According to a new report from audit and consulting firm PricewaterhouseCoopers, advertising expenditures worldwide will total $467.3 billion by 2013. In case that seems to suggest the ad industry will have bounced back in four years' time, consider this: The figure is, in fact, about 2.5 percent lower than 2008's tally of $479.3 billion. A growing number of advertising and marketing officials now believe a fundamentally new advertising and marketing sector will emerge from the recession -- one that's slow to recover its previous spending levels and forced to be leaner and meaner.

Already, there are signs of the new face the ad business will wear when the recession finally blows over. The dire economic picture has forced the cutting of thousands of industry jobs. All of the major ad holding companies have cut staff as clients have reduced ad expenditures and looked for other ways to scale back overall marketing costs, such as renegotiating fees paid to agencies. Procter & Gamble has gone so far as to dictate to agencies a list of vendors to be used in the production of commercials.

If anything, say experts, the trend toward leaner and meaner is just beginning, and both client demands and changing consumer behavior are fueling it. According to Richard Pinder, COO of Publicis Worldwide, client demands are changing the way marketing services are delivered, especially in terms of agency staffing. "Clients are looking for greater speed and much greater focus of teams," Pinder says. "They don't want nearly as many people. They want things in a 'ready, fire, aim' model."

Such rapid-response approaches are critical in an age "where your brand can be affected by one teenager who puts a message out in a YouTube video," Pinder adds. (Anyone who recalls the notorious YouTube video from April showing two Domino's employees/saboteurs mishandling food now understands the need for rapid brand response.)

But since the fiscal crisis hit in September of last year, consumer behavior has been an equally potent factor in bringing changes to the agency landscape. Retrenchment best sums up that behavior. But there's ongoing debate both inside and outside the industry about whether curtailed, value-driven consumer-spending trends will endure when Americans return to fiscal security.

One thing is clear: The recession is giving us an early glimpse at what agencies will look like when the smoke clears, especially as they explore new business models and increasingly look toward emerging markets and new media for growth opportunities.
 
The current global economic crisis has shocked consumers in ways not felt since the 1930s. For proof, executives point to numerous studies that reveal dramatic shifts in consumer behavior and outlook over the past six to nine months. Before the recession-thanks to near-limitless credit fueled largely by home-equity loans-the prevailing consumer habit was spend and spend some more. Now, thrift is in vogue, as hard choices between wants and needs dominate family dinner table discussions.

According to a July Gallup poll on the subject, 32 percent of respondents said they've been spending less in recent months. More telling, however, is that these consumers expect that curtailed spending to become their "new normal pattern for years ahead."

Another telling sign: In a study issued just over a month ago, Interpublic Group's Initiative found that 75 percent of consumers have altered their purchasing behavior over the past year. In some cases, they traded down; in others, they made wholesale lifestyle changes.  "Brand loyalty has been badly shaken," says Sue Moseley, Initiative's worldwide director of research and futures, who oversaw the research and the resulting report.

That the consumer budget cuts of today are poised to become the permanent spending reductions of tomorrow is not only the prediction of researchers; many in advertising feel it, too. One of them is David Kenny, managing partner of Publicis Groupe's VivaKi and one of the holding company's top media chiefs. "People are going to emerge from the current recession forever changed," Kenny says. "The global recession has changed them. Environmental realities have changed them. New global leadership has changed them."



Not everyone agrees, however. At June's International Advertising Festival in Cannes, France, Google CEO Eric Schmidt argued that those who think consumer frugality is here to stay "don't understand the American psyche."

After all, we've had recessions before, but the personal savings rate of Americans remains one of the lowest in the world; when Americans get a dollar in their pocket, the historically American thing to do is spend it.

Martin Sorrell, CEO of holding company WPP Group, also believes consumers will eventually revert to their old spending and saving patterns -- i.e., more of the former and less of the latter. "I don't think the change will be permanent," he says.

But with unemployment levels hovering around 9.5 percent in the U.S. and Western Europe, Sorrell says he expects consumers to remain cautious for some time to come. "They're more concerned with heritage and authenticity than anything ostentatious and showy," he says.

