Companies such as newspapers, news websites and social networking sites dependent on advertising dollars to make money may see a particular slow down as businesses cut unnecessary expenditures for fear of continued economic woes.  Sageworks Database of private company activity shows a downward trend in advertising dollars spent as a percent of sales from 2007 to 2008 for automobile dealers, restaurants and retail clothing stores.

In light of this trend Brian Hamilton, CEO of Sageworks, remarked, “when companies feel threatened in an uncertain economic environment, they tend to cut discretionary expenses, one of which is advertising.  Unfortunately, this tends to further depress sales and profits, since good advertising efforts drive profits and sales.”

The downward trend in advertising which is presumably due to tightened spending by businesses is similar to the downward trend being felt by retail stores due to tightened discretionary spending by consumers (see “Small and Large Retail Businesses Feel the Downturn“).

See also: http://www.adotas.com/2008/09/report-display-down-6-year-over-year/ - On online advertising trends in 2008.

In the wake of current economic turmoil sales and profitability have both slowed significantly for retail businesses since last year.   Sales growth for privately held retail businesses has fallen in 2008 to 3.18% from 3.85% in 2007.  A similar trend is evident for publicly traded retail businesses; sales growth was at 3.72% in 2007 and is currently a dismal 0.32%.  Net profit margins for private clothing stores have dropped to 2.88% in 2008 from 3.46% in 2007; for publicly traded clothing stores average net profit margins are currently 5.55%, down from 6.81% in 2007.

With rising prices for food, health care, energy, gasoline, etc., retail customers are left with fewer discretionary dollars to go towards retail spending. Consumers are pulling back on spending and focusing on the essentials. The fall in consumer confidence to near all time lows has caused a general slowdown throughout the economy, which also seems to be adversely affecting retailers. Rising energy and transportation costs are raising expenses in the retail industry, which is placing more strain on profit margins. Competition between retailers is currently intense, with superstores battling on price and direct marketers/online selling increasing competition to stores.

Net Profit Margins of Privately Held and Publicly Traded Clothing Stores From 2000-2008

Sageworks aggregates private company financial data from financial professionals that use our ProfitCents and Sageworks Analyst applications.

Related Links:

http://blogs.reuters.com/summits/category/consumer-retail-07/ - Reuters Summit Notebook Blog - consumer and retail analysis
http://www.nsba.biz/content/1993.shtml - NSBA Small Business Mid-Year Economic Report
http://abclocal.go.com/wls/story?section=news/consumer&id=6397582 - Holiday Retail Slump Expected
http://www.sageworksdatabase.com- Sageworks Data on Privately Held Companies