How Advertising Agencies and Brands Should Negotiate 2023

We should have seen it coming. The economic slowdown, after a couple of terribly volatile years, caused by the Covid-19 pandemic. While the first year of the Covid pandemic prompted strict lockdowns in many countries adversely impacting the services part of the economy, manufacturing chugged along, even if a little slowly. Thanks to that, international trade picked up pretty quickly, although it is still nowhere near pre-pandemic levels. Then, after vaccinations were administered across the world and lockdowns eased, the surge in pent-up demand sent the manufacturing sector into a gridlock as it simply couldn’t keep pace with demand, what with the semiconductor industry located in China and East Asia now badly impacted by the Delta and then the Omicron variants of the virus. Services are getting back to business, except in China which continues to pursue severe lockdowns and is now overwhelmed with protests erupting across the country against the Zero-Covid policies of the government.

After all this see-sawing, we ought to expect a year of relative calm and stability next year. It promises to be anything but. Thanks to all the liquidity pumped in by central banks, including India’s RBI, and generous stimulus checks in the US as well as job-protection programmes in the UK and Europe, consumer spending as well as supply shortages have taken consumer price inflation to multi-decade record highs in the West. Even in India, where inflation began to creep up before the pandemic, it shows little signs of easing; core inflation (that excludes volatile food and fuel prices) has been stubbornly high at around 6% for well over a year. The ongoing war in Ukraine doesn’t help either, keeping commodity prices of energy, food and fertilizer high.

In order to control inflation, central banks are now in the process of tightening monetary policy and raising interest rates, hoping to curb demand. That is expected to slow down economies, with recession expected in many developed economies by the end of this year and through most of next year, if not already set in. All this is going to affect business, across all sectors of the economy and with much of the world globally connected, it is bound to affect the entire world in different ways.

Most companies reported earnings in 2022 much better than in 2021, for sure, but the pressure on their operating margins was evident. Revenues rose thanks to higher prices, but the bottom line was affected; profits rose more slowly, or stayed flat. The best performing sectors were energy (no surprises here), and finance because of higher interest rates and trading incomes. Investment banking earnings were subdued. Most consumer goods companies saw reasonably good growth, though many multinationals in the US would have been negatively impacted by a stronger dollar.

The forecast for 2023 is certainly cloudy, even if not entirely gloom and doom. Global trade will slow significantly with consumer demand slowing, and although commodity prices are cooling down, they are likely to remain a challenge thanks to the war in Ukraine and are also dependent on how soon China recovers.

High inflation and higher interest rates will slow consumption demand; Image: Joshua Rawson Harris on Unsplash

I am sure most folks in advertising will be wondering what all this has to do with brand communications. Plenty, as you will discover. Slowdown in consumer demand and high inflation usually means a cutback in companies’ advertising budgets and that impacts advertising agencies immediately. Some of the more marketing savvy companies will fine-tune their advertising budgets, if not impose severe cutbacks across the board. You can be sure that the urge to turn to digital marketing will be immediate, in the hope that it will yield immediate sales spurred on by discounts and other promotional offers.

Besides, different markets will face different kinds of pressures, as will different industries; for example, India is slightly better positioned to weather the slowdown than western economies, and consumer packaged goods will tend to be more resilient as they usually do during downturns, though discretionary goods will be severely impacted. However, here are some broad guidelines on how brands and advertising agencies can better negotiate 2023.

Premiumising the upper end of the market

Because the middle-to lower end of the market is likely to be adversely impacted by high inflation and more price-sensitive consumers, it would make sense for companies that operate in the premium and luxury end of the market to focus on those from a brand building point of view. If intelligently done, some premium brands can even take a price increase, or launch a new premium variant to take advantage of the buying propensity of premium consumers.

This could, in many cases, even help subsidise the lower end of the market, by either helping the company absorb higher costs on these, or by enabling them to offer discounts or smaller packs to boost sales.

Luxury brands will survive

Companies targeting high-spending luxury consumers will have an easier time navigating 2023. Whether in discretionary goods like cars and fashion, or travel and hospitality, luxury consumers are a safe bet during downturns, so it makes sense to cultivate them and strengthen the brand’s relationship with them.

