CEOs Offer State of the Business

In a more rarefied version of show and tell, the Big 3 holding company CEOs last week presented their strategic visions and financial data at the annual media conferences. This year, talk of the recession and its impact on the media and agency landscape naturally dominated.

Run separately by UBS Warburg and Credit Suisse First Boston, the events typically serve as state-of-the-business forums for analysts.

The week kicked off with Universal McCann’s Bob Coen projecting year-to-year growth in 2002 of about 2.4 percent in the U.S., to an estimated $239.3 billion.

John Perriss, CEO of Zenith Optimedia Group, was more cautious, projecting a 1 percent decline in U.S. ad spending next year, to an estimated $219.8 billion. “We do not expect miracles,” he said.

WPP CEO Sir Martin Sorrell, the only parent-company chief to present at both conferences, was the most pessimistic among his peers on the prospects for economic recovery. “2002 will be a difficult year,” said Sorrell, whose agencies tell him revenues will be flat or up slightly.

On whether advertising is a leading or lagging indicator of economic health, Sorrell said, “On a downturn, it’s a leading indicator. On the upturn, I think we lag.”

Some executives, including IPG CEO John Dooner, seemed optimistic that a re covery is in sight. But Sorrell said, “We see none of those rays of sunshine.”

John Wren, CEO of Omnicom, was the most optimistic. “At this point, we see momentum building, particularly for the second half [of 2002],” he said.

Dooner acknowledged that “go ing through a downsizing is not a pleasant thing,” but said he embraced the opportunity to address efficiencies. “There is no finish line,” he added. “These things must be guided monthly, weekly.”

The economy was not the sole focus. Agency compensation, client conflicts, cost-cutting measures, profit margins and acquisitions were among the topics also to receive airings.

Of the Big 3, IPG appears to have the greatest proportion—an estimated 60 percent—of its revenue gener ated by advertising (as opposed to marketing services). The bulk of that revenue, some 59 percent, comes from North America.

In contrast, about 45 percent of WPP’s revenue comes from advertising, of which 45 percent is generated in the U.S. Omnicom, which dispensed with a PowerPoint presentation to field questions only, is believed to have a similar advertising-as-percentage-of-revenue figure.

Sorrell and Dooner both emphasized the need to increase the portion of revenue generated by nonadvertising services, which include direct marketing, Web-based marketing and promotional work.

As for client conflicts, the CEOs ac knowledged they are an ongoing issue and often an emotional one. Still, Dooner and Sorrell said they see more tolerance ahead as the trend toward client and agency consolidation continues.

Dooner, whose shops have lost significant PepsiCo and Reckitt Benckiser business in recent months due to conflicts, said: “We need to educate clients [so they] have a greater appreciation of where the industry is going. … I believe [the conflict policies] will relax.”

The latter sentiment was echoed by Sorrell. “The truth is conflict is becoming less of an issue,” he said.

Wren, whose agencies have benefited from several business consolidations since the fall of 2000, most notably DaimlerChrysler and Pepsi, fielded two questions about agency compensation. One analyst asked, if Wren could wave his “magic wand,” would he choose to be paid 100 percent on a commission basis or 100 percent on a fee basis?

“Neither,” replied Wren, who explained “it’s generally a component of both” and that both have their pros and cons. “There has been pressure on fees and compensation forever,” he said. “You get what you pay for at the end of the day.”

On the topic of client spending, executives from the media agencies cited signs of stabilization and said the beginnings of re covery are on the horizon—though they differed on the time frame.

In terms of categories, Perriss said he expects an uptick in spending among travel and leisure/sports clients, given next year’s Winter Olympics and World Cup soccer tournament. He also said household durables should rebound due to deferred demand, and over-the-counter pharmaceuticals will remain a source of growth. On the flip side, he predicted more tough times for dot-coms, telecommunications companies and those in financial services.

“We believe the U.S. economy will begin to start moving back upward in the first quarter,” Coen said. “By spring, the actions of the [Federal Reserve Board], combined with the effects of tax cuts and other government stimulants to come, should result in a much more robust economic climate than we’ve been experiencing lately.”