One thing I learned from past recessions is that billboard revenues are extremely “elastic”. They can go up or down significantly based on how the economy is doing. Although there is typically a renter for every sign, what they will pay is all over the map and is derived from a number of factors. So what do you need to know about billboard elasticity and how to plan around it?
Clearn Channel rents down 39% and their loss has increased ten fold
Why are billboard rents subject to extreme highs and lows
Billboards are not an “essential” item to any business but an optional cost. There is no law that says “all businesses shall advertise on billboards at all times”. As a result, when businesses cut back in recessions they often choose advertising – and billboards in particular – and this lowering of demand equals lower rents. The Covid-19 pandemic, and it’s related recession , have pushed the revenues of Clear Channel (one of the largest billboard companies in the U.S.) down by nearly 40% in one year. That’s a huge reduction. At the same time, in boom times, billboard rents have been known to go up 40% or more with the accompanying increase in demand for advertising space. It can go both directions, but most operators need to focus on the bad news and let the good news take care of itself.
How to protect yourself
Since rents are elastic, there are many strategies billboard owners take to minimize this risk:
- • Use very low rents in your assumptions when doing budgets. Do not use “best case” numbers (such as the asking rate of other signs in the area which are typically 20% to 40% more than are actually achieved) but instead realistic numbers you can hit day in and day out.
- • Try to rent signs to users who will “stick” on them in good times and bad. These are typically advertisers that can put “exit now” on the sign and include big, solid players like McDonald’s and not little players like hobby shops that can blow out in the smallest recession.
- • Try to use leases that are at least one-year in length to insulate you from having a bunch of advertisers drop simultaneously when the recession hits.
- • Only build an own good quality signs with strong visibility as in bad times there is a “flight to quality” among advertisers who survive the shake out.
A case study
When I was hit by the Texas S&L Crash (one of the worst depressions in U.S. history in the Southwest) I was able to survive by having good renewal on my core advertisers such as Wendy’s despite the fact that they paid lower amounts in the boom times, as well as having set budgets much lower than my peers and building signs for lower prices. I was able to survive on lower rents but most of my competitors were not. That opened the opportunity for me to buy them out of bankruptcy when they failed.
Conclusion
Billboard rents are very elastic. It’s just a fact. And you have to work around it. If you always remember this, you will be fine. But if you forget this simple reality, you will get caught in a really bad situation. Recessions have winners and losers and you want to be a winner.