Diversify chips and semiconductor supplies

As the world discovered post-pandemic, supply chains are the biggest bottleneck for most companies, and semiconductors go into more things than we ever thought was possible. Since most of the global supply chains of semiconductors are based in East Asia, including China, it makes sense to have more supply hubs across the world and for companies to source them from a variety of suppliers around the world. I was quite surprised to hear in the news that JLR has announced production cuts in the UK owing to chip supply issues.

Save energy

By that I mean both using less energy in the production of goods and services as well as producing more energy-saving products. At a time when the world is faced with a huge energy crisis, the likes of which it has not seen since the 1970s, it makes sense to double down on energy conservation. Helps us get closer to the climate change targets as well. And in the West, especially, consumers would love to have devices and gadgets that use less energy, so there’s a brand opportunity for you!

Energy saving products will find favour: Image: Pixabay

Hybrid working model might stay a while

Although returning to the office would be best for business and most advisable, the current set of circumstances of unusually high energy prices might force many businesses and employees to work from home a little longer, or at least continue with the hybrid working model – a few days a week in the office – for some more time. If you have a product idea or service that is tailored to help people working from home, you might want to make it even more appealing to customers.

Corporate travel only when essential

With fuel prices sky-high, and economies in slowdown, many businesses may cut back on business travel through 2023, especially the small and medium size businesses. Companies targeting even larger corporate clients will have to work harder to make them want to travel. Airlines might have to work on better corporate deals, and luxury hotels will have to make MICE (meetings, incentives, conferences and exhibitions) an important part of their calendar next year.

Resist the rush to digital

As happened during the pandemic, there could once again be the rush to digital technology. While some of it made sense then because of Covid restrictions, this time around companies ought to evaluate their digital requirements carefully. Capitalising on the digital medium’s sales funnel for quick sales, including with offers and deals will always be a temptation.

It makes more sense, though, to evaluate it from each specific brand’s point of view. For example, a company might choose to invest in proper brand-building assets and in strengthening relations with customers during 2023, so that the investment yields results the year after, when inflation has cooled and customers are more willing to spend. Advertising agencies ought to assist companies with this, whether it is boosting the dealer network, or investing in direct marketing, or going direct-to-consumer.

Advertising agencies ought to advise clients better; Image: Smartworks on Unsplash

Advertising agencies as brand advisors

During the expected economic slowdown and the tough times client organisations will face next year, advertising agencies that advise, partner and work together with companies will be more appreciated and better rewarded. Instead of simply reacting to clients’ requests or demands, agencies ought to take a more proactive role in guiding and working alongside their clients in overcoming the challenges.

The anticipated cutback in advertising budgets will certainly force agencies (especially the smaller ones) to rethink their costs, resources and investments, depending on their roster of clients. It is quite likely that agencies might rush to digital or rely on fresh, young talent in order to save on costs. However, adverse economic conditions require senior minds and experienced hands that have seen such turmoil and low-growth periods before. Count on their wisdom and intelligence.

Think different communication disciplines

The answer to every brand problem is not always only more advertising. Quite often, it might be direct marketing, where audience targeting is more focused and results more measurable. Or it could be public relations, where editorial news coverage of the company’s operations or brand might make a deeper impact at much lower costs.

Sometimes, the answer to the brand problem might even be better consumer research; you might want to save some of your communication budgets this year and direct them towards understanding your consumers or competition better, so that you can then return in 2024 with an improved product range and brand campaign. Advertising agencies ought to partner their client companies through making sense of all of this and recommending the right approach.

Time for learning

Companies and their advertising agencies would do well to use 2023 as a year of learning. Of discussing problems, finding solutions and making the best use of the advertising and marketing money together.

I have always believed that the advertising industry – even the best of advertising agencies – doesn’t invest enough time and resources in understanding their clients’ businesses really well. This is an opportunity for us to make amends. We could use the year to gain marketing wisdom and insights. We could organize client-agency workshops to discuss brand problems and issues threadbare and discover solutions together.

If the advertising industry is to stay relevant and on top of its game, it’s time it built its expertise. It’s also time to invest in its ability to build brands, create intellectual property, get remunerated fairly for it and showcase it well.

2023 is just a few weeks away. Here’s hoping that the economic slowdown will not be so severe as to trigger stagflation, when economic growth stays really low and inflation remains really high.

Perhaps, more advertising and communication agencies will partner their clients through what might well be harrowing 365 days at worst, or the most brilliant brand idea, at best. Here’s to the latter.

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