Conventional wisdom was wrong. Top major marketing-services ventures this year have slashed hundreds of jobs and closed offices as they face the economic downturn. While the field's long-term prospects look solid, the short-term ride will be bumpy.
"I don't think marketing services are immune" to the economic downturn, said Alexia Quadrani, managing director at Bear, Stearns & Co. "We're seeing cutbacks across the board, and that applies to all marketing services. Certainly direct marketing, database marketing and definitely PR are seeing some softness," she said. "The best case we can hope for is that their relative performance is stronger than traditional advertising."
What a difference a decade makes. It's not 1991, when the marketing services sector-just a shadow of its current self-was a popular refuge for budget-busted marketers looking to direct marketing and promotions as a quick fix to increase sales.
In the past few years, advertisers across the board, from blue-chip old timers to newer ventures, have increased spending in marketing services in pursuit of disciplines that deliver measurable results. Ad agency holding companies, meanwhile, have bought up the marketing-services arena, seeing it as the ticket to growth. The world's top three agency companies-Omnicom Group, Interpublic Group of Cos. and WPP Group-last year accounted for 41.9% of U.S. marketing services revenue, according to Advertising Age data (AA, May 21).
But marketing services, finally getting the respect showered upon mainstream media for decades, also has inherited traditional advertising's vulnerabilities.
Most analysts and agencies predict marketing services growth for this year to be below 2000, but certainly above what's forecasted for mainstream media.
"Marketing services is still safer than advertising. We see it as not bullet-proof but as bullet-resistant," said Morgan Stanley analyst Michael Russell, who forecasts 5.5% marketing services growth in 2001, down from 8.5% last year. In his projections, marketing services is defined as direct marketing, sales promotion and public relations done by agencies as well as internally by marketers. In contrast, he predicts a 1% decline in general advertising (including Internet) this year, vs. 10.7% growth last year.
"I don't think the growth curve is going to die, but everybody in marketing communication services is feeling the conservative side of clients coming back," said Carla Hendra, president of WPP-owned Ogilvy & Mather Worldwide's OgilvyOne North America. After impressive growth in recent years-44.8% in 2000, according to Ad Age-OgilvyOne was prepared for slower growth. "We weren't planning on enormous growth this year anyway. After you have two years at 50%, you need to ratchet it carefully," Ms. Hendra said.
Marketing services agencies that were careful to mediate expectations for this year are riding through the storm with the least damage, while those that expected the growth of recent years to continue have been forced to trim jobs or close offices like many of their general advertising counterparts.
"I fully expected the companies that are in the marketing services business to actually do better in a down economy," said Dennis Troyanose, principal in charge of the direct-marketing search practice at Gunderson Partners, a New York recruiting firm. But instead, layoffs have occurred because in some cases "the demand for [agencies'] services isn't keeping pace with the size of their business," he said.
As a result, many marketing services agencies are downsizing.
Interpublic's Jack Morton Worldwide laid off 70 staffers last month, or 6% of its U.S. operations, because client spending was not in line with the agency's expectations. "We were invested, in terms of our expense base, in anticipation of continuous 20-plus percent growth," said exec VP Laura Shuler. Jack Morton, which provides consulting services for companies' meetings and events, had a 90% revenue increase in 2000 over 1999, according to Ad Age. "As it became clear that that growth wasn't going to be there this year, we had to adjust our expense base," said Ms. Shuler, who is now predicting a flat year, or a slight uptick. "It's like a catching of the breath," she said. "It doesn't feel like we're going backward; it just feels like we're downshifting one gear."
Publicis Groupe's Frankel also answered clients' reduced spending with job cuts in Chicago and San Francisco, trimming 45 in February and 30 more in May. "All agencies have been hurt by the economy, without question," said Frankel President-Chief Operating Officer Dan Rose. "We're one of the agencies that has been hurt, as evidenced by our layoffs," he added. "Revenues were less than we thought they would be. And the cause of that is that a couple of our accounts [have cut back] and new business has been slower."
