA that its members were planning for three months’ work without income. For these businesses timely payment of existing invoices could determine whether the company survives or not.

Operational challenges

19. Market research facilities are closed, and face-to-face research has not been possible. Research spend has decreased by between 25-35%.  Market research companies are continuing work from commissioned projects contracted before the lockdown but are concerned that postponed research projects will not be commissioned due to increasing budgetary pressures. The research sector is considering the future willingness of the public to engage in face to face research in their homes, in street and in research facilities.

20. Promotional merchandise businesses that are reliant on international customers were already facing a three-month backlog in their invoices, not helped by worsened by a spike in air freight costs. This has led to businesses being unable to trade, whilst others are facing bankruptcy.

21. The industry is made up of a number of advertising and marketing services sectors that are successful and support jobs across the country. Freelancers make up a considerable part of the workforce. For some sub-sectors this threat is existential.

22. Cash flow is a primary concern for businesses across the industry and Government support has proven crucial to businesses, but immediate challenges remain as businesses have been unable to operate in a normal way. To help further deal with the financial pressures caused by the outbreak, businesses have been asking staff to take temporary pay cuts and reduced hours, furloughing staff[3] and in some cases, already starting redundancy consultations, with some sectors expecting a 30% decrease in workforce.

23. One in four Data & Marketing Association (DMA)[4] members surveyed said they only had enough cash to keep the business going for 3 months or less, and more than 50% of members believed they would not last longer than 6 months in the current climate.

Long-term impacts of Covid-19 on advertising

24. The uncertainty created by COVID-19 means that companies are finding it hard to plan for 2020 and beyond, with some sectors seeing their ad spend hit harder than others, such as travel and tourism.

25. The advertising industry has been subject to several regulatory reviews including the ICO investigation into real-time bidding, the DCMS review of online advertising, the CMA competition review, and the review of HFSS (High Fat, Sugar and Salt) advertising. It is particularly important at this time of considerable economic turbulence that there is regulatory stability and that the reviews reflect the new situation.

26. Permanent or long-term scarring of the sector is highly possible, especially if, in the future, there are large-scale layoffs and company closures. Apart from the risk of long-term unemployment, the sector will be operating under reduced capacity and it could lose international competitiveness as a result. The EU, for example, is our largest collective export market, and there is concern over the slow progress of the UK-EU negotiations. The £3.7 bn worth of advertising services that were exported to EU nations in the last ONS figures (2018) accounted for 53% of overall advertising exports. Understandably these talks have been overshadowed by the COVID-19 crisis however the clock is ticking and the cliff-edge of 31 December 2020 edges closer. Given the economic damage caused by COVID-19, should the UK fail to reach an agreement with the EU on a post-Brexit trading relationship before the end of the year it could compound a disastrous situation. Advertising is a leading UK services export and the Government should do everything it can to protect this valuable source of revenue and jobs for the UK.

27. Continued fiscal and monetary coordination will be important to offset economic risks. Boosting aggregate demand will also be incredibly important as 70% of the UK’s economy is reliant on consumer spending.

28. The outbreak has disrupted normal consumer behaviour and the concern is that these effects could become ingrained. The industry is considering how it must adapt to reach its audience at home. Consumers have changed their usual purchasing habits and are now becoming increasingly reliant on e-commerce. Additionally, there has been an increased usage of streaming platforms and subscription-based products and services which will have wider implications for traditional advertising channels, such as TV, print and radio.

Government Support

29. BEIS, as well as DCMS, have been very pro-active throughout this period, with Ministers and officials speaking to the AA and its members every week. We have joined weekly calls with Ministers: DCMS calls with the Creative Industries Council and BEIS calls with the Professional Business Services Council. We have responded to regular consultations by both Government departments and held roundtables for them to hear the concerns of the industry sectors.

30. In preparation for lockdown measures easing, the AA has been working closely with Government on practical measures that need to be put in place, including on social distancing, to enable businesses to get staff back to the office. Whilst home working has been remarkably successful for many companies in the services sectors, particular issues arise for manufacturing and the supply chain, for advertising production (as mentioned elsewhere in this document) and for sectors like market research which is reliant on face to face contact for core parts of the business.

31. The AA and its members are now discussing measures in addition to the ones above that will aid recovery in the advertising industry as the lockdown eases.  In this context, we welcome the Government’s recent announcement that it will be providing a temporary guarantee for credit insurance for business-to-business transactions. This is vital to the successful functioning of the market.

32. When media agencies take bookings/arrange to buy media for clients, they take a risk when booking this media, in case their clients fail to pay. Therefore, credit insurance is routinely taken out on three months of clients’ media spend.

33. The market continues to work but insurers have either reduced or pulled credit insurance in sectors that are closed down. Since advertisers such as airlines or events companies are not advertising now it does not present an immediate impact. However, as businesses re-start, it is important that these limits are high enough to cover capacity when these advertisers return. Government guarantees should not be based on current levels but on pre-COVID levels plus (to allow for increased ad spend as the economy re-starts). It is important that the dynamics of the advertising industry are not overlooked when the details of the scheme are published.

