Stock spasms spur fears of ad cutbacks

By Published on .

Most Popular
As corporate America issued a series of warnings about disappointing earnings and the stock market went into convulsions, the ad industry was left with a case of jitters about the prospects for ad spending in the fourth quarter and into next year.

"Our industry would tend to be an early indicator of a downturn. Our clients would tend to make adjustments before they saw a downturn, rather than after it had happened," said Martin Sorrell, chief executive of WPP Group, reflecting an industry belief that advertising often is one of the first spigots turned off to cut costs when times are tough.

But the market adjustment, Mr. Sorrell said, is a necessary correction to several years of growth fueled by unrealistic expectations.


In many ways, though, it couldn't have come at a worse time. Marketers in recent months have been bullish about the outlook for continued expansion, and many still are. But the stock market slide comes just as many marketers, media companies and ad agencies are preparing their budgets for next year. It also comes amid renewed fears of inflation, and the threat of even higher energy prices generated by political instability in the Middle East. All those factors combined create a sense of uncertainty about the impact on ad budgets.

Intel Corp., Eastman Kodak Co. and Home Depot are among those that issued warnings to Wall Street in recent weeks about disappointing third-quarter earnings and, in some cases, uncertain outlooks for future quarters. On Oct. 12, the market rushed to punish them, resulting in the fifth-largest daily drop in the Dow Jones industrial average. The market rebounded somewhat the following day, and some observers advised marketers not to overreact.


Stocks in the Advertising Age/Bloomberg AdMarket 50 Index were off 3% as compared to a 3.8% drop in the Dow Jones industrial average and a 2.47% fall in the Standard & Poor's 500 Index. Since June 30, the AdMarket 50 index is down 15.78%, reflecting sharp stock price declines in key index components Microsoft Corp. and Intel Corp., compared to a 5.53% decline in the S&P 500.

"At the present moment, it's better not to pay attention to anything. There's too much confusion about what's happening," said Robert Coen, senior VP-director of forecasting at McCann-Erickson Worldwide.

"There is a lot of anxiety because things have been so good . . . but the majority of the forecasters are still seeing growth next year," Mr. Coen said. Still, 2001 will be without the Olympics and a presidential election, which fueled part of this year's unusually strong growth.


The second half of 2000 looks good for advertising agencies, and none will admit that its clients are worried. But there is anxiety, said Jim Dougherty, an analyst with Prudential Securities.

"Bear in mind that the market is under tremendous pressure. It's about to go below 10,000 for the first time in a long while," he said."A lot of people are worried, and once they get that way it doesn't matter what they are worried about. Stocks go down." For now, though, he said, "there doesn't seem to be any impact on the agencies' business."

Much of last year's freewheeling spending was fueled by the wild stock market and money from dot-coms, now much reduced due to the tech stock meltdown, said Allen Banks, exec VP-North American media director of Saatchi & Saatchi, New York.

Companies are holding back fourth-quarter budgets until they feel they can meet their revised expectations, but they will spend their branding dollars, said Jed Petrick, exec VP-media sales for the WB network.

"You are coming into Christmas season," he said. "You are not just going to punt. They are going to make the call and say, `I'm in.' "

Retailers aren't anticipating an especially bright Christmas and are approaching the slowdown with various marketing strategies. Some, such as The Gap, had promised Wall Street a heavy holiday advertising schedule to make up for flat fall sales. Others, such as Shopko Stores, plan to slow down or rethink spending.

"I've been trying to be optimistic since March," said Terry McDonald, Shopko senior VP-marketing and communications. The chain plans to increase its media spending next year, but only by an amount trailing traditional media inflation, about 6% to 8% a year.

Uncertainty is strong in the tech sector, which has taken a beating since the spring. Martin Reynolds, research fellow at market researcher Gartner Dataquest, projected PC market growth could flatline by 2002. But at least one analyst said he sees ad spending in the sector growing.

"The issue with most of the [earnings] warnings is that they are from lower than expected demand, and one of the ways to spur demand is to increase advertising," said David Bailey, research analyst at Gerard Klauer Mattison.

Other companies already had begun to trim or refocus marketing expenditures this year, including blue chips such as Procter & Gamble Co. and DaimlerChrysler.

P&G President-CEO A.G. Lafley reiterated to shareholders at P&G's annual meeting Oct. 10 that P&G would hold its rate of spending as a percent of sales steady. But Mr. Lafley said P&G also has shifted marketing budgets away from TV and toward print, direct mail, Internet and other more targeted vehicles in the past year.

DaimlerChrysler is due to reveal third-quarter results this week, but the carmaker already has announced the Jeep, Chrysler and Dodge brands in North America will lose an expected $528 million. Meanwhile, chief competitor Ford Motor Co. said it expects to advertise to clean up after the Explorer/Firestone debacle.

DaimlerChrysler's North American arm decided in the summer to cut about $2 billion from its marketing costs, one reason it called for a shoot-out between Omnicom Group and True North Communications. The company wants to cut its agency costs by 25%, executives close to the situation said.

Rising costs and a volatile market are a conundrum for companies such as Darden Restaurants. "The marketing budget isn't sacrosanct," a spokesman for the company's Red Lobster chain said. Red Lobster this year has been faced with record-high product costs, leaving it with a tough choice: a price increase and lower sales, eating the costs and reducing its profits, or managing costs.

Companies that cut costs while keeping a full marketing budget are "mortgaging their future," the spokesman said. "You don't want to cut out marketing and watch your sales drop. By the same token you don't want to cut out the departments that can grow your business in the future and have the view that marketing is above reproach."


It's still too early to determine where fourth-quarter budgets will end up, but "we're definitely in the middle of some kind of a change," said Natalie Swed Stone, managing partner and director of national radio services at Optimum Media Direction, New York.

The stock market gyrations and earnings shortfalls "certainly have a negative impact on a lot of the budgeting process," said Jack Haire, president of Time Inc.'s Fortune Group, which publishes eCompany Now, Fortune and Fortune Small Business. "I worry about it all. Publishers are optimistic folks, but the stock market impacts how individuals feel about their wherewithal. . . . The thing you worry about is [the news] generating a self-fulfilling prophecy."

Contributing: Cara Beardi, Alice Z. Cuneo, Tobi Elkin, Jon Fine, Wayne Friedman, Jean Halliday, Richard Linnett, Kate MacArthur, Stephanie Thompson

In this article: