Indie success: a 2017 horoscope from Paul Hammersley

Harbour founder Paul Hammersley writes…

We’ve recently seen lots of wildly optimistic commentary about the likely strength of client marketing and ad spend next year. WARC have forecast marginally reduced increases of 3.3% in 2017; Sir Martin Sorrell was quoted as saying ‘2017 would be more of the same as 2016’; not one of four Campaign interviewees two weeks ago thought budgets in 2017 would decline.

Perhaps this optimism is driven by evidence that the UK economy didn’t fall off a cliff immediately after Brexit, that stock markets are up, that Google and Facebook have announced hiring programs in the U.K. (though these stories serve only to remind us how few people these behemoths actually employ).

But for me, all this flies in the face of some staggeringly obvious signals of what will actually happen to marketing budgets in 2017 as a result of the impact of Brexit; and it flies in the face of every piece of anecdotal evidence I pick up from talking to clients.

According to a CBI survey this week (coinciding with their annual conference), 60% of companies say that they will be forced to make budget cuts going into 2017 but two thirds claim to have made no provision for them. Some of this is sentiment driven by the ongoing loss of confidence and uncertainty created by the failings of our political leaders, but the biggest issue is the reality of exchange rate changes and their dramatic impact on cost bases.

Clearly not all the products we consume are imported but with our trade deficit clearly the majority are, and in any case, according the the ONS, UK manufacturers have seen a 12.2% increase in input costs in the year to September.

The fact is that the vast majority of consumer companies and especially grocery brands will be handling the impact of cost base increase of between 10 and 15% as they plan their budgets for next year. The Tesco/Unilever spat was neither an oddity nor, I’m sure, is yet fully resolved; it was, and is, a sign of much to come.

Unless you have either a profoundly strong brand and/or control over your own retail distribution (both explain how Apple so easily and readily increased their UK prices by 10% last month) your ability to pass these costs on to the consumer via any number of retailers fighting for their own lives right now (and with their business rates pressures) is close to zero.

Even if retailers accept a few percent in increases to be split between them and their shoppers; even if brand owners take a small cut to their margins and profits, we have to be looking at widespread and extensive cuts in other areas of brand owner costs. The upward pressures in other costs areas (transportation, heating and electricity, IT, workplace pensions etc) means that marketing, as ever, will be at the top of the list for cost reduction targets.

The idea I’ve read from some writers that international clients will move marketing budgets to the UK to reap the benefits of relatively lower marketing costs demonstrates a failure to understand how these companies are organised and run their P&L’s around the world.

With pressures on their own headcount and in pursuit of quick returns, clients will be focused on agency budgets and will put particular pressure on agency fees, widely referred to these days as ‘non-working marketing costs’ …..

So I predict 2017 will see an acceleration of recent trends in client/agency relationships. It will put huge pressures on agency cost bases and demand new ways of working and new solutions. Clients will still strive for the best of integration and specialism though the former will surely take precedence over the latter with less money to go round and leaner client teams. Retainers will continue to become rarer with project assignments and fees the order of the day demanding that agencies manage more flexible resource and cost bases.

In response the big agency networks will accelerate their own aggressive cost reduction focused reorganisations and continue to force together multi disciplined teams from across their branded networks.

But what about the independent agency sector, how will they fare? If they are prepared to create new alliances and new partnerships to get beyond their areas of specialism they are better placed to service clients in these difficult times than their cumbersome, corporate competitors. If they are also open to finding new efficiencies in their operating model they can also survive the cost pressures that are inevitably coming their way.

Come the New Year, I hope to be able to help.