Some media experts have predicted 20%-30% increases for this year's TV upfront market, in which media buyers will strike deals for commercial time in the fall season, based on early reports of economic recovery. Several key economic indicators are up since last year -- durable goods; real retail and food service sales; vehicle sales; and consumer spending -- leading to a feeling of optimism among network executives. But a lurking factor could spoil the party: rising gas prices.
The average price of regular unleaded gas has hit $3.68. That's still shy of the $4.24 high set in June 2008. But what happens if the summer driving season and the unrest in the Middle East pushes gas prices above the summer 2008 levels, above even $5 per gallon? According to Nielsen Wire, a 50-cent increase in gas prices would cost the typical U.S. household about $52.50 per month, and if prices were to rise two dollars, that would mean $210 a month, or more than $2,500 a year. In an economy where job and personal income growth is meager at best, the economic and psychological impact of paying $2,500 more a year for gas can have a profound impact on consumer spending.
A jump in fuel prices also eventually translates to higher transportation costs for marketers, which pass those costs to consumers through increased prices for everything they buy -- not just gas. As prices rise and inflation ensues, the Federal Reserve could be forced to raise interest rates, which would hurt the still floundering housing market.
At times like these, retailers need to protect their brick-and-mortar businesses. When shoppers go online, there is clearly less foot traffic in traditional stores. Rising shipping costs also eat into the retail profit structure. Either way, retailers are squeezed.
Heading into the upfronts, then, smart marketers and media buyers should consider whether the hike in gas prices will be short-lived or whether it will trigger a longer economic downturn that alters consumer behavior and shopping patterns.
Marketers must evaluate future economic scenarios before committing to a buying strategy -- even if they don't buy in the upfront. In the fall of 2008, many categories pulled their dollars out of prime time while others canceled upfront commitments altogether. Many shifted investments into TV's scatter market, where advertisers buy commercial time much closer to the air date. Those actions drove up the cost of TV time outside of prime-time and, of course, in scatter. Many marketers thought prices would drop because of the economy, but the exact opposite happened. Here's where experienced planning paid off.
Looking ahead, a dual strategy may be the wisest approach, one that considers what the retail landscape will look like if gasoline reaches $5 per gallon, and another that is prepared to move quickly on new opportunities that arise if fuel prices drop.
If recession returns, look for ways to retain or even steal market share from competitors.
Determine which consumer segments were won or lost during the recession to ascertain your Achilles heel. Then plan marketing and media efforts to retain the customers you could lose if rising gas prices send the economy south. Even if the worst doesn't happen, you'll be better equipped to take advantage of continued growth.
Companies also often cut back on advertising during difficult economic times, but that's exactly the opposite of what they should do. Numerous studies indicate that companies that maintain their spending during slowdowns fare better than those that slash advertising.
If most advertisers pull back, the 2011 upfronts would surprise everyone by becoming a buyer's market.
But both those maintaining spending and those becoming more thrifty should follow a targeted media-buying strategy, focusing on each specific customer base. In a tough economy, each dollar is critical to the media buy. As agency leaders, it is our job to reach our target markets with greater efficiency. If the gas prices drop and the economy expands, however, prepare for price increases by evaluating your media mix.
The advertising industry rebounded in 2010, defying some expectations. Super Bowl inventory sold out extremely quickly, and most media categories sustained the previous year's levels or improved. If this trend continues, bargains may evaporate. At some point in the cost/benefit curve, you'll reach the point of diminishing return, and it will make sense to consider alternative media investment strategies. If your media agency is simply predicting higher costs without recommending alternatives, it's time to consider a new agency.
The bottom line: Buyers can and should prepare for price increases at the upfronts in May, but seasoned veterans will be preparing now for alternatives, including digital video, social media and other options.