Spending on outdoor advertising did not fall nearly as much as spending on other forms of media during 2001. The outdoor segment reported revenue was down 0.8% for the year while overall ad spending dropped 9.8%. Most analysts attribute the industry-wide decline to general economic weakness compounded by the shock of the terrorist attacks on September 11. The most devastating drop in advertising was suffered by national newspapers, which saw their ad revenue plunge by an amazing 23%. This segment of the media market accounted for $2.94 billion in ads in 2001. National advertising spots on radio were off 20.5% and television spots were off 18.2%.
Most experts believe that outdoor advertising held up better than other media for two reasons. First, a large percentage of outdoor ads are purchased by local businesses instead of national corporations. At some billboard companies, more than 75% of advertising comes from local accounts. Small local businesses such as restaurants and motels tend to rely heavily on highway signs that direct customers to their location. These businesses need to keep advertising in good times and in bad. If the economy is weak, that is often an even greater incentive to maintain advertising in hopes of sustaining sales. The second reason for stronger performance in outdoor ads is the relatively low cost. Outdoor advertising tends to be less expensive than media such as radio, television and newspapers. Companies cutting back on ad spending can achieve quicker and greater savings by cutting out the expensive media first.
The decline in ad revenue for the outdoor industry is the first since the end of the last recession. Income to billboard companies was down in 1992 following the national economic recession that ended in the spring of 1991. Growth resumed the following year and continued until 2001.
Billboard companies are using various methods to mitigate the impact of lower ad spending. One of the most effective methods is the use of “preemptive advertising contracts” where low prices are offered to advertisers that will take space “as available.” These advertisers agree that in return for the lower price, the billboard company can take the ad down if another customer is willing to pay regular rates. This is similar to the television industry where tapes of advertisements are kept on the shelf and put on the air if time spots are not sold to regular customers. The advertiser does not know in advance how many times the message will air, and in return is awarded with a deeply discounted price. For media companies, low revenue is better than no revenue. This will change. As the economy recovers and ad spending begins to rise, the ads at discount rates will be gradually replaced with customers paying regular prices.
In the near term, forecasts of ad spending in 2002 are not bright. Jessica Reif Cohen, a securities analyst at Merrill Lynch, expects total ad spending to be down again this year by 1%. Jack Myers of the research firm bearing his name is forecasting even worse conditions with a 5.7% decline. A decline of some magnitude is a likely scenario. After the last recession in 1991, ad spending had a lagging effect and actually bottomed out in 1992. While the national economy seems to be doing better than expected in the first two months of 2002, most economists believe that economic weakness is not entirely gone. Most outdoor advertising companies are hoping for some improvement in revenue for the year and would be willing to accept at least another flat year.
In most cases, the value of billboards declines along with reduced spending on ads. This occurs because the value of signs is dependent on the income that is generated. Unless cap rates decline, lower income will result in lower value.