And marketers, Sorrell says, will generally follow that lead in terms of the amount they spend trying to get customers to buy. Last fall's economic crisis, he says, was "so severe [and] there was such an impact on corporate psychology that it will take a long time before companies and consumers go back to what they did years ago."

Sorrell adds that the current recession is not the classic V-shaped variety, with a sharp downturn matched by quick rebound. Instead, he says, "this is an italic-L-shaped recession. The back half of this year and next will look better than the first half and this year. ... I say 'will look better,' but it will not feel better, simply because the comparatives this year are so difficult."
 
Certainly, ad agencies will not be feeling better about it, Sorrell says, because while CEOs and CMOs might be relieved that things didn't turn out to be as apocalyptic as some predicted, "that's not extended to them writing checks. It will take a long time to get back to where we were."

But what happens, theoretically, when things do come back? Even when unemployment rates fall and consumer confidence returns in earnest, experts say agencies will not be able to simply return to business as usual. Some will be better positioned to grab a greater share of spending than others, say industry watchers, and those with the edge will be the ones that can optimize the use of digital media.

The ad business was already moving headlong in the digital direction before the fateful day last year when Lehman Brothers collapsed. When the recessionary smoke clears, says Robert Liodice, president and CEO of the Association of National Advertisers, that trend will continue to evolve. "The dream for marketers is to market to consumers on a one-to-one basis," Liodice says, adding that digital conduits like search and social media are the way to do that. Post-recession marketers, he adds, will rely on a "portfolio of marketing and media vehicles, allowing them to reach who they need to reach with greater precision and greater accountability than they ever had before."



There's an unlikely catalyst to the digital trend: the green movement. Kenny argues that growing sensitivity over the environment and the movement against conspicuous consumption will force real change in the way advertisers communicate with consumers. "Now is the time for responsible advertising," Kenny says. "It will be the most meaningful transformation in the history of advertising."

Digital technology, Kenny argues, will be in the vanguard of that transformation. "It's waste-free," he says. "It doesn't scream and shout at people, but rather it has true potential to add meaning to their lives by connecting when and where people are most receptive to the content and messaging."

These changes are likely just the beginning. With digital technology already making the world smaller culturally and economically, a rebounding global market will leave it smaller still, pointing agencies to a range of new opportunities.

Sorrell says the key to WPP's future growth will be "new markets, new media and consumer insights. The biggest difference going forward will revolve around geography, media function and the importance of quantitative justification."
 
Sorrell goes so far as to predict that burgeoning economies such as those of China, India, Russia and Brazil will come to account for up to one-third of WPP's business. "These emerging markets have been underspending, underbranding," he says. "Advertising as a proportion of GDP will become more and more important." New media, he adds, is just as critical to growth in these countries as in the U.S. Channels such as online and mobile may well account for about a third of the company's business in a relatively short time, he says.

Experts also predict that agency compensation models will continue to evolve in a post-recessionary climate, with both procurement- and performance-based models gaining greater traction. Russ Sapienza, a partner in PwC's entertainment, media and communications practice, says agencies have to be "black belt in working with procurement and striking a balance between the agency and the client's procurement teams and brand managers."

Sapienza urges both marketers and agencies to consider easing into a performance-based compensation structure, earmarking perhaps 25 percent of fees, initially to see if both sides can devise a workable formula.

Pinder agrees that performance models will continue to gain favor. "We see a significant number of incentive contracts coming through," he says, noting that Coca-Cola and P&G offer variations on such models. "But they have to be linked to something tangible," he says, such as sales performance. "Intangibles become an excuse not to pay."

Meanwhile, agencies at least have some time to gear up for these and other changes as the latest economic indicators suggest the unemployment rate will rise before it falls. Still, some agencies will be better poised for growth than others. "Those who have good facts, data and metrics to prove their case" will get back faster, says the ANA's Liodice. But generally speaking, he says, staffing and "the reinvestment in the ad market will be a longer-term build-back."

Much of it, he says, will depend on consumer confidence -- and it's anyone's guess when that will recover. "There is," Liodice says, "a lot of psychology at play." --with Noreen O'Leary