Could we advertise ourselves out of recession?
Advertising pays, that much is accepted, but to what extent does it actually boost the economy? According to an exclusive report from the Advertising Association, it contributes £100bn a year.
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Advertising has been blamed for everything from binge drinking and childhood obesity, to sexism and the rise of gambling among women; not to mention the accusations of false claims made in ads. But a new report aims to banish those views and rebuild the industry’s sometimes tainted image by proving its worth to the UK economy and wider society.
Launched today (January 31), the three-year study by the Advertising Association (AA) and Deloitte claims that for every £1 spent on advertising in the UK, £6 is generated for the wider economy. Annual ad spend stood at £16bn in 2011, so by that estimation advertising added at least £100bn to the UK’s gross domestic product.
To put this in perspective, the AA’s chief executive Tim Lefroy says: “That’s bigger than spending money on building new roads, railways or stations where the conversion factor would be one to four. Spending money on advertising will grow the economy, increase jobs and make things better in this country.”
And in her first press column, culture secretary Maria Miller speaks of advertising as being on a par with manufacturing, saying that both will drive economic recovery in the coming years (see viewpoint).
While ad spend is set to increase from £16.8bn last year to £17.2bn this year, according to the AA and WARC, the new report is about the overall contribution of advertising to the economy - how it generates demand for products.
Matt Barwell, consumer marketing and innovation director of Diageo Western Europe, says: “People fundamentally believe in advertising but a lot of the conversation focuses on negative elements. People rarely get the opportunity to talk about the positive role advertising plays in terms of wealth creation, exports and the social benefits that it provides. These are all things that many of us take for granted.”
In addition to encouraging price comparison and competition, advertising has been credited with promoting innovation by speeding up the communication of new products to consumers.
It also contributes to greater brand recognition both in the UK and globally, which helps to build larger market share and, so the argument goes, exported business. Although it is difficult to quantify the effect of advertising on exports, the report finds that it helps to support more than £2bn of exported ad services each year.
At a time when unemployment is high, it is also encouraging to note that the UK ad industry supports more than half a million jobs, both directly and indirectly, according to the Department for Culture, Media and Sport.
Meanwhile, advertising that highlights product benefits, price and availability has also been credited with expanding existing sectors and helping to build new ones. This was found to be most effective in markets where there is significant technological, economic or social change. An example is the internet.
“The digital revolution would not have happened and would not be happening without advertising,” says Barwell, who takes over as chairman of Front Foot in March, the AA’s practitioner group that funds and guides industry think tank Credos. “The growth in broadband penetration happened because that industry has grown as a result of funding from advertising. Whether it be in search, websites or social media, the reason it exists is because of the advertising investment that helps fund it.”
Its growth has been fuelled by the competition between the major broadband providers. Over the past eight years BSkyB, BT, Virgin Media, Talk Talk and others have aggressively pitched themselves against each other through competitive pricing and faster access speeds in a bid to attract new customers and gain market share.
As a result, the average price of broadband dropped from £21.84 to £14.02 per month between 2005 and 2010, while average speeds increased from under 2Mbit/s to nearly 16Mbit/s. Without advertising the report estimates that 36 per cent of the households that have access to broadband would not have done so.
Although the growth of the internet has laid claim to many positive innovations it has also been blamed for the decline in high street sales. But the AA is keen to balance that argument; it suggests that ad-funded sites do drive offline retail sales, £33bn of which have been supported by shoppers researching online prior to purchase, according to the report. Online advertising also “stimulates” around £9bn in annual retail sales.
Meanwhile, 43 per cent of visits to ecommerce sites come via search and a further 8 per cent are driven by social media sites. Taking all these factors into account, the report suggests the result is that £76bn is contributed to the UK economy, £7bn per year of which would not have happened without the internet.
While the report is grounded in solid thinking, there will be sceptics that say it is self-serving. There are, of course, brands that boost sales and raise their profile without relying heavily, or in some cases at all, on advertising.
The Body Shop UK brand and values director Sam Thomson says: “It’s about finding the most effective way to be engaging, exciting and relevant for your customers. For us, that is less about advertising and more about a strong focus on personalised service - whether in our stores, online, through our Love Your Body loyalty programme or on social media.” (See viewpoint)
Retailers such as Primark and Jack Wills similarly do not rely on traditional advertising to boost sales. Primark’s owner Associated British Foods posted better than expected sales for the 16 weeks to 5 January, 25 per cent ahead of the same period last year and with an increase in operating profit. This was down to “very strong like-for-like sales growth, a substantial increase in retail selling space [up 14 per cent since the same time last year] and superior sales densities in the larger new stores,” according to the group’s financial statement.
It is also worth noting that although many retailers’ sales are being driven by online transactions, Primark is one of the few that does not offer such a service. It also does not have a large social media following with only 430,000 followers on Facebook; its high street rivals like Topshop and H&M have millions. This shows that if a brand does what it does well, advertising is not a necessity, whether it is paid for, earned or owned.
Jack Wills, the British heritage-inspired brand that targets the “university crowd” has grown considerably since its launch in Devon in 1999. It has more than 60 stores in the UK and a presence in the US and Hong Kong.