34. We are also actively exploring the idea of an advertising tax credit, as a time-limited measure in response to the crisis, to help spur business investment and economic growth. For example, a tax credit for advertising and marketing services could encourage companies to re-invest in advertising or SMEs to start advertising, and this would help kick-start the economy by encouraging people to buy goods and services.

35. Of all the Government support schemes, the furlough scheme has been the most popular and is extensively used across all advertising industry sectors. The extension of the furlough scheme is welcome as is the announcement that part-time furloughing will be introduced. These all provide employers with greater flexibility. The CBILS scheme has been less successful and we have heard of numerous difficulties in accessing funding.  The newer Bounce Back Loans are popular amongst very small companies and they are easy to access. However, most companies in the industry are too big to qualify.

36. Business rates and rents continue to be a challenge. The business rates holiday for businesses in the retail, hospitality and leisure sectors will provide much-needed relief to keep many businesses afloat. However, many creative organisations, including advertising agencies, local radio stations, publishers, event companies and charities are paying business rates and rents whilst being unable to operate. The out-of-home media owners are paying business rates on 158,000 out-of-home advertising sites. Advertising revenues have collapsed because of the decline in footfall. Yet there is a close relationship, and many similarities with, the entertainment and leisure sectors that currently qualify for the relief: billboards outside venues for example. Similarly, market researchers, data analytics companies and other sectors such as publishers with conference programmes as an integral part of their business model are impacted. Offices and venues stand empty but are still subject to business rates.

37. Many freelancers still face issues with access to Government support. Freelancers will often be ‘employees’ of their own limited company and were compelled to operate in a way which falls outside of the Job Retention Scheme.

38. Finally, companies are still expected to pay the apprenticeship levy and yet all training has been suspended. So, whilst funds are not being used, it appears the clock on the expiry date of those funds is still ticking. We would recommend either suspending payments or stopping the clock, or both.

Advertising and the economic recovery

39. Investing in advertising can be of great benefit to businesses during an economically challenging period. Advertising and promotions help businesses compete to retain or build back their market share. Businesses which cut their marketing budgets entirely during the economic downturn in 2000 took 5 years to return to the sales levels of those who sustained their spend. According to a Kantar/BrandZ analysis from the 2008 recession, brands that retained ad spend during the recession, recovered 9 times faster than competitors in the years that followed.[5]

40. Advertising will be crucial in helping the economy bounce back but it can also be vital in helping small and medium sized enterprises survive. For every £1 spent on advertising, there is an average of over £3 increase in profitability. These results are even greater amongst the SME community, particularly when undertaking multi-channel campaigns - £1 can benefit an SME eight times as much as a larger business.

41. The AA’s pilot scheme, AAccelerate, was established to drive growth across the nations and regions of the UK by encouraging more SMEs to advertise. AAccelerate brings together the best of UK advertising to help with advice and incentives to give UK SMEs the best return on their advertising investment. As the economy begins to turn a corner, advertising will be crucial to ensuring that business and the wider economy begin to grow again and encouraging businesses to advertise will be an important part of this process.

42. Advertising is one of Britain’s leading service exports, with nearly £8 billion of export earnings according to the latest ONS figures, which date from year ending December 31, 2018. The UK exports more advertising services than it imports to the tune of £3.6bn – this is the largest trade surplus in ad services in Europe. Over the nine years 2009-2018, advertising services exports grew by around 229%, specifically from £2.4 bn to £7.9bn. The £3.7 bn worth of advertising services that were exported to EU nations accounted for 53% of overall advertising exports. The percentage of all UK advertising exports going to Europe, including both the EU and non-EU countries, was 55%. The USA once again remains the largest market for UK advertising services in terms of individual country exports. In total, they take in £1.1bn worth of UK advertising service exports. They are followed by Germany (£1bn), France (£733m), Switzerland (£661m), and Ireland (£640m). Therefore, the re-emergence of advertising export markets will be crucial to the UK’s economic recovery.

43. The Advertising Association officially launched the UK Advertising Exports Group (UKAEG) in March 2020 and it brings together 50 members from across the UK’s advertising and marketing services landscape, with the support of the Department for International trade. Advertising is already the second largest service sector export among reference industries and UKAEG’s aim is to further support the Government’s drive to increase the export of advertising services by promoting the UK as the global advertising hub.

44. With markets in China and others across the Far East beginning to reopen, the UK advertising industry has the potential to be at the forefront of this recovery. The UKAEG is alert to new industry events planned to take place in these markets and plans to participate remotely as a means to promoting the industry abroad.

45. Advertising is a driver of economic growth and competition. Investment in advertising will boost company sales and will help the UK economy recover from the recession caused by COVID-19.

May 2020