Direct marketing is the one sector of the marketing industry that has consistently remained buoyant. In the past year it has grown by 6%, according to the 2003 DMA Census, revealed exclusively here by Marketing.
Although this is the smallest year-on-year growth rate recorded since the annual census began in 1995, it is a relatively strong increase against a background of uncertain economic confidence and budget cuts. Indeed, expenditure in the UK DM industry reached an estimated total of £11.85bn in 2002.
"It is gratifying when the industry shows consistent growth when trading conditions are tough," says Mike Barnes, director of marketing and business development at the Direct Marketing Association (DMA).
"From our perspective, it keeps us focused on best practice and threats to growth, enabling us to take advantage of an improvement in conditions."
But this top-line growth may be small consolation to the many DM agencies seeing their margins squeezed and profits falling.
"The key issues for the industry are the same as last year - continued decline in pre-tax profit growth, dramatically slowing sales growth and pressure on employee numbers and new investments. Smaller supplier companies seem to be weathering the challenges better than their larger counterparts due to greater flexibility in charging for projects and lower fixed-cost ratios," states the report.
Barnes says: "The picture within the picture is that there are still a number of firms finding it tough. I see some dramatic changes in the way big clients are working and the pressure on direct marketing agencies and fee structures. So although the industry is performing well and has a confident future, there are a few sectors and members waiting for the fat lady to sing."
Competition is extremely fierce, confirms Chris Duncan, managing director of Alchemetrics. "Over-subscription to pitch processes is now common and there is more pressure to show detailed return on investment at the pitch stage as a result of financial pressure. Inevitably, this leads to commoditisation and price pressure in mature markets," he says
But there are mixed fortunes across the industry. Direct mail has continued to grow, confirming its position as a mainstay of the industry that is little affected by the growth in other media and proliferation of channels.
Direct mail is now worth £2.47bn. Not surprisingly, another strong area is interactive media, which the report says is "making an increasing contribution to the value of DM, now estimated to be worth £525m overall, with the inclusion of figures for text message marketing of £22.5m and e-mail marketing in the UK of £120m."
Meanwhile, expenditure on inserts has risen, with volumes rising by 5%.
Targeted print media has also had a good year, with door-to-door distribution growing by 11% to an estimated total of £677m. Contract customer magazines increased by 13% to £313m.
Yet telemarketing has experienced just a 4% increase in value. The sector makes up a large slice of expenditure, thanks to its £3bn investment in people and technology. But, states the report: "It appears to be showing the first signs of a slowing growth rate for more than a decade, reflecting the effects of a downward pressure on call charges in a competitive market."
Commenting on these results, Barnes says: "Obviously some sectors and channels are not experiencing the same optimism and we cannot get complacent - telemarketing has slowed, database turnover is less. We were concerned that we might be late-comers to the recession and we still need to watch and be aware of this."
But the strengths of the industry - its accountability, flexibility and responsiveness - are standing it in good stead. "DM is always likely to do better when the economic climate is slower," says Richard Marshall, business development director at Tullo Marshall Warren. "It comes back to the simple economics of measurability and accountability. When budgets are tight, every pound has to deliver ROI and DM is better placed to achieve this than other disciplines."
Barnes agrees, pointing out that growth is driven by "the strengths of targeting, measurement, accountability and cost effectiveness."
"Budgets, especially now, have to work for everybody and results have to be visible," he adds.
The industry has weathered such storms before, according to Dawn Orr, managing director of Consodata. "Today's market conditions are comparable to those of the early-90s, although direct marketers haven't experienced the same extremities. The drop in direct mail response rates hasn't been as dramatic and in turn the bounce back won't be as extreme. There's a faster loop than there was ten years ago. Technology has sped up and as the US economy is beginning to turn, the situation will be mirrored in the UK."
DM continues to find favour with certain sectors - charities and financial companies in particular - while other sectors are beginning to use it much more extensively.
"You will always have the financial sectors and charities when you use volume as a differentiator, but retail is beginning to use it to drive footfall," says Carolyn Stebbings, managing partner, client services, at agency DP&A.
Recent retail campaigns that have made extensive use of DM include activity by Ocado, the online supermarket service set up in partnership with Waitrose.
Its launch campaign, developed with agency Heresy, took a Silver award at the 2002 DMA Royal Mail Awards thanks to an innovative mailing that attracted response rates of up to 6.3%.
Similarly, Bronze award winner Blockbuster and its DM agency, Armadillo Associates, used direct mail to pull in customers. Proving DM can be cost-effective and lucrative, it invested £826,000 and saw visits rise 15.9% over a 60-week period. This equated to two million incremental transactions worth £8.4m.
But as some sectors increase their spending on DM, others have cut their budgets. "Performance across different business sectors has been variable," says Richard Marshall. "In some areas of financial services, products such as ISAs have been very difficult to sell. Yet this is compensated by continued growth in areas such as loans and credit cards."
"Sector variations are not uncommon," agrees Alchemetrics' Duncan. "This year the travel sector had SARS, war in Iraq and the weakening of the pound to deal with, none of which would affect the FMCG sector to the same degree."
Indeed, the trend for FMCG brands to move their marketing budgets below the line continues. "Many relationship marketing programmes, such as those for Guinness and Smirnoff, are using an exciting mix of conventional direct mail together with viral, e-mail and SMS elements," says Marshall.
