Ad Intensity Analysis: Avg. Large Brand Ad Expense/Revenue Ratio = 3%, Profit Margins To Rise In Years Ahead
I’ve started building data-sets of advertising expenses and related figures for hundreds of the world’s largest marketers, based on public disclosures and sell-side analysts’ consensus expectations for revenue growth and profitability. The conclusions so far aren’t necessarily surprising, but nonetheless provide useful benchmarks and reference points, which I know many readers will find useful. Here are a few headline data-points:
While companies of all sizes around the world allocate under 1% of revenue to advertising, the group of large advertisers I’m studying here – a reasonable proxy for large brands – allocate slightly more than 3% of revenue to advertising on average.
EBIT profit margins among the largest companies who disclose advertising expenses exceed 20%, and after briefly popping in 2021 to pre-pandemic levels and then falling off in 2022 are expected to return close to 2018 levels in 2025.
Revenue growth is expected to average 5.6% between 2022 and 2025 for the group of companies who disclose advertising expenses. If advertising expense ratios held constant for the group, ad spending among them would rise in line with this figure.
Travel & leisure companies have the highest advertising expense intensity while retail has the lowest allocation.
For some background on my approach, I have aggregated data on a group of companies that includes 200 of the world’s largest companies by revenue and then nearly 200 others with more than $200 million in annual marketing expenses or $50 million in advertising expenses. The smallest of this group is expected to have $1 billion in revenue by 2025, according to consensus estimates tracked by Refinitiv. For the most part, companies primarily operating in or contained to China are excluded in this data-set. Total revenues tracked in this data set amounted to $17 trillion last year. For reference, all companies globally probably have around $100 trillion in annual turnover.
Among the group are 167 with disclosed historical advertising expenses in 2022, 129 for whom there is consistent advertising expense data for at least five years and 88 with data back to 2013. The group of 167 incurred $145 billion in advertising expenses during 2022 while the figure for the group of 129 was $120 billion and the group of 88 spent $99 billion. Most of my analysis below will focus on the group of 129 for now although over time I expect to extrapolate data to cover all of the companies for whom I have revenue data.
As a percentage of revenue, the group of 129 deployed 3.2% of revenue into advertising expenses last year, essentially matching where they were in 2019. 2020 saw a big drop to 2.9% while 2021 began a rebound to 3.1%. During 2022, travel and leisure companies allocated the highest share of revenues into advertising (13.5%) while retail companies had the lowest (0.5%). As a percentage of total advertising expenses tracked, FMCG companies represented the largest share last year, or 34% of the total advertising expenses incurred by this group.
Looking forward, I can see that consensus expectations for revenues growth in 2023 is 4.8%. For 2024 that figure is 3.7% and it’s 5.5% in 2025. As EBIT margins are expected to rise from 20.6% in 2023 to 21.7% in 2025 – close to where they were in 2018 (22.0%) – I think it’s not unreasonable to assume there might be a modest cut to the share of revenues which are allocated to advertising. If I look at the group of 88 companies, margins rose from 20.3% to 21.1% between 2015 and 2018. During that time advertising expenses as a percentage of revenue for that group fell from 3.9% to 3.7%. If something similar happened to the group of 129 and ad expenses fell from 3.2% of revenue in 2022 to 3.0% in 2025, it would reduce the CAGR from 5.6% to 2.2%.
Of course, it’s far from a given that advertisers would reduce budget allocations to advertising – in fact, the opposite may be true if marketers believe that margin expansion is more likely to occur because of superior advertising and marketing activities. Looking at the period from 2018 to 2022, the median growth rate for revenue for all companies was 28.5%. But the median company who increased budget allocations to advertising grew by 35.1%.
Similarly, just because large advertisers contain their spending growth it doesn’t follow that total advertising slows. There can be outsized growth from middle-sized or smaller businesses. However, it does reinforce my general view that media owners (including the largest technology platforms who sell advertising) and other industry participants who are focused on large brands should generally continue to expect single digit growth for the industry in the years ahead.