The party's over: Agencies

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Advertising agency executives aren't ready to turn out the lights on this spending party. But agency expectations vary sharply - with some agencies downright pessimistic.

"I'm expecting a hell of a bad year, and I'm being very conservative," said Scott Marshall, president of Publicis Groupe's Publicis & Hal Riney, San Francisco. "Almost every projection I read in the business press [makes me think] we're not going to make our numbers. I'm worried."

Companies were pretending the last quarters of 2000 were going to be as strong as 1999, Mr. Marshall added, and only late last year did they begin to acknowledge troubles ahead.

Some insist the news may not be so bad.

"Yes, all of us are wary of precautions that have been issued, political, financial and legislative cautions " regarding an economy that's softening," said Bill Katz, president and co-CEO of Omnicom Group's BBDO Worldwide, New York. "But here's the thing: All agencies that are good agencies plan for these things."

Just how bad business could get in 2001 is debatable. Some agencies, ignoring ominous signs about the year's sluggish start, are even projecting a higher growth rate for 2001 than they saw last year. But to stop any post-party hangover before it hits, agencies are outlining plans to keep their businesses thriving in the face of a slowdown in traditional domestic ad spending.

John Perriss, chairman-CEO of Zenith Media and a longtime watcher of the ad market, forecasts a 4.6 percent increase for 2001, compared with 8 percent last year. Similarly, Robert Coen, senior VP-forecasting director at Universal McCann, calculated last month that marketers would increase their spending on U.S. advertising by just 5.8 percent this year, compared with an increase of 9.8 percent in 2000.

Agencies that are building a global presence - or have clients that are - may also be padded for a fall because non-U.S. ad spending is projected to grow faster than U.S. ad spending this year. Mr. Coen forecast 6.5 percent growth in international markets, while Mr. Perriss predicted ad spending would rise 6.7 percent in Europe and 6 percent in Asia Pacific.

By any measure, 2000 will be a hard year to improve on simply because of the confluence of events that generated extra ad spending.

"I knew two years ago that we would never follow up on [2000's] millennium, the Olympics and a presidential year. We'd never follow up with the same magnitude of growth," Mr. Coen said.

In the fourth quarter of 2000, some agency executives were seeing that reflected in clients' 2001 budgets.

"We don't see wild growth, not a 'let's ride the wave' mentality. Instead we're seeing 'What do we need to manage inflation and how can I get more mileage out of a flat budget vs. a year ago?' " said Alan Jurmain, exec VP and executive director of integrated media services at Lowe Lintas & Partners, New York.

When speaking with analysts last month at media conferences sponsored by Credit Suisse First Boston and UBS Warburg, executives remained bullish. Top executives of True North Communications, parent of FCB Worldwide, said the only spending cutbacks were coming from dot-com clients and that the company was still on track to meet goals.

Similarly, Interpublic Group of Cos., parent of such agency operations as Lowe and McCann-Erickson WorldGroup, stated that other businesses were already replacing the dot-com companies that came and went.

Said WPP Group CEO Martin Sorrell: "In the last six months, we've seen a revenge of the brands. We don't as of yet see any cutting of budgets for 2001." WPP's agency operations include J. Walter Thompson, Ogilvy & Mather Worldwide and Young & Rubicam.

When the last recession hit in the early 1990s, the American Association of Advertising Agencies penned a book explaining why a reduction in ad spending during an economic downturn would equal an expensive mistake for marketers because they would consequently lose market share and sales.

Now advertising executives and analysts believe clients already know the rule. "Advertising and marketing has become a lot more indispensable to most companies, and therefore, despite the fears of a slowdown in economic growth next year, marketing budgets are not as likely to be cut back in 2001," wrote Alexia Quadrani, an analyst with Bear, Stearns & Co., in a December report.

But marketing budgets could be distributed differently, as many marketers demonstrated in the early 1990s by shifting spending from long-term branding campaigns to targeted sales promotions.

"In a time of drought you don't totally shut off the hose; you turn on the sprinkler. You make more economical use of what you do," said Mike Zeigler, chief financial officer of Y&R Advertising, New York. Mr. Zeigler said clients are already investigating new marketing directions that include online, guerilla marketing, radio and outdoor.

