It’s been so long since the U.S. was mired in a recession that it’s easy to forget the carnage it can bring. But one stat serves as a wake-up call for the marketing, media and agency industries: U.S. ad spending plummeted 12 percent in 2009, the last year of the Great Recession, with global spending down 9 percent, according to the average of spending estimates from GroupM, Magna and Zenith.
While economic conditions certainly remain better than they were 10 years ago, there are ominous signs, starting with declining consumer confidence, which is suffering amid the U.S.-China trade war. Anxieties rose this summer when the so-called yield inverted. This happens when yields on short-term bonds are higher than those on longer-term bonds, often considered a recession harbinger.
The Consumer Sentiment Index, published monthly by the University of Michigan, in August experienced its steepest drop since December 2012. “The erosion of consumer confidence due to tariff policies is now well under way,” warned University of Michigan economist Richard Curtin. Brian Wieser, global president of business intelligence at WPP’s GroupM, weighed in with a blog post last week, saying “advertising growth is looking neutral to negative versus last year, with recent trends likely to continue.” Marketers, he stated, “need to be prepared for a downturn.”
Here is what to expect if the economy hits the skids, or worse yet, slides all the way into a recession.
If things are bad now, just wait. Agencies could lose 3 percent to 30 percent of their revenue during a recession as brands shift to more project work, says Keith Johnston, global CMO practice leader at Forrester. “The needs of the clients shift drastically in a recession,” he says. “There’s already a call for more efficient, measurable media. There’s going to be a greater squeeze on that.”
The environment is especially tough for Western ad giants that operate in China. The economy in the world’s second-biggest ad market grew 6.2 percent in the second quarter, the slowest rate since 1992. The biggest holding companies—WPP, Omnicom Group and Publicis Groupe—mentioned negative growth in China in their most recent earnings reports.
Interpublic Group of Cos. Chairman-CEO Michael Roth says the world’s fourth-largest agency holding company is positioned to weather a downturn because it has been keeping a close eye on costs, including getting out of some countries, like Vietnam, where “we weren’t making any money.”
Smaller shops see a potential downturn as a chance to prove their flexible, nimble models. Jordan Warren, CEO of the 14-person San Francisco-based agency TBD, says “clients are under even greater pressure to do more with less, which is what small agencies are used to and where we can really shine.”
But agencies of all sizes could risk losing talent (or at least the talent they aren’t forced to lay off) to the client side. Employees “feel agencies are unstable, especially now that the holding companies are consolidating,” says Christie Cordes, an industry recruiter and founder of Ad-Recruiter. One creative director at a boutique agency is already looking to jump ship for some in-house brand work. “Things are looking pretty dang hairy for the future,” says this person, who requested anonymity. “There are going to be bloodbaths on the agency side of things soon.”
Unlike during the last downturn, Facebook, Snapchat, Twitter and Pinterest are now public companies reliant on digital advertising. Ad prices on digital platforms could decline, says John Lovelock, IT analyst at Gartner. “In a recession, the time you get is less valuable,” Lovelock says. “People are less likely to buy something, less likely to consume a new service, less likely to sign up and they would pay less for those services. That’s the nature of recession.” One response from Facebook, which owns Instagram, and Google, which owns YouTube, could be to simply show more, but cheaper, ads, Lovelock says.
In 2009, Netflix was hailed as “recession proof.” Its subscription service was barely two years old and growing. The company could be a source of comfort and relatively inexpensive entertainment during a downturn, but it’s also a “discretionary purchase,” WPP’s Wieser says. Also, consumers have more streaming choices now than in 2009—many of them free, including Tubi and PlutoTV. Disney is getting ready to launch Disney Plus for $7 a month, a discount from Netflix’s most popular plan that costs $13, although there is a basic plan at $8.
As some $20 billion in upfront holds are now being converted to firm orders before the start of the 2019-20 broadcast season, the TV marketplace is engineered with a sort of built-in fail-safe; in fact, the very nature of the summer bazaar is meant to bolster near-term stability. Barring an
unforeseen catastrophe, advertisers are unlikely to exercise their cancellation options to pull back on their first-, second-, and third-quarter upfront commitments.
The real impact of a recession is likely to be felt in next year’s upfront. We’ve seen it before: After sheltering in place for the duration of the Great Recession in 2008, spending at the Big Four networks didn’t take a big hit until the 2009-10 upfront was underway—or about two months after the recession had technically run its course. In the teeth of that recession, broadcasters set a record during the 2008-09 bazaar, as ABC, CBS, NBC and Fox raked in some $8.9 billion in advance commitments.
But media buyers are skeptical that the TV market would show such resilience this time around. “The prevailing wisdom 10 years ago was, ‘Oh, TV’s the cheapest entertainment option, so while people might cut back on going out to the movies and start eating in, they’re never going to shut off the cable box,” says one national TV buyer. “That line of thinking no longer holds up. If you look at the cord-cutting trends and the sort of impact [they’re] having on the ratings, you start to realize that the one thing people won’t give up in a downturn is Netflix. And I can’t buy Netflix.”
Geoffrey Colon, head of Brand Studio at Microsoft Advertising, points out that there has been a decline in the number of new ad tech companies launching in the past year. A recession could mean more consolidation as venture capitalists bring more scrutiny to their investments. A slowdown means “VCs want out of their investments quicker, which means more demand for ad-tech companies to become solvent,” Colon says. “You’re looking at actually more mergers and acquisitions in a recession, not less, as competing forces join into alliances to stay afloat.”
Retail and dining
Tariffs on U.S. imports from China are already weakening brands, with more bad news to come. Last month, Abercrombie & Fitch reported a quarterly sales decline and now expects annual sales to be from flat to up 2 percent. The teen retailer said the new tariffs will have “a direct adverse impact on cost of merchandise and gross profit of approximately $6 million for the fall season,” according to Bloomberg.
Retailers are also beginning to see a decline in overseas shoppers. On a conference call to discuss earnings, Macy’s CEO Jeff Gennette noted that sales to foreign tourists were down 9 percent in the recent quarter compared with the year-earlier period. Similarly, Tiffany & Co. said that international tourists are spending much less than in previous years, particularly at the brand’s costly New York City flagship. Of course, some retailers are already well-positioned to weather the potential storm. Target and Walmart recently reported strong quarterly earnings as they raised their profit expectations for the full year.
Recessions are always bad news for the restaurant industry as consumers watch every dollar. But that could translate into good news for cheaper fast-food chains. Burger King is preparing by balancing its menu with everything from low-priced value deals to more premium items, which allows it to “course-correct the portfolio by emphasizing different layers when needed,” says Fernando Machado, Burger King global chief marketing officer.