Ian Whittaker is a City analyst, and the current City A.M. Analyst of the Year.
Shaky seems to be the best word for the start of results season on Wall Street – at least, compared to the generally positive message we received at the last quarterly go-around. Companies such as Carnival and FedEx – seen respectively as barometers for their respective sectors and for the wider economy – have reported numbers that disappointed investors, as well as offering appropriately downbeat accompanying commentary.
Nike, too, was another company which disappointed investors – but look beyond the headline number and you’ll see US sales holding up well. A build up of inventory caused by uncertainty over supply chains has led to a number of major retailers in the US discounting heavily to sell products, especially as signs grow of lower income consumers under pressure.
All this, of course, comes amid huge economic uncertainty on both sides of the Atlantic. So why, then, do I think this is a time for advertisers – usually the first to feel the effects of economic slowdowns, as companies trim budgets where they can – to invest?
Well, while some price-conscious consumers are trending to cheaper products, price increases to consumers are remaining remarkably high and in excess of what would be suggested by historic models.
This was a feature of the second quarter results season. Look at Unilever’s results presentation and you’ll see pricing going up 11.2 per cent, whilst volume was down only slightly at just over 2 per cent. We will find out soon enough whether that is still holding but the signs look good. US food producer Conagra, meanwhile, told investors that whilst it has increased the average unit cost by 12.9 per cent over the past 12 months (a 240bps jump from the previous quarter) consumer price elasticity has remained unchanged. Certainly looking around at the consumer environment, it does feel as though large price increases have mainly stuck – particularly for those goods targeting higher-end consumers.
So what does this mean? It makes sense to invest now in advertising to make those prices stick – as there is a real opportunity for companies to see a permanent, and significant, step up in margins.
The reason for this is as follows. Prices tend to be sticky – once they have increased, it is very unusual for the prices to be then cut back down to a lower level – but many costs, particularly commodity and supply chain costs, tend to go in cycles and so are likely to fall over time. This is already happening in commodities like copper, timber and oil, which are all coming off their highs, and many of the supply chain issues of earlier this year have already eased. So if prices are at a new, permanently higher level – and it is fair to say we have all seen several years-worth of price increases just since the start of the year – and many costs are falling, the result should be permanently higher margins.
This is now starting to be noticed, here and abroad. Consumers tend not to demand reduced prices in the shops due to falling commodity and supply chain costs in the same way they do when it comes, for instance, to the price of fuel at the pump when oil prices collapse. The end result might not be apparent in this quarter’s results season due to short-term factors but it will come in the medium- and longer-term – especially if, as we all hope, Russia’s assault on Ukraine comes to an end.
Firms often feel as though they need to cut their advertising budgets when times are tough because of pressure from investors to protect margins.
There is already a growing body of evidence that that does not make sense for the long-term but it certainly does not make sense in the sort of environment where a significant part of the population, particularly at the higher income scale, seem willing to accept greater than expected price increases due to the wider macroeconomic circumstances.
Those investors who truly care about creating long term shareholder value will realise this. Now is the time for advertisers to be advancing, not retreating, when it comes to advertising – and helping to deliver a long-term boost to shareholder value as a result.
Ian Whittaker is twice City A.M. analyst of the year, a long-standing City media
and tech analyst, and founder of advisory firm Liberty Sky Advisers
