Facing The Economic Fallout After Katrina

new york As relief workers struggled last week to gauge the human toll of Hurricane Katrina, the market coldly assessed the financial costs, primarily a spike in already-rising fuel prices. Within the communications industry, the impact is expected to be felt most immediately by marketers and the agencies crafting their messages. Consumers, too, with their household budgets strapped by fast-rising gas and home-heating costs this winter, are rethinking their spending priorities. Nor are media companies immune. While the higher price of oil was already factored into ad deals struck in the early part of the year, there are new concerns about the 2006 marketplace. Still, the larger question for marketers, agencies and media executives alike is whether soaring oil prices are a harbinger of yet another economic downturn. That is what is causing the queasy feeling going into the fourth quarter.

Stock prices fell late last week after the hurricane, which one group estimated could cost the economy more than $100 billion. The price of gasoline surged well north of $3 a gallon in some parts of the country, and the crossing of that threshold has many consumers rethinking their spending decisions. Even those in income brackets as high as the 90th percentile (around $120,000 a year) are likely to cut back, according to Reach Advisors, a Boston marketing consultancy.

“Three dollars is really a shocker. We will be seeing a major rethinking of consumer priorities, at least temporarily,” said James Chung, president of Reach Advisors. “One category that may see a significant change is the automotive industry. Americans have realized that cheap gas is not a given.”

Rising gas prices will likely prompt some rethinking in Detroit, which relied on high-margin, gas-guzzling SUVs and pickup trucks to bolster profits during the last decade. Sales of General Motors’ and Ford’s truck-based SUVs, for example, fell 11 percent and 16 percent, respectively, last month, according to Global Insight in Lexington, Mass.

In a Kelley Blue Book/Harris Interactive survey in August, 59 percent of car shoppers said gas prices have either changed their minds or strongly influenced their purchase decisions, an increase of 13 percent since July. Forty-two percent said they would seriously consider a more fuel-efficient vehicle if gas prices were to increase an additional 25 cents above the national average, then at $2.61.

Rob Schwartz, executive creative director of TBWA\Chiat\Day in Playa del Rey, Calif., which handles the Nissan and Infiniti brands, said the auto industry will have to adapt. “But it won’t be in mpg numbers alone,” he said. “The brands that win are also going to be those who offer alternatives to big trucks and SUVs. We’re Americans, so we want it all—gas mileage, plus performance, plus cachet.”

Steve Rabosky, chief creative officer at Saatchi & Saatchi in Los Angeles, which handles Toyota, said the company plans new ads supporting its Hybrid Synergy Drive vehicles, and he expects an increase in hybrid messaging industrywide. “The issue of fuel economy will extend beyond hybrids, though it’s obviously a critical message, and the hybrids are the stronger message,” Rabosky said.

For packaged-goods marketers, rising fuel prices have been an issue since the beginning of the year. Since it costs more to ship, there has been pressure to raise retail prices, and most companies have been able to do that without losing market share. As fuel prices rise, products that rely heavily on plastic packaging made from petroleum, like laundry detergents and trash bags, will be most affected, said Ken Harris, founding partner of Cannondale Associates in Evanston, Ill. Harris added that higher prices will be a test for brands overall. “People that aren’t emotionally tied to a brand will look to private label,” he said.

Beer and beverage giants face higher costs to operate delivery fleets. Regardless of whether the price of beer increases, volume is like to go down, according to 75 percent of the beer wholesalers who participated in a recent Smith Barney survey. “They believe the ‘working man’s’ disposable income is under pressure and that beer purchases are suffering as a result,” according to the study.

The restaurant industry is feeling the pinch as well. Some 19 percent of consumers are cutting back on trips to full-service restaurants, while 18 percent said they have reduced their spending in quick-service restaurants, according to Technomic in Chicago. “The fourth quarter could be the poorest we’ve seen in a number of years,” said Ron Paul, president of Technomic.

Aside from rising gas prices, a more limited effect is being seen on products imported through the New Orleans area. New Orleans serves as one of the largest ports for coffee, second only to New York. Anywhere from one-quarter to one-sixth of the country’s coffee is stored there; roughly half of Procter & Gamble’s Folgers brand is produced there.

One-quarter of Chiquita bananas shipments had come through Gulfport, Miss. Future shipments will be run through Florida and Texas. Shipments of a variety of non-food products, ranging from rubber to oil to chemicals to timber, were also rerouted.

From a production standpoint, oyster and shrimp prices could be affected, as New Orleans fisheries were destroyed. The area produces 40 percent of the country’s oysters and 10 percent of its shrimp. “How would you like to be Red Lobster right now?” said TBWA\Chiat\Day’s Schwartz. “It’s not going to be ‘All you can eat,’ but ‘All you can get.’ ”

The Gulf Coast is a major poultry provider, with Mississippi producing about 10 percent of the nation’s chickens. More than a quarter million chickens in Georgia were reportedly wiped out, and processing plants in Mississippi were closed. The country’s cotton and sugar cane harvests also received a blow.

Tourism has taken a hit, too, as some flights have been cancelled due to fuel shortages and businesses that rely on car travel will suffer. New Orleans and its economy, of course, are shrouded in uncertainty. In 2004, New Orleans tourism brought in 10 million visitors who spent $4.9 billion.

Three of the city’s largest ad agencies were displaced: Peter A. Mayer Advertising, whose clients include the Louisiana Tourism Department; Trumpet, whose clients include the New Orleans Metropolitan Convention and Visitors Bureau; and Zehnder Communications, which represents the New Orleans Department of Economic Development.

Media ad sales and buying execs remained firm in their belief last week that the advertising marketplace will not dramatically be hurt by rising prices—for now. Some said the higher price of oil may actually spur spending in some ad categories, from hotels and airlines that need to attract cost-conscious travelers to auto dealers looking to clear their lots. Even some oil companies are inquiring about adding pages to their print ad commitments. Far less predictable is how the marketplace will be affected next year.

Broadcast and cable TV has not seen any immediate impact of rising prices, and most TV sales execs believe any effect will not be felt until after the fourth quarter. Media agency executives said most advertisers built into their budgets for the coming TV season some safeguards for situations like rising oil prices, so the short-term impact should be minimal.

Sales execs and media buyers agreed that the fourth quarter—the first quarter of the new broadcast TV season, and also the holiday buying season—is too important for many advertisers to chance ad cutbacks. Categories like retail, movies, wireless, soft drinks and even some packaged goods need to be extra competitive at this time of year. And the auto category has shown that soft sales can be boosted by TV-heavy campaigns, even if those promotions are tied to heavy price discounting.

Magazine and newspaper execs said they are not nervous about the short-term impact on advertising, but they are concerned about long-term effects on operational costs. Newspapers will see distribution costs rise, as publishers pay more to gas up their delivery trucks. Magazine publishers fear higher distribution and manufacturing costs in 2006, particularly when it comes to printing contracts.

In an interesting twist, magazines including Reader’s Digest have actually gotten more inquiries from oil companies like BP and Shell seeking to advertise in the last half of 2005.

Local media may benefit from the cloud of a possible recession, as advertisers continue to be cautious: Ad campaigns will be placed close to air dates, a practice local stations know how to handle. But so far, industry experts and agencies have not seen any pullback for the fourth quarter. In the short term, retailers and auto dealers might even spend more to stimulate sales as the holiday season approaches.