Dark Clouds

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It's beginning to look a lot like recession. * Ad executives were in a penitent mood on Ash Wednesday as the American Association of Advertising Agencies' media conference opened in New Orleans. There and elsewhere, hopes for a second-half rebound appeared to be fading fast amid disappointing earnings reports, news of more layoffs and dropping economic indicators. * "I've never seen an advertising environment so bad, with such a combination of client caution [and] zero new business activity," said Nigel Carr, managing partner-general manager of Kirshenbaum Bond & Partners West, San Francisco.

The dot-com meltdown and a surge in energy prices have helped depress the U.S. economy to a degree not seen since the early 1990s. Agencies that couldn't fill vacancies a year ago now are laying off staff and hoping interest-rate cuts and President Bush's proposed tax reduction will salvage consumer confidence and push the economy out of its doldrums.

Some observers even say the "R-word"-recession. As the 4A's meeting got under way, the U.S. stock market officially entered a bear market, with the Dow Jones Industrial Average dropping 20% off its peak and the Conference Board announcing its consumer confidence index had dropped for the fifth straight month to its lowest level in nearly five years.


Even Federal Reserve Chairman Alan Greenspan, testifying before the U.S. Senate, sounded more pessimistic than in his own testimony just two weeks earlier. Mr. Greenspan noted low consumer confidence has squeezed consumer spending, while increased energy costs eat at companies' profit margins. At the same time, foreign economies appear to be slowing down as well, which could reduce demand for exports.

Pessimism reigns among Wall Street analysts, who continue to stress there are no recession warnings ahead, but are using words such as "stagflation"-a combination of slow growth and inflation-to warn that more interest rate cuts may not have the desired effect.

David Bailey, research analyst at investment bank Gerard Klauer Mattison & Co., explained that while tech stocks-the most high-profile losers-look dismal, companies are not canceling orders, but deferring them. Still, Mr. Bailey believes hopes for the second half may be all for naught. "I think we can pretty much write this year off."

Conventional wisdom in ad circles was that the second half would save 2001, but not now. Allen Banks, executive VP-executive media director at Publicis Groupe's Saatchi & Saatchi North America, was asked at the media conference whether the ad market would rebound in the second half or next year. His response: "I have no idea."

Some agency execs privately say clients aren't only cutting budgets-they're not setting budgets at all.

"We're not quite as gloomy.... But we've seen a caution among larger clients-a move to quarterly budgeting," said Bob Schmetterer, chairman-CEO of Havas Advertising's Euro RSCG Worldwide. Although Havas reported strong growth for 2000-revenues were up 22.3% even without counting the third-quarter acquisition of Snyder Communications-he said the consensus is U.S. media spending will be up only in the "low- to mid-single digits" during the first quarter.

Yet there are signs some numbers are shrinking. In January, magazines audited by Publishers Information Bureau showed a 0.8% drop in ad pages (though PIB figured revenue-which is a less accurate measure-went up 5.3%).

"Publishers need to be optimistic, and certainly there is nothing to suggest the economy is on the verge of a full-scale recession," said Dan Brewster, president-CEO of Gruner & Jahr Publishing USA. "At the same time, I don't see anything to suggest the situation is immediately going to get better. And the financial markets and the advertising markets would suggest, as well as commentary from people in the administration and elsewhere, that the situation could well continue through yearend."


News of layoffs at marketers is a warning sign that ad budgets also will be under pressure, said Tom Moloney, CEO of Emap USA. "When a company makes a decision to lay off people," he said, "senior management is looking at every aspect of their expenditures, and that includes advertising."

Many agency holding companies did not feel the full pain until they tallied year-end results and found the rising euro ate into fourth-quarter non-U.S. profits just as the U.S. economy hit the brakes.

"Revenue growth in some pockets of our business was a challenge in that quarter," said Sean Orr, chief financial officer of Interpublic Group of Cos. Interpublic's revenue grew 13% in 2000 but rose just 6% in the fourth quarter.

The downturn has hit West Coast shops particularly hard, with agencies large and small cutting staff.

In San Francisco alone, agencies late last month fired more than 100 employees in one week; others are cutting headcount by attrition. True North Communications' FCB Worldwide cut 7% of its staff, or 28 people, in the city. Omnicom Group's Goodby, Silverstein & Partners had its first major layoff, trimming 10% of its staff, or about 30 people, after laying off a half-dozen employees earlier this year. Leagas Delaney fired half its 87 employees. Saatchi's office let go just under 10% of its 90 employees.

Some cuts are tied to the general evaporation of dot-com accounts. That's not new. But a more troublesome sign, agencies say, is that traditional clients are pulling back. Agencies now are cutting jobs as they struggle to meet the budget and profit demands of their publicly traded parent companies.

Reflecting the boom that was, ad agencies at the end of 2000 employed a record 199,100 people, according to the U.S. Bureau of Labor Statistics. Employment grew each year from 1995 on after falling each year from 1991-1994.

The recent ad agency layoffs piggybacked on continuing cuts at interactive shops. Magnet Interactive West-purchased earlier this year by San Francisco's Citron Haligman Bedecarre as part of a venture to form a new global marketing company-is closing its Los Angeles office, which had some 75 employees.

Until more new business pitches hit, agencies are keeping what little account activity there is close to the vest. John Butler, co-creative director, Butler, Shine & Stern, Sausalito, Calif., said many agencies' new business strategy for the past two years consisted of answering the phone. "That's going to change," he said, anticipating a return to the days when a pitch for an obscure $2 million account will draw not just small shops but powerhouses, too.

Reviews are picking up, said Mike Agate, chairman-CEO of consultancy Select Resources International, West Hollywood, Calif. He predicts clients soon may look to get the most for their media dollars not just by consolidating at one shop, but by assigning agency of record to media buyers by niche, such as print or daytime TV. In some companies, one division now may pay 25% less for a print ad than a sibling division pays in the same issue, he said.

Although the New Orleans media conference generally was gloomy, there were a few optimists. Dave Smith, president of MediaSmith, San Francisco, said the soft economy simply is a correction, and he took to quoting Winston Churchill: "At the end of the Battle of Britain, Churchill said, `This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.' We are just starting out here," said Mr. Smith. "The central vitality of the marketplace is still intact." Except the bombs are still dropping.

Contributing: Alice Z. Cuneo, Tobi Elkin, Jon Fine, Jean Halliday, Richard Linnett and Kate MacArthur

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