Why the Euro Crisis Is Your Business Problem, Too

The 'Old Country' Is Still Important to Future of Multinational Marketers

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"We're all in this together; if there's a failure in Europe it will affect us all."

So said WPP Chief Executive Martin Sorrell, issuing a wake-up call to those who think the debt crisis in Europe is an ignorable brushfire. It's a reminder of just how important the proverbial old country is to the future of multinational marketers in an age when so much attention is focused on emerging markets in Asia and South America.

WPP Chief Martin Sorrell
WPP Chief Martin Sorrell

Over the past few months, as European leaders have struggled to find a solution for the debt mess, corporate boardrooms all over the world have been sounding alarms. In June, Thomson Reuters reported that the ratio of companies that have issued profit warnings to those that have improved forecasts is 3.6-to-1, the worst since 2001. Much of it is attributable to the mess in Europe, which seems to be escalating with every passing financial quarter.

Tesco, the much-admired U.K.-based grocer, kicked things off in January with its first profit warning in 20 years, leading analysts to wonder how problems in its own

neighborhood would stymie expansion efforts in places like the U.S. and China. Tesco's news was followed by companies similar news from Groupe Danone and, most recently, Germany-based Puma.

But to Mr. Sorrell's point, it's not just European companies feeling the pinch. PepsiCo, Procter & Gamble and FedEx have all issued warnings. Shares of Ford Motor Co., bailout-rejecting star performer of the recession, took a haircut last month when executives warned of a decline in second-quarter profit. It followed up with the news that sales in Europe would be the lowest since 1994.

"My sense is things have got tougher for our clients in Q2 than in Q1," said Mr. Sorrell. He observed that the outlook is better in Northern Europe than in Southern Europe and excludes Germany from the gloom.

What marketers are reacting to is a period of dampened and, in some countries, record-low consumer confidence spread by high unemployment rates, declining currency and uncertainty about the future. Unemployment across the eurozone is in excess of 11%, and it's worse in the most extreme cases: Spain is at 24% and Greece is at 22 %.

Euromonitor International forecasts that in 2012, total consumer expenditure in the eurozone will fall 1% in real terms. At a household level, spending is expected to fall at the rate of 1.7%. It's even worse in Italy, Portugal and Greece, which are expected to see consumer expenditure per household falling 3%, 4.2% and 7.6%, respectively. "Consumers are becoming vigilantes," said Daphne Kasriel-Alexander, consumers editor for Euromonitor International, adding that group-buying, bargain-hunting and secondhand-shopping are on the rise. "Customer loyalty has been diluted."

The hit to consumer wallets is having an impact on the ad market. "It's tough stuff in the short term, and in my own view, it's going to take a long time for France, Spain, Italy and the U.K. to shake themselves out of their financial lethargy," said Mr. Sorrell, predicting that it will be "three to four years before we get significant growth." But Mr. Sorrell believes that the European mess is "baked into" current expectations.

While that may be true, it seems as though the forecasts are being continually revised downward. Last week, WPP's Group M revised estimates due to a decline in U.S. ad spending spurred by uncertainty in the eurozone and in the election year. The report said ad investment in Greece, Ireland, Italy, Portugal and Spain fell 6% in 2011 and is expected to drop 8.8% in 2012.

Mr. Sorrell noted that a factor not baked into anyone's estimates is the repercussions if a country, say Greece, were to exit from euro currency or the failure of a major bank.

Maurice Levy, CEO of Publicis Groupe, said European marketers and agencies need to prepare themselves several years with modest growth of 1% to 2.5%. "The name of the game will be winning market share and the impact for advertisers will be being innovative and finding new products" to roll out, he said. "Advertisers will need more and more acute strategies and clever solutions to win share of market. The fight will be very tough."

For agencies, "this will make our jobs all the more interesting," he said.

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