A dull December: How demonetisation is hitting the advertising industry

With Christmas and New Year to cash in on, December is usually a busy – and profitable – month for the advertising sector. But this December is likely to be a dull one. If the cash crunch caused by demonetisation has led to a slump in business across sectors, advertising is the one industry that ends up feeling its collective pinch.

In the three weeks since currency notes of Rs 500 and Rs 1,000 were demonetised, advertising agencies and other media companies have seen a marked decrease in the advertising expenditure of companies, particularly those producing fast-moving consumer goods. By the end of December, some media agencies are expecting to see advertising cancellations worth Rs 600-Rs 700 crore, while others estimate a 25%-30% drop in advertising spend in the short term.

While this would mean a definite gloom in the third quarter of the financial year (October to December), advertising experts are unsure if these effects of demonetisation will spill over into the next quarter.

Pulling out of product launches

Since advertising both influences and reflects consumer sentiment, the industry serves as a sensitive barometer of the mood of a country and its consumers. “The moment a chill sets in, it [the ad industry] is one of the first sectors to catch a cold,” said Anvar Alikhan, senior vice president and strategy consultant at JWT, a prominent advertising agency.

With the government suddenly invalidating 86% of the India’s circulating currency, and the Reserve Bank of India still struggling to push new, valid currency notes back into circulation, demonetisation has had a direct impact on consumers’ ability to buy commodities. This, in turn, has brought down sales of almost all goods that are discretionary, or not essential to people’s lives. These include real estate, durable goods like vehicles and gadgets and a host of retail and fast-moving consumer goods. For instance, Britannia Industries – known for its biscuits and processed food products – is expecting its sales to be hit by 15% to 20% in the next six weeks.

The drop in sales in the past three weeks has led to a clear drop in the advertising expenses companies are willing to make. “If consumer demand is going to be significantly lower, then advertising spends will also be correspondingly hit,” said Anant Rangaswami, editor of CNBC TV18’s Storyboard, a show on advertising, brands and entrepreneurship.

Since FMCG companies are among the biggest advertisers in India, particularly in the sector of television commercials, they are now cancelling or postponing ad campaigns and product launches that were planned for December.

“Companies are categorically postponing product launches, which will affect the revenues of general entertainment channels,” said Rangaswami. “December and Quarter 1, 2017, are likely to be dry months.”

At several advertising agencies, senior client servicing executives confirm this unexpected slowdown. “One of our clients, an FMCG brand, had a whole ad campaign ready for the launch of a new product, but they have paused it for now because this is not the right market environment for a product launch,” said the client servicing head of a leading advertising agency in Mumbai.

At another prominent agency, a senior executive claimed that campaign launches have been deferred for “cash offtakes”, or products that are usually always paid for by cash. “One quarter is definitely going to be washed out,” said the executive, who did not wish to be named. “A lot of marketers are sitting on the fence, waiting and watching to see how things play out.”

A long wait?

Most companies and advertisers have no option but to wait and watch, because of the widespread uncertainty about the medium and long-term impact of demonetisation.

“From November 8 till today, the government has made so many changes on demonetisation, it is difficult to predict what the next quarter will look like,” said Rangaswami.

So far, says Alikhan, advertising spends had been reflecting the country’s GDP growth in recent months, which was clocking 7%. “But now suddenly the mood has turned frosty, and the big question is how much of a hit the economy will take in the coming six to 12 months,” he said.

Since there is almost no precedent to the kind of demonetisation that the Indian government is now attempting, what happens in the next few financial quarters will depend on how the government is able to manage the current liquidity crisis, says Alikhan.