Why Ad Industry Won't Recover in Second Half

Though Some Bright Spots Ahead, Recession Triggers Reset for Business

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NEW YORK (AdAge.com) -- It's not getting a lot better, but at least it's not getting any worse. And it probably won't ever get back to where it once was.

That's the marketing forecast for the second half of the year based on a temperature check of players in the media, marketing and agency worlds by Advertising Age. We found that there are pockets of strength: online and PR, for example. Some package-goods players are ramping up spending, but many are doing so to take advantage of lower media pricing. The TV networks continue to struggle, and agencies are coming to grips with the fact that marketers will continue to squeeze them on fees with procurement (recession or no) -- and that they have to come up with more-viable metrics.

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How This Ad Recession Compares
Plus Job Losses in the Ad Industry and Beyond
Leading Indicators
Where Ad Spending, Consumer Spending and the GDP Are Heading
On one point there seems to be almost universal agreement, and it was perhaps stated best by Robin Domeniconi, VP-sales at Microsoft: "Right now some of the budgets are being released more than they have in the past [year]," she said, but "it's a reset. It's not like, 'Yoo-hoo, we're out of the recession.' This is about a new way of doing business."

"This current economy has stimulated a new marketing consciousness," said Laurence Boschetto, president-CEO, DraftFCB. "Clients are saying they want accountability for every dollar they spend, and they want cause and effect. Clients will continue to rally behind ideas that build business, and we as an industry have to accept that things will never revert back to the pre-recession mind-set that wasn't totally focused on accountability."

That seemingly bodes well -- or at least better -- for some media. MaryLee Sachs, director of the worldwide marketing communications practice at WPP's Hill & Knowlton, said that when a turnaround does come, chief marketing officers "will continue to look for new avenues and means with which to connect with their core consumers most cost-effectively. This puts digital, earned-media opportunities and niche-targeted initiatives" at the forefront.

She added: "Some consumer values and buying habits may have changed irrevocably, so it will become increasingly important to foster brand relationships -- ideally loyalty and advocacy -- and this is more difficult to achieve through traditional TV push marketing."

Tough road for TV
Indeed, the outlook for TV isn't very bright. "In this environment, ad spending for the broadcast networks may stabilize in the second half of 2009, but it is more likely to remain difficult. Marketers continue to hold on to budgets longer and seek more flexibility in their buys," said Christopher Vollmer, partner and leader of global media and entertainment at Booz & Co. "They also have more and more options -- whether it's cable, digital or other below-the-line marketing services. This will not make it any easier for broadcast to get growth going."

Early reads on this year's broadcast upfront marketplace suggest that total dollars committed were off by as much as 15% or more, meaning that the five broadcast networks took in something akin to $7.8 billion to $8 billion for prime-time inventory, compared with the about $9.23 billion they secured for their prime-time ad slots in 2008. While softer pricing played a role, part of the falloff is due to the fact that there was less volume, as networks held more inventory to sell in the scatter market. Cable volume could be off as much as 10% or more, media buyers said, meaning that total dollars committed to cable in the upfront would come in at about $6.75 billion, compared with about $7.5 billion last year.

"Media-spend trends can only go up and will be accelerated by the dramatic drop in pricing across all media," said Linda Sawyer, CEO of Deutsch. "TV and online will recover fastest, print the slowest, as their decline is less economic and rather a fundamental, long-term shift."

At least the second half won't be as brutal as the first, said Stephanie George, exec VP of Time Inc. and president of Time Inc. advertising sales and marketing. "In categories like auto, retail, pharmaceutical, finance and even some luxury, the second half is better than the first."

Another potential bright spot is package goods, where several signs point to a spending rebound in the second half, thanks to a combination of lower commodity costs and relief from profit pressure on U.S.-based marketers from a stronger dollar.

