Spending slowdown hurts researchers' 3Q results

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Research powerhouses ACNielsen Corp. and Information Resources Inc. reported third-quarter earnings and sales were hurt by what they characterized as the short-term impact of package-goods consolidation. But industry analysts believe the effects may indicate a longer-term trend caused by lower spending on market research and media.

In the case of ACNielsen, an overall positive third-quarter earnings report was dragged down by sales declines in its BASES and Market Decisions units, which offer simulated and actual test market services. If sales declines estimated at more than $4 million for the quarter for those two businesses are factored into the company's overall U.S. sales of $130.3 million, the company's total growth rate was cut by more than half to 4.5%. Earnings growth similarly was halved by the BASES and Market Decisions results -- with total U.S. earnings up 16.2% to $20.1 million.


While ACNielsen Chairman-CEO Nicholas Trivisonno blamed client reorganizations and industry consolidation for the hit to U.S. sales in a conference call last week, the company later told Advertising Age that cutbacks by one client, Procter & Gamble Co., were primarily to blame. Based on current bookings, ACNielsen said it expects fourth-quarter sales for BASES and Market Decisions to bounce back to year-over-year growth.

A P&G spokesman could not immediately comment on whether the cutback resulted from a review of new-business projects initiated when A.G. Lafley became president-CEO in June or from a trend Mr. Lafley noted earlier this month toward the company using online research to carve 90% off the cost of each concept test (see story on Page 76).

Ironically, ACNielsen acquired both BASES and Market Decisions in the past two years to become less reliant on its larger but slower-growing and lower-margin retail measurement business.


Separately, IRI reported a 3.2% decline in third-quarter revenue to $131.7 million and earnings flat at $1.3 million before restructuring costs, results that Chairman-CEO Joe Durrett likewise said partially reflected temporary effects of industry consolidation.

But Prudential Securities analyst Jim Dougherty said that in tracking the combined U.S. sales growth of both companies over the past five quarters, he's noted a gradual deterioration from a 10% growth rate in the third quarter of 1999 to flat year-over-year sales last quarter. The fact that the higher-margin concept and in-market testing segments of each company appear to be taking a hit is even more worrisome, Mr. Dougherty said.

Both companies rely almost entirely on a package-goods business that's been spending proportionally less on advertising over the years and now may be turning the budget knife to research, he said. "If you look at the mid-1980s, consumer package-goods contributed around 45% of the national advertising in the U.S.," he said. "Last year it was 19%."


Both ACNielsen and IRI vehemently deny the same trend is coming to research, but Mr. Dougherty has his doubts. "If package-goods is becoming that much less important to the advertising industry, why should they continue to spend more on market research?"

ING Barings analyst David Doft said he believes client consolidation is primarily to blame for current results, but said consolidation also could create long-term pressure on research companies "due to more scale and better pricing for the client."

Though moves by P&G and others to online testing also may depress research sales, Mr. Doft said research companies benefit from reduced costs, too. At least in the case of BASES' online testing business, he said he believes profitability is similar to its older, offline testing.

"The question longer term," he said, "is does it become more of a commoditized business because technology lowers the barrier to entry?"

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