July 2, 2001
NEW YORK (AdAge.com) -- Media and advertising agencies spent New Year's Eve debating whether a downturn was coming. This July 4, the talk at barbecues from East Hampton to Santa Monica comes down to one question: When will it end?
|Which way to relief?
Marketers spent the first half of the year finessing quarterly announcements as business ground to a halt ahead of anybody's forecasts. Ad budgets froze and agencies, hard-pressed to fill vacancies last year, moved from hiring to firing.
"What nailed everybody [early in the year] was we didn't know what was going to happen," especially how rapidly the downturn would hit, said Nancy Hill, president of Interpublic Group of Cos.' GMO/Hill Holliday, San Francisco.
The ad market is stuck in economic limbo. "We know what the bottom is and what the second half is going to be,"
That's the consensus among agencies, as hopes fade for a second-half recovery. "It's going to be tough, as tough as the first half," said Bob Scarpelli, U.S. chief creative officer of Omnicom Group's DDB Worldwide and chairman of DDB Chicago. Because the agency's clients are still cutting expenses, it has had to trim staff and budgets. "I don't see things getting worse, but I don't see major hope to be really optimistic," he said.
While some media companies openly admit they have written off 2001 and now expect to recover in 2002, agencies won't give up the ghost. Under pressure from investors to lift sagging stocks, they're furiously chasing the few accounts in review. Large holding companies, in particular, have benefited from account consolidations of clients seeking to cut costs.
"All I can do is pray," said the head of one global holding company when asked about his agency's chance of winning one of the most high-profile reviews. "With so little business floating around, everything takes on a new level of importance."
Nowhere was the uncertainty more obvious than Interpublic's annual midyear spending forecast. Universal McCann's forecasting guru, senior VP Robert Coen, had already signaled he would lower his estimate for 2001's growth rate sharply, based on the deteriorating economy, but the capacity crowd was still acting like bookies at the track.
"I'm anxious to see how far down Bob is going to go," said one analyst to another. He didn't have to wait long.
Home, auto sales hold
Surveying the advertising/media carnage of the first half of 2001, what's striking is that it's happening in an economy where home and auto sales are holding, inflation is under control and unemployment is just a slice above full-employment levels. The shrinking set of believers in a second-half ad recovery point to those indicators as proof that a long, drawn-out recession is not in the cards.
"Bearish consumer views simply look at the lousy paint job and do not pop the hood," wrote Salomon Smith Barney Equity Strategist Tobias M. Levkovich.
The Federal Reserve Board was on the same page. After five half-point rate cuts in January through May, it only cut 0.25% June 27, based on signs the economy is near bottom.
"The patterns evident in recent months -- declining profitability and business capital spending, weak expansion of consumption, and slowing growth abroad -- continue to weigh on the economy," the Fed's Federal Open Market Committee said in its statement. But it noted "continuing favorable trends bolster long-term prospects."
Forecasting is difficult because this economic down cycle has not behaved as others have in the past, analysts said. The optimists can point out gross domestic product is still growing, so -- in spite of all the gloom -- the economy has not yet met the textbook definition of a recession, two quarters of negative GDP growth.
"It's not fashionable to say this is a recession. ... [So] I would define it as a sharp deceleration in revenue growth," said WPP Group Chairman-Chief Executive Martin Sorrell.
It's payback time for media sellers. "Advertising has been fueled by very strong price increases, and now we're going to play the game with pricing flatness or weakness in certain categories," said Michael Russell, advertising analyst at Morgan Stanley & Co. At some point, price deflation -- brought on in part by slumping prices in the upfront TV market -- could spark a return to traditional media by big advertisers, Mr. Russell said.
"Companies are much more conscious of managing costs and earnings than trying to manage market share or revenues," he said. Because there are so few clear indicators for forecasters, "We just try to look for stability, for people who've stopped cutting ad spending rather than increase ad spending," Mr. Russell said.
Marketers are cautious. "From a macro economic point of view, there is not much evidence to suggest a magical turn in the economy come July," said David Selby, senior VP-marketing, Sears, Roebuck & Co. "To expect that is naive."
Sears has a "very realistic view" of the economy and the "realities our customers deal with," Mr. Selby said. "There continues to be a high level of concern among customers on the state of the economy. We will address that in our merchandise, our marketing and our positioning."
While a variety of package-goods companies, from Playtex Products to Clorox Co., blamed the economy for weak sales in the first half, analysts are skeptical about how much impact the economy actually has on that category.
U.S.-based consumer products companies are affected more by negative currency effects from the falling euro than the U.S. economy, said Jim Gingrich, analyst with Alliance Capital's Sanford C. Bernstein unit. "Consumers don't stop buying toothpaste and toilet paper when you see the type of contraction we're seeing right now," he said.
In the wake of spikes in private-label sales and Mr. Gingrich's April report citing a long-term decline in the industry's rate of ad spending, top executives of package-goods giants Colgate-Palmolive Co., Gillette Co., Procter & Gamble Co. and Unilever vowed to increase or at least maintain ad spending relative to sales and promotion.
"Clearly the first-quarter numbers suggest what they're doing is not necessarily in line with what they're saying," Mr. Gingrich said. "I would expect ad spending to continue to be somewhat down vs. the prior year."
Banc of America Securities analyst William Steele, however, is more optimistic package-goods companies will stick with their resolve to do the right thing for brands now that many have scaled back or abandoned overly optimistic earnings forecasts.
Poor short-term decisions
"These folks know how to build brands," he said. "It's just that intense pressure from Wall Street has caused them to make poor short-term decisions. ... Now I think you've got folks saying, 'Hey, let's stop the madness.'"
He cited new Gillette Chairman-CEO James Kilts, who refused to provide specific earnings guidance and vowed to re-invest in advertising brands during an analysts' presentation last month. Last week, Gillette launched a $100 million ad and promotion campaign for Duracell CopperTop.
"That should be applauded, and it has been," Mr. Steele said. Despite downgrades from three analysts following Mr. Kilts' presentation, the stock didn't go down significantly, he said. "That shows investors are starting to put pressure on companies to do the right thing longer term."
Some advertisers are taking advantage of dropping rates and eager media sellers to boost brands when competitors are silent. J.C. Penney Chairman-CEO Allen Questrom told investors Penney will raise its 2001 ad spending by $100 million to coincide with federal tax rebates in the fall. H&R Block is also angling for those rebates and is considering doubling its ad spending starting this fall to cross-sell new financial management products to tax clients.
The optimists got a boost in June when the Conference Board's consumer confidence index edged up for the second month in a row. It was the first two-month upswing since the index's peak in September 2000.
But the indicators are still mixed, said Lynn Franco, director of the Conference Board's Consumer Research Center. While consumers said they have a brighter outlook for the economy and job market six months down the road, they are not going on any shopping sprees. Planned purchases of homes, cars and major appliances are still conservative.
"All of us are in a holding pattern right now," said H&R Block Chief Marketing Officer David Byers. "We're right on the cusp of determining if the consumer is going to take us one way or another."
Contributing: Hillary Chura, Alice Z. Cuneo, Kate MacArthur, Jack Neff and Laura Petrecca
Copyright July 2001, Crain Communications Inc.