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How the drop in inflation could help push ad spends in 2015

How the drop in inflation could help push ad spends in 2015

Author | Collin Furtado | Wednesday, Dec 24,2014 8:34 AM

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How the drop in inflation could help push ad spends in 2015

Recently the Wholesale Price Index (WPI) data was released for the month of November 2014 which showed it had reduced to 0%. This means that wholesale prices in November were the same as November 2013. The WPI which represents the price of a representative basket of wholesale goods determines the level of inflation in the economy. This means that inflation in the wholesale markets in India has been brought down to 0%. This is attributed to the fall in global oil prices and slowing down of manufacturing coupled with the high interest rates maintained by the Reserve Bank of India (RBI) governor Raghuram Rajan. Another factor which determines inflation rate in the country is the Consumer Price Index (CPI), which in November was below 5% (4.38%), which is good news considering the monetary policy target was supposed to be 6% in January 2016, meaning that the target has been reached a year in advance. With inflation cooling off and positive sentiments reflecting in the economic growth of the country as RBI expects the economy to grow to 6.5% next year from 5.3% this year, we look in to the possibility of reduction in inflation resulting in higher ad spends in the following year.

Lower inflation leads to higher media ad spends?

Inflation is something that directly affects the economy on the whole as prices of raw materials invariably increase the cost of production of goods which are then passed on to the consumer. Higher costs affect the purchasing power of consumers and as a result affect sales of companies. While measures such as discounts help in boosting sales, it inevitably eats into revenues of companies. According a senior analyst from a market research firm we spoke to said that there is definitely a relation between inflation, the economy and media and marketing spends of companies as it enables them to save out on raw material costs. Not only this it also puts more money in the hands of the consumers which increases their spending power, for which brands look to target them by increasing their marketing and advertising spends he said. Vaishali Verma, VP, Lodestar too believes that the lowering of inflation helps increase brands’ spending power and increases ad spends.

While average inflation in 2011 had dropped down to 8.87% from 12.11% in 2010, the ad spend in 2011 saw an increase of 21.8%. In 2012 inflation however increased to 9.30% which saw ad spends increase by only 5.0%. In 2013 inflation further grew to 10.92% but saw ad spends grow 10%. This year ad spends in India are expected to growth to 12.5% according to GroupM estimates, which was revised from 11.6% predicted earlier. This was due to the positive sentiment in the economy brought about by the emergence of the new government. The positivity in economy will further be aided by the decline in the inflation which will definitely reflect in the next financial year. This could be seen in the +13.3% ad growth forecasted for India in 2015 by a Magna Global report recently.

However, Harish Shriyan, COO, OMD says that inflation is one of the factors in the economy as a whole that results in an increase in ad spends. “There will be a correlation between what the advertising companies are looking to spend and inflation. It definitely will help them in getting better budgets for the companies. When the economy grows then the cost of borrowing goes down and they always produce better results for the company. When the companies are doing well they are expected to spend more. It is not only because inflation has gone down, in general whenever the cost of borrowing money goes down it is always a positive impact for the companies. When there is a positive impact for the companies there will be an increase in ad spends. It is all inter-related and does mean that inflation is gone down, the rest remains the same and it does not mean that suddenly advertisers will start spending more. It does not work that way,” he explained.

Similarly Atul Sharma, GM, Starcom MediaVest believes that ad spends depend on the economy as a whole and not on inflation. Commenting on whether the cooling off of the inflation recently will have an impact on the brand ad spends in the future he said, “They (ad spends) usually stay stable, they don’t increase too much. It will really depend on the sentiments in the market and if good sales are anticipated then probably they will spend. But it is very unlikely that somebody will over invest to that extent. With inflation it is more about the global factors, it is not the fundamentals of the economy. What happens if the prices start to heat up again of petrol and other fuels? So it (ad spends) depend on the economy as a whole and how that one category is doing.  Right now ecommerce is doing well so they are just splurging.” 

This definitely is true as inflation is related to many global factors, one being the prices of crude oil. Global oil prices have fallen due to an increase in production recently but the price is subject to increase in the near future. These factors may be ranging from dwindling oil reserves to even disputes in oil producing countries or nearby regions.  

Expected ad spends growth in 2015

With the economy running on positivity the lowering of inflation comes at the perfect time in order to boost consumer sentiment. According to the Magna Global report, the outcome of the general elections has improved business and consumer confidence, this has prompted them to increase their 2015 ad growth forecast to +13.3%. Similarly other global media agencies peg the growth of ad spends in India to be more than 12% in 2015. According to the FICCI-KPMG projected the Indian Media and Entertainment industry in 2015 is expected to grow by 15.59%. It is expected to touch Rs.1,785.8 billion by 2018 growing at a CAGR of 14.2%.

Speaking about this Shriyan said, “In the next financial year we are hoping that things will improve and there are new set of categories like ecommerce which are expected to spend more. If the cost of borrowing goes down different investments will come, there will be money coming from the IPOs. And at the same time the financial and banking sector which puts a good amount of money on advertising will probably come and spend a little more money than what they are spending currently. So this will all have a positive impact on advertising.”      

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