Similarly, Havas Advertising's Brann Worldwide last month closed its 60-person Richmond, Va., office and laid off 10 people at its Brann Data division, also in Richmond. The shutdown of the agency "really had to do with the scale of the business and the operating costs associated with it, which were not in sync," said Brann President-CEO David Finkel. Clients serviced out of Richmond were moved to other offices. "Everybody has to answer to the stock market," Mr. Finkel said. "When clients try to manage profits, oftentimes it's at the expense of their marketing dollars, and that has a ripple effect on the agency business at all disciplines."
Other marketing services shops forced to reduce costs include Omnicom's Rapp Collins Worldwide, which, after closing its 29-person Minneapolis office in March and consolidating its accounts in Chicago, let six staffers go in its Chicago shop-with possibly more to come-as it transitions that operation from a full-service agency to a service organization.
Interpublic's DraftWorldwide laid off 8% of its New York office-33 people-in May. Early this year, Draft cut 30 jobs in Chicago, though it quickly staffed up after winning Burger King Corp.'s promotional account. "We've tightened our belts, just like everyone has in the industry," said Chairman-CEO Howard Draft. "We're just trying to run a leaner, meaner machine."
Carlson Marketing Group, the No. 1 marketing services agency according to Ad Age, laid off less than 2% of its 4,000-plus worldwide work force in April, with all cuts coming from its travel-related marketing business. Grey Global Group's Grey Direct Marketing Group trimmed jobs in February and again in April-about 2% of its roster, now at 300.
The marketing services pullback also has included public relations as PR firms react to the collapse of dot-coms and technology. "People are cutting back on PR because it does feel more discretionary," said Morgan Stanley's Mr. Russell.
Marketing-services agencies that were prepared for a slowdown have retained their employees. "We're not seeing the vibrancy and activity to the tune of double-digit growth that we saw last year, by any stretch of the imagination," said Daniel Morel, chairman-CEO of WPP-owned Young & Rubicam's Wunderman. The agency is on target to realize the single-digit growth it forecasted for the year and still has positions, including a creative director, to fill. Wunderman Chicago's President-CEO Stephen Zammarchi said he's looking at a flat year for the office, echoing clients' expectations. "The first quarter of the year, which is now becoming the first half, people sat on their budgets. Nobody knew what was going to happen. They said `plan for flat."'
Industry executives dispel the theory that marketers are reallocating mass-media dollars to their shops. "I don't know that they're shifting their dollars," Mr. Zammarchi said. "In the past when the economy softened, people would shift marketing dollars to promotion and direct because they were more short-term oriented," but today, clients see these activities as part of their overall strategies and use them all the time, he explained.
Added Zenith Media Chairman-CEO John Perriss: "Historically, that [shift from general advertising to below-the-line] tended to happen. But it's so long ago, who knows if it's the same world as it was 10 years ago." Zenith, jointly owned by Publicis and Cordiant Communications Group, recently branched out by opening Zenith Direct, a direct-advertising shop.
Mr. Draft said existing clients that believe in direct and promotional marketing are spending like they used to, while "maybe being a little more cautious."
"But I don't see a dramatic shift to direct and promotion," Mr. Draft said. "It's business as usual."
That status quo has marketers and holding companies alike placing their bets on marketing services in the long run. "My sense is that the current economy is not responsible for the incremental interest that we're experiencing with direct marketing," said Ron Greene, president-CEO of Havas' Devon Direct Euro RSCG. "That interest has been brewing for some time; it's now just coming to more focus by many companies."
And also by the Big Three holding companies, whose long-term strategies include shifting their business models-now split almost evenly between general advertising and marketing services-to favor the latter. They believe marketing services' popularity only stands to increase as marketers continue to see investments in direct and relationship marketing translate to their bottom lines.
"In the short term, direct marketing has been affected [by the economy] to a lesser degree than general advertising, but to a degree," said Grey Direct Chairman-CEO Larry Kimmel. "But in the longer-term horizon, we're seeing more and more dollars coming our way."