FUTURE OF ADVERTISING SPEND



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Future of Advertising Spend: How Has It Evolved, and How Will It Continue to Evolve? The advertising landscape continues to evolve, with new mediums, shifting spend and agency consolidation creating a more complex ecosystem. In this new Executive Insights Spotlight on Media & Entertainment series, L.E.K. Consulting answers the following questions: What are projections for future advertising spend? or How is advertising spend-bymedium shifting? How will future economic conditions affect advertising spend? Are agencies continuing to consolidate? What is the latest with ad spending?»

Steady as She Goes: US Advertising Spend Expected to Grow at ~4% CAGR, Reaching ~$231B in 222 After some rockiness corresponding to the global economic recession, U.S. advertising spend has returned to historical growth rates in recent years. Total US advertising spend (2-222F) Billions of dollars $24 2 (1-6) 4.2 (6-9) (9-14) -7.2 4.4 Forecast 186 19 21 (14-19F) (14-22F) 3.6 3.8 24 216 219 231 Projections indicate that future ad spend will continue to increase at moderate rates, growing between 3.5% and 4% per annum through 222. 16 152 141 145 148 159 165 173 172 163 138 147 152 159 163 171 175 12 8 4 2 4 6 8 1 12 14 16F 18F 2F 22F Source: L.E.K. analysis, Magna Global, Pivotal Research, PQ Media How does U.S. ad spend break down by medium?»

Digital Takes Charge: US Market Shifting to Digital but, Importantly, Not at Expense of TV Digital advertising spend is expected to drive total U.S. advertising spend through 222, although growth rates will likely slow down slightly from historical rates. Interestingly, digital spend dollars are not being redirected from TV ad spend but rather from other media, including newspapers, magazines, radio, outdoor, out-of-home and cinema. Total US advertising spend by media type (2-222F) Billions of dollars Forecast $24 231 216 219 21 24 2 186 19 159 165 173 172 171 175 163 159 163 16 152 141 145 148 152 147 138 12 8 (-14) (14-19F) (14-22F) Total.8 3.6 3.8 TV 2.6 2.3 3.2 Digital 14.2 1.1 8.1 Growth in TV ad spend is, in fact, expected to accelerate in the coming years, increasing from 2.6% annually from 2-214 to 3.2% from 214-222. 4 2 4 6 8 1 12 14 16F 18F 2F 22F Other (4.3) (2.) (.5) Mix composition 5 8 9 14 19F 22F TV 34% 37% 39% 41% 43% 4% 41% Digital 5% 7% 14% 16% 28% 37% 38% Other 62% 56% 47% 43% 3% 22% 21% Source: L.E.K. analysis, Magna Global, Pivotal Research, PQ Media What is the outlook in other markets?»

The Queen Goes Digital: UK Shift to Digital During Recent Recession Will Continue U.K. advertising spend has been similar to that in the U.S. in recent years, with moderate overall growth driven in large part by strong growth in digital ad spend. Total UK advertising spend by media type (28-219F) Billions of dollars $35 Forecast 3 28 29 31 33 24% (8-14) (14-19F) Total 2.6 6.5 TV 3.7 4. Similarly, strong growth in the digital space will drive future growth, with TV expected to see slightly higher growth rates for 214-219 than 28-214. 25 2 21 25% 18 2 21 22 23 24 27% 26 48% Digital 15.8 11.9 15 18% 37% 1 5 57% 36% 28% Other (4.9) 1.6 8 1 12 14 16F 18F Source: L.E.K. analysis, emarketer, PQ Media What is the global outlook?»

Changing Center of Balance: Global Growth Largely Driven by APAC and EMEA Markets Forecasts of global advertising spend indicate that APAC and EMEA will drive future growth, with the industry reaching ~$679B by 219, up from ~$56B in 214. Global advertising spend forecasts (28-219F) Billions of dollars $7 Forecast 65 6 569 6 643 679 (8-12) (12-14) (14-19F) Total 1.3 2.5 6.1 LatAM (8.6) 1. 9.6 Latin America is projected to have the fastest growth rate, coming in just shy of 1% per annum, although its relatively small base limits its impact on the overall market. 55 5 45 4 35 483 392 423 442 46 479 56 531 EMEA (.8) 3.3 6. APAC 4.7 6.9 7.9 The North American market appears to be the most mature and saturated, with moderate growth projected for 214-219. 3 25 2 15 1 North America (.3) 3.7 3.8 5 8 1 12 14 16F 18F Source: L.E.K. analysis, Wilkofsky Gruen Associates, Magna Global, PQ Media What impact will the economy have on growth?»

Moving in Unison: US Ad Spend Moves in Line With GDP, With Typically More Pronounced Declines Not surprisingly, U.S. advertising spend growth has moved mostly in unison with real U.S. GDP growth over the last 45 years or so, with declines in ad spend corresponding to the five U.S. recessions during this time. US ad spend growth vs. real GDP growth (197-214) Percentage 15% 1 U.S. real GDP U.S. real ad spend 5 197 1975 198 1985 199 1995 2 25 21 215-5 -1-15 28 collapse coincided with changing content-consumption habits -2 Source: L.E.K. analysis, U.S. Bureau of Economic Analysis, OECD, Universal McCann How strong is the connection between GDP and ad spend?»

