Robert Coen presentation Advertising Expenditures 2008.

By the end of the 1970s the economic effects of the Mideast wars and energy shortages had run their course and high inflation, high interest rates, and pent-up consumer demand combined to fuel a new spurt in ad usage.

As a result, advertising as a percent of nominal GDP finally moved to a rising trend. In 1990, when Iraq invaded Kuwait, the trend turned downward again. The economy improved in the middle of the decade, and a lot of new ad spending by Internet companies for ads in the traditional media fueled the sharpest upturn in advertising history. Advertising as a percent of GDP peaked at 2.52% in 2000. However, the unrealistic expansion in advertising demand ended as the stock market drifted downward from its peak in 2000, and the Internet bubble began to deflate. The terrorist attacks and a softening economy helped to bring about a plunge in advertising spending in 2001. As the economy gradually improved after 2001, the advertising softening slowed and by 2004, an election/Olympic year, a recovery in advertising appeared to be developing. However, the improving trends did not continue after 2004, with new digital facilities for the distribution of news and information affecting many established media.

Spending for search marketing which better fits the definition of a sales promotion activity has been diverting dollars from traditional advertising to a newer form of marketing communication activity, and current indications point to a continuance in the near future. The impact on traditional advertising has been most severe at the local level. Competition for limited consumer disposable income has intensified, and the response by most local entrepreneurs has been price concessions. Local marketers’ expenses such as taxes and rents continued to rise, and profit margins have shrunk. Many local marketers have gone out of business, sold out to nationwide chains or reduced their number of physical locations. In addition, there have been shifts to the Internet or online marketing spending tactics which have further reduced the demand for advertising time and space at the local level in many established media.

The outlook for traditional advertising is currently not very good. Eventually the pendulum will probably swing back to recovery but not in the immediate future.

By Robert J. Coen, Senior Vice President, Director of Forecasting at MAGNA

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