Philip Geier, chairman emeritus of Interpublic, predicted sales-response and special-events divisions would fare well should a recession hit.

Noted Lowe's Mr. Jurmain: "In our discussions with clients, the dialog has increased on those dollars that impact short-term sales vs. the longer term issues."

Kevin Coyne, exec VP-director of media and new technologies at Cordiant Communications Group's Bates North America, said increased spending on the Web showed that clients are already pursuing a creative form of direct response promotions. Yet Net revenue is no sure thing: The Internet Advertising Bureau reported third-quarter 2000 Web ad spending dropped 6.5 percent from the second quarter - its first ever fall.

If marketers feel the pressure, they may re-examine the dollars they pay to agencies in the form of fees. Last September, for example, when DaimlerChrysler launched a review between its two incumbent agencies, the car giant said it would award its business to the agency that could cut fees while providing consistent, high-quality creative work. BBDO walked off with the $2.4 billion prize that it had shared with FCB.

"We have not seen more price sensitivity. Clients don't call and say 'We want the Daimler deal' - major recession notwithstanding," said David Bell, chairman-CEO of True North.

Fran Kelly, president-chief operating officer of Havas Advertising's Arnold Worldwide, Boston, said he did not expect the economy to make clients press particularly hard on fees, or that fees would cost his agency business.

"They want the best partner, and if your relationship is working, they're not going to change agencies to save a couple of percent," Mr. Kelly said.

But David Beals, president-CEO of ad management consultancy Jones Lundin Beals, said he expects marketers to question the agency margins they finance. "We're anticipating they will ask 'Should I consolidate too?' or 'Are other clients getting a better break than I am?' " Mr. Beals said.

Agencies plan to watch their own wallets more closely in this softening economy as well. "We will look to get things done faster," said Y&R's Mr. Zeigler. "Also, cracking down on expenses, you have to look at that."

Bob Tesar, a recruiter with Tesar-Reynes, said agencies began to watch their spending and freeze hiring in the fourth quarter.

Mr. Beals suggested agency jobs could be cut. "What traditionally we've seen is if expenses get out of hand, clients cut back on what they're asking of the agency. You shrink the team or don't do as much work with them, or turn off the spigot on media planning," Mr. Beals said.

Case in point: BBDO's new PentaMark Worldwide is expected to add about 100 people to do the Chrysler work BBDO picked up from FCB. FCB had 300 people working on that business.

Even if the party first wanes for traditional advertising, some agencies predict they may be able to transfer the festivities to a different venue - namely their higher-margin, fee-based marketing-services divisions.

"We would not be surprised to see more categories shift from advertising to marketing services, as companies shift from more expensive and less quantifiable media to less expensive and more quantifiable media," wrote Michael J. Russell, an analyst with Morgan Stanley Dean Witter & Co., in a November report.

Indeed, Bear, Stearns' Ms. Quadrani, who follows the Interpublic, Omnicom, True North and WPP agency holding companies, said in her report that the larger, more diversified advertising and marketing services stocks will provide the most upside.

"The marketing-services business for these companies, which represents on average 50 percent of revenue, is expected to grow at a much faster rate than traditional advertising, roughly 15 percent in 2001," she wrote.

"We are pleased about the evolution. The client wants a stronger database and to know the consumer, so the opportunities for marketing services is high," said Alain de Pouzilhac, chairman-CEO of Havas, which derives 60 percent of its revenue from marketing services.

Agencies that have been building or buying below-the-line divisions - units that handle marketing services other than traditional advertising - may find themselves somewhat insulated from an ad-spending drop-off.

"The fact is agencies won't care which pocket of the client [their revenue] will come out of," said Lauren Rich Fine, an analyst with Merrill Lynch. "With half of a company's revenue from marketing and half from advertising, and 80 percent fee-based, only a small portion of the company is exposed to changes in media."

Contributing: Hillary Chura, Alice Z. Cuneo, Richard Linnett, Kate MacArthur and Anthony Vagnoni

Copyright January 2001, Crain Communications Inc.

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