The latest IPA Bellwether Report gives reason for marketers to be cautiously optimistic once again, as budgets are revised higher during the second quarter of 2023.

The growth in budgets is said to be fuelled by a record increase in revisions to sales promotions as brands continue to battle against the cost of living crisis. The IPA Bellwether report reveals that over a fifth of survey respondents observed growth in total marketing spend during the second quarter - more than the 14.4% who registered budget cuts, yielding a modestly positive net balance of +6.4%.

Whilst the slow but steady growth continues the positive trend that began two years ago, against an ongoing uncertain economic backdrop, spending weakened slightly from last quarter. The report signalled a softening in budget growth since the beginning of the year; +6.4% in Q2 compared to +8.2% in Q1.

Category growth led by promotions

Data in the report split out by marketing categories revealed that three out of seven registered budget growth. The top performing segment was sales promotions, where the net balance of firms recording budget expansion rose to +13.4% (up from +8.8% in Q1).

Where the cost of living crisis has left consumers battling with inflation, with less disposable income stripping them of purchasing power, sales promotions are allowing brands to gain favour, providing a quick win. Notably, the uplift in sales promotions spending was the most pronounced in over two decades of survey data.

The other categories to experience growth were events (+9.8% from +6.3%) and direct marketing (+7.3% from +4.2%). The increased interest in events shows that the post-covid appetite for in-person engagement continues to hold strong. Direct marketing experienced its biggest increase in spend since the third quarter of 2006.

All other segments saw budgets scaled back. In particular, PR budgets had a sharp decline (-1.9% from -0.6%). The report also found that the main media segment budgets also fell for the first time since the third quarter of 2022. Within the main media category, other online (net balance of +8.3, from +10.5%), and video (+3.2%, from +7.9) remained in growth territory, although this was offset by audio (-8.0%, from +1.7%), out of home (-7.1%, from -12.4%) and published brands (-5.0%, from -1.9%). The IPA suggests that the drop in main media and rise in sales promotions is a reactive change from UK businesses responding to the economic climate. While investing in promotions may alleviate consumers' worries in the short term, the IPA warns against too much short-termist thinking and encourages brand building to balance long and short term activity.

“We continue to advocate the well-tested rule of thumb that a 60:40 ratio of brand building to sales activation is the best way to grow business through marketing activity” says Paul Bainsfair, IPA Director General. “It is welcome news that total UK marketing budgets remain in positive territory, despite the latest figures from the ONS which reveal a ‘listless’ UK economy. It is therefore not surprising to see a dramatic increase in sales promotion this quarter. But we would not want to see this as a long-term trend because our comprehensive bank of evidence shows that price promotions damage brands because they lower consumer price references and do not build brand loyalty.”

He continues: “While, understandably, brands may think this is the right thing to do for their customers during the current cost-of-living crisis, it is a counter-productive exercise that may generate short-term spikes in sales volumes but will almost never change how consumers think or feel about their brand because they are only interested in the lowest price point.”

A sombre sentiment

Across the industry, the Bellwether reported a sombre mood. Sentiment towards industry-wide financial prospects has moved deeper into negative territory. 28.8% of survey respondents expressed a downbeat assessment for their industry in the coming 12 months - more than offsetting the 16.2% who registered optimism. Yet, sentiment towards own-company financial prospects was closer to neutral during the second quarter of the year. This was highlighted by the net balance of firms who were optimistic in their outlook slipping to +2.6%, down from +7.0% in the opening quarter.

Long-term recovery

Forecast growth for the UK economy has been upgraded by authors S&P Global who expect GDP in 2023 to grow by 0.3%. While the economic outlook remains uncertain for both business and consumers, the revised forecast is said to be reflective of the resilience of consumers throughout inflation.

“Against a backdrop of escalating inflation and interest rate increases, it is heartening to see the stalwart attitude of many brands, responding with agility to their consumer intelligence. It is equally heartening to see marketing strategies addressing the very needs of the UK market at the moment” says Richard Aldiss, Managing Director of McCann Manchester and IPA Chair for England & Wales. “The rise in budgets across sales promotion is testament to this, showing brands supporting their customers during the cost-of-living crisis. However, we know that those brands applying a long-term lens will reap the benefits.”

Despite this, the immediate growth outlook still remains challenging. The Bank of England is set to raise interest rates even further, to tackle an inflation rate which stands well above the 2% target. This means that for 2023 overall, the Bellwether Report foresees adspend declining marginally by -0.6% (compared to -0.9% previously).

Looking to 2024 and beyond, small but steady growth is predicted year on year. Growth is forecast at 0.1% in 2024, set to improve to 1.5%, 2.0% and 2.1% in 2025, 2026 and 2027 respectively.