Agencies Agency Models Inflation

‘Quoting is a nightmare’: agencies feel the pinch from inflation


By Sam Bradley, Journalist

March 29, 2022 | 9 min read

The rate of inflation has risen in almost every major advertising market around the world in recent months. The Drum talks to agency leaders about what increased costs mean for their businesses.


Rising inflation means agencies are experiencing higher operating costs / Unsplash

In March, in the UK, inflation reached 6.2% according to the Office for National Statistics (ONS). In the US it’s up to 7.9% and in France it’s at 3.6%.

It’s a worry for agency businesses for several reasons. In basic terms, higher inflation puts pressure on staff, who will see the cost of living rise. It also puts pressure on clients, whose running costs will rise while sales fall due to less enthusiastic consumer spending. And it hits agencies directly as their operating costs rise.

Pressure on wages

For Incubeta, a digital agency headquartered in the UK that operates in 14 markets worldwide including the US, the impact will be felt primarily in its personnel costs. The cost of living in the UK has risen significantly in recent months, with energy, housing, fuel and food prices all going up.

Consequently, chief revenue officer Andrew Turner says: ”The expectation of the workforce will be for salary increases to be in line, or ahead of, inflation. The expectation is that we as an employer cover inflation, so the standard of living for our team remains the same. But that’s compounded by challenges around increased salary costs across the industry that have been driven by talent shortages.”

With labor costs accounting for a huge chunk of any businesses’ costs, that will inevitably cause a headache for agency leaders. Turner says that his agency has a duty to support its team, and that doing so is essential if it is to retain a competitive edge.

”We work in an incredibly competitive industry and if we’re not responding well, looking after our staff in these times when they want to retain a certain standard of living, we’re going to lose those people and we’re not going to be able to attract the right talent.”

Jennifer Quigley Jones, founder of British social agency Digital Voices, says her agency will be raising the wages of its 35 staff from April to help beat rising inflation.

”We’re doing a pay rise in line with inflation in the UK. Everyone’s costs are going to go up, it’s been coming for a while. So, how can you as an employer make people’s lives easier when you know that people, especially those at the bottom of your organization, are really stretched?”

She suggests that, after the agency sector’s banner post-pandemic year, marketing businesses have a moral duty to help staff out.

”Agencies made a lot of money last year, making hay while the sun shined. They should have the money available to cover these costs and, if they’ve been smart, also to pay staff. You can’t have the positives of global finances and then hide when the negatives come around.”

Production costs rising

The CBI, a British business lobby, recently reported that 80% of British manufacturers were expecting to increase their prices in March. That’s being driven in part by rising logistical costs, such as petrol, and by demand for raw materials. Agencies whose products and services aren’t entirely digital, such as production or experiential shops, are facing similar pressures.

Andrew Southcott, managing director of Captivate Group, says the rising price of materials has landed its specialist retail design and events agencies with ”some pretty lumpy costs”.

”We’ve seen swings of between 10% and 20%, up and down,” he says. That volatility has made suppliers keen to lock in prices farther in advance, and made quoting the agency’s clients difficult. ”Quoting is a nightmare at the moment. If you feel the price will be this, and then all of a sudden it’s moved – the question is, who swallows that?

”Wood is by far the worst. Wood was impacted by the backlog of Covid, and then everyone started to do things. Now there’s the addition that a lot of the wood people were using came from Russia. No one wants to purchase anything from that part of the world now.”

The subsequent rise in demand for local – and sustainable – timber supplies has driven prices up further, he notes. With the prices of metals such as aluminum, (frequently used as a raw material by production agencies, Russia is a major exporter) spiking over the last month, with even the secondhand and scrap metal market affected, production costs have increased across the board.

It’s not just affecting UK agencies. Andrea Stillacci, founder and president of Parisian agency Herezie and chair of Europe-wide indie agency group By The Network, tells The Drum: ”Operating costs have gone up and I expect they will more.

”Inflation is everywhere with the effects of the pandemic, the war in Ukraine affecting the cost of primary materials and stock exchanges going down. It’s not a wonderful situation and I forecast price tension will increase for quite some time – but at least there’s some visibility.”

Quigley-Jones notes that the costs of product and model shoots have also risen, with transport the biggest concern. ”The cost of getting shoots, in mileage for cars, is so much more expensive.”

Southcott agrees: ”We move a lot of stuff around and petrol is rising rapidly. There is upward inflation coming through for petrol, but there’s also a shortage of heavy goods vehicles (HGV) drivers and that is also creating an inflationary pressure on transport costs.”

Stillacci says: ”Our travel and production costs have been the most impacted. That being said, we’ve all gotten used to travelling a lot less and finding innovative solutions when it comes to production, so I’m confident in our ability to weather any significant changes.”

Other agency costs, such as property leases or utilities, haven’t been affected as much as other areas. Many businesses have fixed term contracts on their heat and electricity bills, for example, insulating them from the recent spikes in gas prices, which have hit households in the UK.

”I think light and heat will start to pinch, but it’ll be when your current contract comes to an end that you’ll see the rise,” explains Southcott.

Similarly, agencies that were able to negotiate favorable leasing agreements back in 2020 and 2021, when the commercial real estate sector was on its knees, will have bought themselves some protection. But when fixed agreements come up for renewal, agencies might see the costs of utilities and real estate rise sharply.

”Everyone negotiating in 2020 got great deals because they were paying for space they were legally unable to access – that will now revert,” Southcott predicts.

Impact on clients

Depending on their sector and business model, advertisers will be exposed to inflationary pressures in different ways. But one universal will likely be rising agency costs.

Incubeta’s retail-focused client base, Turner says, will already be experiencing inflationary pressures. ”We are a very retail-focused business. They’re ultimately going to be feeling that strain as well, compounded by the cost of goods and by the reduction in consumer confidence.

”Beyond those costs, there is a concern around general consumer confidence. The impact on consumer spending is ultimately going to impact their bottom line. We’re having to support our clients in how they address that, through revised strategies to respond to changing consumer demands and changing habits.”

As a social agency, Digital Voices also deals with a lot of retail, fashion and luxury brands. Quigley Jones expects that its clients will soon feel the pressure, saying: ”I think the cost of logistics and shipping will hit them.”

Turner and Quigley Jones both expect to raise their prices in the future. She says: ”We’re going to have to raise our minimum spend slightly. I think clients will understand and see it as part of being a growing agency.

”We’ve tried to position ourselves as an agency by showing positive return on investment and return on ad spend. Influencer posts tend to be the channels that drive the strongest ROI because that’s where people spend their time.”

Turner makes a similar argument. ”We’re helping them to be more efficient with their spend, really scrutinizing and helping them squeeze everything about their budget. We’ve created a number of tools and proprietary technologies that help our clients to do that and that, we hope, will in the round identify that we’re helping them save money. In the short term we could expect to make a margin sacrifice, but over the long term the understanding is that fees will increase.”

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