Some increase spending
Two marketers that already have seen pressure from commodity costs lift and face relatively little foreign-currency impact -- Clorox Co. and Church & Dwight Co. -- both hiked ad spending considerably last quarter and vowed to continue spending increases into the second half. Likewise, Colgate-Palmolive Co. plans to increase its marketing spending after three quarters of taking savings in media costs to the bottom line instead of increasing media weight.

Bigger fish, too, appear poised to ramp up spending. Irene Rosenfeld, chairman-CEO at Kraft Foods, said: "We delivered strong, broad-based results in the first half and raised our full-year outlook. What's more, we're reinvesting a portion of that upside in incremental advertising and consumer spending to increase our share of voice. As a result, we expect 2009 [advertising and marketing] to increase as a percentage of net revenue, even though advertising rates have come down."

Laurence Boschetto, president-CEO, DraftFCB
Laurence Boschetto, president-CEO, DraftFCB
P&G, which is projecting $1 billion in lower commodity costs and relief from foreign-exchange pressure in the fiscal year that started July 1, expects to plow the savings in roughly equal parts into increased support for its core business, increased new product activity and price reductions to narrow gaps with competitors in categories such as laundry. "We're using foreign currency to help to bolster investment plans," Chief Financial Officer Jon Moeller said on an Aug. 5 conference call.

Digital agencies are pretty optimistic as they continue to steal share from their traditional-agency counterparts. " AKQA and other digital agencies are better-positioned than traditional agencies to benefit in the second half of 2009 as marketers continue to shift spending to digital channels," said Tom Bedecarre, CEO of San Francisco-based AKQA.

In the first and second quarter, many marketers were unwilling to gamble on the next 30 days, let alone do any long-range planning. But that is shifting now that it's becoming clear that the freefall is over, and along with it some of the fear of the unknown. Bryan Wiener, CEO of independent digital agency 360i, said he's seen a shift among marketers in the past 30 days. "They are adjusting to the economy as the new normal and have come out from under their desks to figure out: 'How do we grow our business in this stagnant economy?'"

Budget cuts, lost accounts
"As clients consider what will help them succeed in this business climate, it is clear that an area of keen interest for them -- and growth for us -- is digital and social media," said Ray Kotcher, senior partner and CEO of Omnicom Group's Ketchum. "Along with that, clients are more interested than ever in research and measurement, using these tools to help them assess, in real time, what is working and adjust plans accordingly."

There's that accountability issue again, which sometimes can be a euphemism for "squeeze" when it comes to agency fees. Jim Tsokanos, president, North America of Publicis Groupe's MS&L, said: "The biggest issues that are facing agencies still are budget cuts vs. lost accounts; clients still have a high expectation despite cutting budgets (more for less); buyer's market for new business. While there seems to be more action, the process and time to close have been extended significantly. Also, budgets/rates are far less than they were a year ago."

Particularly for agencies, there is a consensus that there's got to be a better way. "I feel we could be facing an inflection point in our industry," said Phil Cowdell, head of North America for WPP's Mindshare. "The often contradictory forces of procurement-driven cost reductions and the marketing departments' calls for more, smarter and better [approaches] will create an increasingly uncomfortable and potentially less effective operating zone for agencies. The only viable way forward is to shift from the procurement-oriented benchmarks of input measures such as CPMs [or cost per 1,000 viewers] to more output-oriented measures such as cost per hand-raiser and cost per lead. We need to move away from pure cost to a more-considered value equation."

"We are seeing a paradigm shift in our industry taking place as agencies grapple with how to deal with the new realities and manage costs to revenues. The industry is in for a fundamental, enduring reset over the next 10 years," said Jim Heekin, chairman-CEO, Grey Group. "Agencies are going to have to reshape themselves and focus on the services that have the most leverage with clients: superlative creative ideas, strategic planning, multichannel communications. I'm actually optimistic that new media such as social networks will give us great opportunities to help clients build brands across platforms and be valued and paid accordingly."

And if all else fails, there is plan B. "My contingency plan is to open a falafel stand," said David Sable, vice chairman-chief operating officer at WPP's Wunderman. "There's always a market for that."

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