It, too, does not depend solely on conventional advertising techniques, instead building the brand through word of mouth. It uses brand advocates or ‘Seasonairres’ to generate buzz. For example, the brand launched the Live Life Louder campaign on 17 January which over a three-week period invites people to enter the #beatthis competition to win prizes and access free music by tweeting images that outdo those posted by its recruits working in ski resorts.
The rise of social media has created a huge shift in the way brands interact with consumers but Aviva chief marketing and communications officer and departing chairman of Front Foot Amanda Mackenzie plays devil’s advocate and questions whether its long-term effect will be the same as more traditional media.
“There’s no doubt that money has switched to digital, whether it’s Google or a Facebook. It will be interesting to see what the long-term effect of this will be in terms of shifting attitudes and creating elasticity in the things brands do.
“If you’re driving a direct engine, it is relatively easy to switch money into social media because your input equals your output and you can measure it straight away. But over time what are you effectively doing? Are you building long-term sustainable results or are you driving short-term immediacy that means the minute you stop you’re going to see your sales score decline? If you spend longer in more conventional media, can you build a more sustainable and robust response from consumers?”
At a time when austerity and restraint are the order of the day, the AA is fully expecting to be criticised for advocating consumerism. Giles Fraser, who resigned as chancellor of St Paul’s Cathedral over the Occupy movement, will be debating the merits and demerits of the industry with adam&eveDDB chief executive James Murphy at the AA’s LEAD conference today (31 January), where the report also be launches.
The AA’s Lefroy says that despite what people think, “this industry does not go balls-out to promote materialism and irresponsible consumption. It is actually quite appropriate for the advertising industry to support responsible consumption.”
Likewise, Aviva’s Mackenzie says: “In financial services, [advertising] is not a substitute for doing the right thing, having the right products and behaving in the right way. One of the biggest challenges that financial services companies face on a daily basis is to make sure that as an industry people can trust it. The role of advertising is to make sure we communicate the right things but also deliver and act on them. A brand is as a brand does.”
She believes people will always criticise something that is vaguely commercial, but suggests that as a nation if we want to compete on a global scale, then advertising is a necessary part of that.
“Why would we try to criticise commercialism as long as it’s sound, sustainable, thoughtful and built on good values?” she asks. “It would be sad if people start to do that because growth can be a good thing.”
She points to brands such as Unilever and Marks & Spencer, which are on a big sustainability drive and keen to convey that message to consumers.
“It’s not necessarily about flogging more products; nevertheless you still need people to understand what you’re trying to do and to buy into the brand and its values,” she says.
Diageo’s Barwell adds: “There will inevitably be conversations about over-consumption in society and the fact that we need to build a sustainable world, and I would agree with that. What we’re saying is, let’s have a balanced debate about the role of advertising because it can play a key role in addressing social issues, whether that’s over-consumption, the misuse of advertising or drink-driving. There’s evidence that when you use advertising to address some of these social issues it can be really effective.”
A campaign warning against drink-driving in Northern Ireland, for example, contributed to a 35 per cent reduction in deaths between 1995 and 2006, while nearly 10,000 stroke sufferers got to hospital more quickly as a result of an awareness campaign in 2009, which urged viewers to call 999 more promptly. The ‘extra’ life years created as a result has been estimated as being worth £65.7m for the stroke campaign, and after taking into account additional care costs the payback of the campaign during 2009 was £26m.
Advertising has also been credited with lowering the associated cost of burglary in the UK thanks to the 2003/04 ‘Don’t Advertise Your Stuff to Thieves’ campaign. The activity cost the Government £13.5m, but the cost of crime was reduced by an estimated £189m.
So why, other than to start debate, is the AA launching this report now? Lefroy says it is because it wants to encourage the Government to stand firm on data rules.
Digital expansion has brought with it an unprecedented amount of data, which if used responsibly can unlock immense value, but there are concerns that if the EU’s proposed data and privacy policies come into effect, further growth will be stalled.
Lefroy says: “We want to encourage the Government to push back against EU rules on data. If the proposals actually got onto our statute books, it would absolutely stop and critically disempower our leadership in digital marketing. We are the leading digital marketing economy in the world and if Viviane Reding [vice-president of the European Commission] has her way in terms of the regulation as presently drafted, the mixing up of what is personal data and what is aggregated data (that generally used for marketing) could mean there is a one-size-fits-all type of legislation that stops the whole thing in its tracks.”
The AA is also keen to persuade the Government to lower the barriers to entry to help smaller businesses advertise.
Lefroy adds: “We’ll be encouraging politicans to boost UK capability and production, for example relaxing the immigration regime to enable agencies to employ interesting and diverse people from all over the world.”
Although advertising could be blamed for some things, if it can boost the UK economy, that is certainly something to capitalise on.
To assess the effect of advertising on GDP, Deloitte built a model of the economy, and removed ad spend. Accounting for other variables that are commonly used to determine GDP (such as government spending and international trade), the model found an increase in ad spend led to increased GDP per capita.
Deloitte’s analysis used a data set built from the World Bank, WARC, Nielsen and the International Labour Office, which generated a panel of 17 countries (comprised of the world’s largest economies as well as some developing economies), spanning a 14-year period (1998-2011). Building on established academia, the study accounted for the likely existence of reverse causality (that is, higher GDP per capita is expected to be associated with an increase in ad spend as firms seek to capture a larger market share).