New media channels are certainly having a big impact on the industry as a whole. But are e-mail and SMS a threat to mainstream DM channels or are they a new opportunity?
"There is no evidence that interactive is having any detrimental effect on other forms of 'traditional' DM," says the DMA's Barnes. "In fact, there is a great deal of evidence to say that it is growing channels such as telemarketing and mail. In terms of growth, it is still in its infancy as the technology platforms are developed and confidence grows with consumers. Most marketing campaigns are now multi-channel and it's absolutely fascinating to see how DM is changing as a result of these new forms of marketing. The channels are maturing and becoming established. It's excellent news for everybody."
Marshall says: "I suspect this growth is fuelled by new media as there are very few campaigns these days that don't include some form of digital communication."
So what are the strengths of these channels? Specialist agency e-rm is working with clients such as cahoot and Virgin Atlantic. "New media is sharpening up the direct approach and making it more cost-effective," says Mike Williams, the agency's chief executive. "It is doing well partly because it offers an immediate reaction and is much simpler to produce than normal DM material. The ability to measure effectiveness is far greater and you can reach the target audience immediately and cheaply."
With new media, the key strengths of DM are being taken to a further level. Channels such as e-mail and SMS are even more cost-effective, responsive and accountable than other direct approaches.
But with these channels, marketing directors are realising that they can do more and more marketing with less and less budget. DM suppliers are in demand, but they are under increasing pressure to deliver even more cost-effective solutions.
THE CLIENT PERSPECTIVE
KATHERINE JOHNSON Direct marketing manager British Heart Foundation
DM is a productive and cost-effective way of retaining and attracting supporters. It is one of the most effective media to communicate our wide range of activities. Other media don't give us that time or space to explain what we do. Direct mail offers a good opportunity to show off our wares.
So as long as prospects and supporters are DM-responsive, it's a really good choice.
Having said that, we use all forms of marketing, including TV ads, and DRTV is proving successful in recruiting younger supporters. We also use telemarketing and a growing web presence, but the bulk of our work is still via direct mail. Working in the charity sector, we are always very mindful of the bottom line and DM is measurable. We want to spend our money wisely and if you can measure the response, you can justify the spend.
One of DM's key strengths is its cost, and things are getting more and more competitive. You can find ways of doing a direct mailing more cost-effectively every time. With print and production, you can get good prices if you shop around. Suppliers are very keen to get the business, so there is the potential to drive the costs down.
This means we have more money to spend on our vital work - fighting heart disease - and that's what it's all about.
JOHN GODDARD, Marketing director, M&G Investments
DM has always been seen as accountable, and when budgets are being cut, marketers tend to use the methods that are measurable. With direct marketing, you can get more for your money because more is spent on selling the product rather than on ad production.
We continue to do above-the-line press ads, but we see it as direct because we measure cost per response and cost per conversion. We also use direct mail to up-sell, cross-sell and build loyalty.
Business continues to be better than we expected and we are getting more than our fair share. Our market share is up for the second year in a row.
We have 500,000 customers and our retention rates are rising.
But in terms of the marketing budget, we are spending about half of what we were spending three years ago. That is partly because of the economic climate and partly because we are spending our budget more smartly.
We won't go back to the big budgets, even if things improve. This year alone, our responses are up by 32% and our spending has gone down by 34%.
THE AGENCY PERSPECTIVE
MARTIN TROUGHTON, Founder and managing partner Harrison Troughton Wunderman
There are two main reasons for the continued growth in DM. First, it has come of age and reached maturity. Today, marketers recognise that DM can deliver brand development as well as sales.
Historically, marketers went to an ad agency to build their brand. They then went to a DM agency to find out how to generate sales from the brand.
Now DM can deliver long-term brand strategies as well as immediate response rates. Five years ago, clients simply couldn't have had that level of conversation with a DM agency about brands.
The second reason is economic: money is much tighter today. The fact is that DM appeals to financially constrained organisations and there are more of them about at the moment.
The accountant is in ascendancy. Direct marketing is also a very logical financial sell, as it is all about spending money where it works. Good DM is like drilling for oil. You test five sites and find that three are dry before you hit one or two that gush. You then focus your investment where you will get the greatest return.
LEO CAMPBELL, Deputy chairman Claydon Heeley Jones Mason
Every DM agency in the country feels like it's running up a 'down' escalator right now. Try telling them that the market has really grown by 6% in the past year. From an agency perspective, all the evidence points to the market contracting. So where this growth is meant to have come from is a mystery.
It's all very well for a trade body to talk up the industry, but that's not what we need right now. We need more honesty. Last year, Sir Martin Sorrell spoke about the state of the marketing industry. I think that is refreshing and admirable. I think all his businesses have benefited from his candid stance.
The pressure on agency fees is intense; budgets are being cut and so are agency margins. Clients are enjoying the boot being on the other foot and are renegotiating agency contracts and fees. Who can blame them? In fact, a lot of agencies are even bidding for work at break-even, something that would have been unthinkable a few years ago.
However, adverse conditions create opportunity. As budgets tighten, clients are more likely to shift the centre of gravity away from ad agencies and the biggest winners are in DM. Especially for clients with budgets between £1m and £3m. The emergence of digital as a channel is also a big factor and this work is finding its way into many DM agencies because it is data-driven.