Remember August 2001. Even priot to 9/11 it was pretty depressing for any white collar worker. Even in advertising. But there again, for as long as I can remember ad agencies have been moaning about how little money they make.
In the wake of last year’s Olympics bonanza, advertising agencies are struggling I wrote for The Australian.
WHEN marketers get cold feet, advertising agencies seem to catch a
nasty dose of the flu. This bug is easily passed on. The UK is in its
worst advertising recession for more than a decade: 7000 media jobs
have been lost so far this year; the country’s commercial free-to-air
television stations are in their worst slump ever; a cursory scan of
the UK press reveals marketers’ optimism is the lowest in six years.
Similarly, in New York, marketers are cutting budgets and the stock
market-listed advertising groups are reporting a sluggish year at best
and slashing jobs. Although the US and UK economies have slowed, they
are by no means in recession. Advertising commentators are baffled.
Has the deadly bug spread here? Will we see the worst ad agency recession in 10 years? In Australia, the economy is proving resilient. It isn’t slowing as fast as the rest of the world, according to analysis of the latest retail sales figures from the Australian Bureau of Statistics. However, there is evidence that the same disconnection between gross domestic product and advertising expenditure is occurring locally.
Some commentators reckon advertising expenditure this year will be lucky to reach the $8.3 billion spent in 1999 let alone the $9.1 billion spent in 2000. They estimate ad volumes are down by between 10 per cent and 25 per cent on the equivalent period last year. According to one report from AC Nielsen, advertising expenditure fell by 3.4 per cent to about $1.2 billion in the first quarter of 2001.
Worse, this year there is no Olympic Games and no GST launch to boost spending and the dotcom crash has subtracted more cash. The approaching federal election adds uncertainty to the mix.
Steve Allen of media strategy shop Fusion says: “The fact is that the economy is holding up and the advertising market is more depressed than the economy as a whole.” He says the dislocation between economic growth and advertising spend is a function of the lack of confidence among advertisers, and journalists talking down the economy.
“Advertisers are being overly cautious,” Allen says. Many others have simply stopped spending after overstretching themselves in the Olympics splurge last year.
Russell Tate, CEO of the stock market-listed Singleton Group, says: “Most of them [clients] are holding the line with last year. Several of the bigger clients have spent less this year than last year.”
Robert Morgan, chairman of Clemenger BBDO, one of the largest agencies in Australia, recently experienced the agency gloom in the US first hand. He says in Australia there has been less fat to trim: the market has not grown as dramatically as in the US and Europe.
Australian ad agencies have to live with global deals made on slim operating margins in London and New York, which make it impossible for local agencies to return profits. A weak Australian dollar doesn’t help.
“Certainly the industry here has been run more tightly,” Morgan explains. “I don’t think we’ve benefited from the same levels of uninterrupted growth here reflecting the fact that Australia is [now] doing better than the US or Europe. There is always something [affecting the market] here. You have to be tough.” Morgan concedes Clemenger has made “some adjustments” to staffing.
Singleton’s Tate maintains investors are attracted by the fact that advertising is a “variable cost business”. (That means it’s easy to cut jobs.) The hard economics are that every $1 of salary must reflect $11 to $15 of billings. Every person services about $200,000 of ad agency income. As soon as a client is lost, or a budget is cut, then staff are kicked out.
“There’s not much point having a variable cost business unless you vary the costs,” says Tate. Singleton made “significant” cuts in January, anticipating a tough year ahead. Most other groups are cutting staff too, however brave a face they put on.
Australia’s largest media buyer, Zenith, has sublet a floor of its building and closed the staff bar. George Patterson Bates and McCann Erickson moved from North Sydney to cheaper property in William Street and Clarence Street respectively. GPB lost 10 staff along the way.
Paul Williams, chief executive of Belgiovane Williams McKay, one of the hot start-ups of the mid 1990s says 80 per cent of client companies have downsized. “The ad industry is but a parasite on the top of industry and will have to [downsize] as well.”
He estimates clients are cutting budgets by 10 to 15 per cent. “All clients are prepared for a storm ahead.” Williams is cutting now for 18 months’ time. “It’s a fine act of balancing. Cut too hard and you knock your mast off or you have to trim the sails and keep sailing through. It took me totally by surprise when we were looking at this six months ago.” Winning the $15m AAMI account in February only just compensated for the revenue cuts of other clients. He has downsized by not replacing jobs and making two redundancies.
Agency staff levels are indicative of how an economy is performing, because as clients lose confidence in the economy, they cut their ad budgets, and agencies sack workers. Allen says: “No client plans a year out and sticks with it. Plans are approved by quarters. This is why confidence is so much more important today than it was. It’s all this conjecture that affects clients’ budget plans.”
The next six months is the most important with the uncertainty of a federal election in addition to further falling ad revenue. Morgan says Clemenger’s billings for the first half of 2001 are comparable to the previous year. The second half of the year will be down compared to the same Olympic period in the previous year. He says: “The next six months are more important than the last because that’s when the Olympics were.”
But according to Allen things are not as tough as many think. “We believe expenditure will lift from this month [August] although it’s lifting off a pretty depressed base. You’ve got to forget the year 2000. It had no pattern or rhyme or rhythm to it. You have to go back and look at 1999.”
Morgan says: “There is every indication that Australia may sneak out of it.”
Tate adds: “You can’t pretend 2000 didn’t exist. The fact is comparing this year to last year the media cycle is down to buggery.” He leads the consensus predicting 2002 will be terrific. So will Australia’s ad industry avoid recession fever? Or are these just brave words?
“… 1988 was the bicentenary year, a bit like the Olympics year,” Allen points out. “Advertisers went bananas and spent way over what they said they would. Then lo and behold, sometime later, they went `whoops, we’ll have to cut back’ — and overreacted.”
However, since the 1980s Australian businesses are more tightly run. Downsizing has given companies greater margins and therefore more marketing dollars. Local agencies are battlers and have learned to cope. Perhaps they will escape with only a sniffle after all.
What the world’s biggest say
THE world’s ninth largest ad agency group, London-based Cordiant Communications, sees few signs of an upturn and reports revenues will be flat this year at best. CEO Michael Bungey said this month the slowdown, which started in the US, is spreading to Europe and Asia Pacific. The group aims to cut its salary bill by 5 per cent — 400 jobs went earlier in the year.
The world’s largest ad agency group, London-based WPP, in June reported revenue growth slowing to 4 per cent in the first five months of the year.
New York-based Interpublic, is cutting 10 per cent of its workforce — about 3500 jobs. Revenue dropped by 4 per cent. A second quarter loss of about US$110 million ($220 million) was reported against a profit of $US166 million a year ago.
Media buying group Zenith Media estimates ad expenditure in the UK will fall by 0.2 per cent this year and in the US by 2 per cent.
The world’s biggest advertiser, Procter&Gamble, has cut ad spending by $875 million to $5.5 billion, the lowest level in more than a decade.