GDP Ups and Downs Drive Ad Spend: Strong Correlation Between Real US GDP and Real US Advertising Spend A regression analysis reveals a strong positive correlation between U.S. ad spend and real U.S. GDP growth, with ~75% of the change in U.S. ad spend explained by changes in real U.S. GDP. Historical growth of total ad spend vs. real GDP growth (197-214) Percentage 15% US real ad spend growth 1% 5% -3% -2% -1% 1 2% 3% 4% 5% 6% 7% 8% % US real GDP growth -5% -1% Regression Stats Adjusted R 2 = 74.6% P value =.% -15% -2% Source: L.E.K. analysis, U.S. Bureau of Economic Analysis, OECD, Universal McCann How big is the multiplier effect?»

Multiplier Effect: Next Recession Could Be Very Bad for Ad Spend Advertising spend has declined more during recessions than GDP declines. On average, a one percentage point change in U.S. GDP has resulted in an average swing of 4.4 percentage points of advertising spend over the past seven unique years of U.S. GDP decline. And the average of the past three recession years is a large (8.3%) decline. US recession real GDP decline and real ad spend change Percentage 5% 3.8.7 -.5 -.2 -.2 -.9-2.2-1.9-3.8-4.1-5 -.1-4.4 U.S. GDP U.S. ad spend -.3-2.8-5.4 However, the magnitude of the decline had varied significantly, from as small as ~(2.x) to as large as ~2.4x. -1 In 5 of the past 7 recessionary years, GDP declines have been.5% or less -15-15.1 Average 1974 1975 198 1982 1991 28 29 Ad spend decline/gdp decline 4.4 4.4 2.4 (3.7) (2.) 44.3 17.9 5.4 Source: L.E.K. analysis, OECD, Coen What has happened with large ad agencies?»

Tightening Their Belts: Large Agency Consolidation Has Slowed Since the Recession Consolidation of large holding companies has slowed in recent years. Only one deal has been consummated since 28, compared to seven completed deals from 2 to 27. WPP Acquires: Young & Rubicam Price: $4.7B 2-27 7 deals Value: ~$15B IPG Acquires: True North Price: $1.6B WPP Acquires: Grey Global Price: $1.8B 28-214 1 deal Value: $5B Dentsu Acquires: Aegis Price: $4.9B The failed merger of Omnicom and Publicis in 214 demonstrates the inherent difficulties of combining massive multinational agencies. 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 Publicis Acquires: Saatchi & Saatchi Price: $1.9B Publicis Acquires: Bcom3 Price: $2.2B Publicis Acquires: Digitas Price: $1.3B Publicis and Omnicom merger collapses Havas Acquires: Snyder Price: $1.9B Source: L.E.K. analysis, Ad Age What has overall M&A activity looked like?»

Buying Bolt-Ons: Major Holding Companies Have Acquired 22 Smaller Agencies Since 25 Despite slowing consolidation among major holding companies, they continue to buy smaller agencies. Although the number of acquisitions is down from its peak year in 27, M&A activity has picked up since the depths of the global economic recession. Acquisitions by agency holding companies (25-214) Number of transactions 22 4 22 2 11 34 18 19 16 23 3 26 14 23 24 Interpublic Group Dentsu Havas 24 Omnicom WPP Publicis 12 21 Publicis and WPP have been the most active buyers since 25, with their 66 and 6 acquisitions, respectively, almost 3x greater than the next most active buyer (Havas and Omnicom at 23 each). 1 8 6 4 6 66 2 1 1 1 17 17 19 2 25-214 Source: L.E.K. analysis, S&P Capital IQ 5 6 7 8 9 1 11 12 13 14 What have we learned?»

Our Outlook: Advertising Spend Will Continue to Be Attractive This edition of Executive Insights clarifies issues surrounding agency consolidation and spending forecasts, as well as their relationship with overall economic activity. Optimistic forecasts and shifts in spend toward digital make the advertising market particularly attractive. 1. 2. 3. 4. What Have We Learned About Advertising Spend? Forecasts for U.S. advertising spend project moderate growth over the next seven years, with annual growth estimated at between 3.5% 4% per annum through 222. The global advertising industry is expected to continue to shift toward digital, although not at the expense of TV advertising, in which moderate growth is expected going forward. There is a strong correlation between U.S. advertising spend and real U.S. GDP growth, with advertising spend growth seeing larger declines during recessions than GDP. Consolidation among large holding companies has slowed since the global economic recession, but they continue to buy smaller agencies. L.E.K. Consulting is a registered trademark of L.E.K. Consulting LLC. All other products and brands mentioned in this document are properties of their respective owners. 215 L.E.K. Consulting LLC