Deflation will put an end to the supermarkets' advertising jamboree

One of this recession’s more remarkable phenomena has been the resilience of retail advertising.

A few weeks ago, Martin Morgan, chief executive of Daily Mail & General Trust, called retail an ‘area of strength”.

He may have been thinking about Northcliffe Media, where retail ad revenues fell by only 24% during the six months to March. This compared well with motors (down 23% YOY), recruitment (down 47%) and property (down 54%).

More likely, however, Morgan was thinking about Associated Newspapers, where retail advertising fell by just 7% YOY during the same period. Again, this compares well with the overall decline in display revenues at Associated (around 16%).

As DMGT’s half-year report suggested, this lower-than-expected decline in retail advertising was driven by ‘strong advertising by the supermarkets”.

DMGT might trumpet its nationals as being ‘particularly attractive to retail advertisers”. No doubt they are.

But Trinity Mirror’s nationals seem similarly attractive. Sly Bailey discussed the supermarkets’ continuing willingness to pay good money to publicise their special offers when she presented Trinity Mirror’s full-year results to analysts in late February.

From one perspective, this makes good sense. Even during a recession, consumers need to eat. For the most part, we avoid starvation by trading down. The supermarkets’ efforts to attract us as we switch allegiance has required expenditure on advertising.

So far, so good. But something feels odd about the supermarkets’ financials at the moment. Pretty much anyone with scale in food retailing is crowing about market share gains and increased margins.

Where is all of this growth coming from? According to one view, it’s mostly due to food price inflation, which spiked following sterling’s collapse last year. The extra cash generated by food inflation has boosted the supermarkets’ profits. It has also supported ad budgets.

According to a piece of Alastair Johnson of JP Morgan, all of this will change — and soon.

In research excerpted at FT Alphaville this morning, Johnson predicts that the UK will soon look like France, Spain and Germany, where food prices are declining at 5% annualized.

Describing the outlook for food retailers as ‘bleak”, Johnson suggests that the ‘full force of bad news on the UK sector might take six months or more to arrive”. With it will come reduced profits, and presumably cuts in ad budgets, too.

The supermarkets’ love-in with the nationals and commercial broadcasters was good while it lasted. Soon enough, the hunt needs to start for alternative sources of revenue. Let’s hope something turns up, eh?

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