The Good Times Are Now: Wall Street and Madison Avenue are in Goldilock-step

There are three widely cited advertising-industry prognosticators: Veronis, Suhler & Associates; Zenith Media; and McCann-Erickson's Bob Coen. They do not always agree on everything, but they do agree on one thing: All expect this year's better-than-GDP growth to persist into 1998. There are a large number of executives whose companies' fate, presumably, hinges on advertising's performance in the months ahead. And, not surprisingly, many of them enjoy sharing their views about the industry's outlook. However, at least at the larger agencies-those with revenues of $500 million or more-the focus is far broader than just the U.S. ad industry, and the talk quickly shifts to the global marketing services business. The major agencies and holding companies-those who service larger, blue-chip clients-are all global in scope. In fact, some shops generate more revenue and profits outside America's boundaries than from within. Then, of course, there is a lot more to the agency game these days than just advertising. That is true both on Madison Avenue and around the world. The health of the U.S. advertising business will always matter, but it is clearly not as important as it was 10 years ago. Perhaps the U.S. economy, which has been expanding since 1991, is due for what economists and Wall Street analysts refer to as a "correction." However, the early-warning signs of economic excess, such as a buildup in inventories, lengthening of industrial-delivery responses, excessive consumer and industrial debt, or a plunge in consumer confidence-not to mention inflation-are nowhere in sight. Thus, if the economy is about to tank, the potential cause is not apparent. And, unless we see signs soon, we will be far enough into 1998 to ensure that it, too, will be a year of continued economic expansion. There is no doubt a link between the health of the overall economy and the well-being of the ad industry, but the U.S. agency business has been remarkably resilient nonetheless. Its dip in 1991 was only the second in the post-World War II era. That is a much better record than the economy as a whole, which has suffered a number of recessions during that same period. Still, even though the ad industry's globalization might help immunize it from disaster if the U.S. economy stalls, ad agencies remain vulnerable to some degree to the economies elsewhere on the planet. Global diversification-or exposure to alien economies-is, right now, one of the more attractive aspects of the business. Whether the U.S. ad industry expands by 8.4 percent (per Veronis, Suhler) or 4.8 percent (Zenith) in 1998, it won't knock anyone's socks off; the industry is relatively mature. Agencies today must be international players to sustain growth in excess of 10 percent. Fortunately, industry executives are finding quite a bit of action in developing markets. Asia is the largest region after North America and Europe, and is likely to be the fastest-growing emerging market. Expansion rates in Latin American countries are forecast to be at least twice those of the U.S. market. And the potential for expansion in Eastern Europe, notably Russia, Hungary and Poland, is extremely promising, too. The ability to compete for assignments from local advertisers, in addition to handling work for multinational companies, makes these emerging markets doubly attractive. Just because the U.S. ad business is considered a mature industry does not mean it is a stagnant one. In fact, there are two developments that will stimulate domestic ad growth-if not set it on fire-at least through 1998. First, there has been a significant shift in the pecking order among advertiser categories. While the U.S. market as a whole may be growing slower than in the past, several client industries are behaving more like emerging markets. Tele-communications, for example, is one domestic industry with bright growth potential. Some phone companies are making the transition from regulated utility status with monopoly standing to competitors trying to protect their core businesses and expand at the expense of new rivals. Senior telecommunications managers have little experience as marketers, and the tendency so far has been to overspend on advertising. Home entertainment companies, computer makers and movie studios have also behaved like tipsy sailors when it comes to setting ad budgets. As these cases illustrate, the arrival of an entirely new class of clients can rouse the ad business. Indeed, we're starting to see yet another potentially lucrative category emerge-prescription-drug advertising aimed not just at doctors but at a broad base of consumers. The stakes are high because a large number of pharmaceutical drugs will lose their patent protection over the next few years. Their manufacturers will need to expand the marketing pressure against generic versions that are sure to hit the market. The other big development is a consequence of the proliferation of media. The list of available media has been growing at an amazing pace, and the arrival of digital cable and broadcasting will trigger even greater proliferation. If it isn't axiomatic already, it ought to be a law of logic: No matter how long the list of choices, there can only be one best choice. The increasing number of options are placing advertisers at ever-greater risk of misjudging their market with a suboptimal media plan. Agencies, especially the larger ones, see an opportunity here. Their media-related functions have become points of competitive difference. (It helps explain the relatively high level of capital expenditures by some of the larger shops on computers and other technologies.) In any event, the explosive growth of media has been a net plus for the ad business because it gives a prepared agency a chance to provide superior service. If the media independents take root in the United States to the degree they have in Europe, there may be problems for the conventional agencies if large clients start buying traditional agency services ˆ la carte. That, however, is a worry for another year. In fact, clients seem to be rushing toward their agencies these days rather than away from them, all in the name of efficiency. Even the non-trade press made a big fuss about Citicorp's recent account consolidation with Young & Rubicam, noting that a number of large advertisers have trimmed their agency rosters down to a handful of names. The trend toward roster consolidation has far from run its course. Technology allows a degree of multioffice coordination not possible until recently. The major multinational ad agencies also are adopting electronic communications technology with vigor-another push to the capital spending surge. Supporting companies, such as teleconference producers, are enjoying the boom, too. Consolidation has always promised a greater degree of control and coordination, but until about five years ago this was expensive, impractical and not especially reliable. Indeed, the greatest value of the Internet to advertising has been in the technological resource sense, not as a bright new medium. Technology has been driving the consolidation trend but is not the basic cause. That honor goes to the general rationalization of industry to do more with less. Call it downsizing, reengineering, or cook up a whole new buzzword. Companies have gotten slimmer, much to the benefit of their margins. Cost savings can bolster profits, but only up to a point. Eventually, a business needs to sell more cars, more computers or more hamburgers in order to grow. As a result, we've seen a greater reliance on brand-oriented marketing to foster top-line growth. Even the sales promoters are shifting away from a price-break orientation-coupon issuance appears to be abating-and moving into brand-augmenting activities such as cobranding and event sponsorship. The swing between advertising and the "below-the-line" techniques is interesting to watch but, increasingly for a business analyst, only in an academic sense. Most of the major "advertising" companies are also major public relations, promotion, identity and "other" companies as well. Profit margins in some of the specialty disciplines, such as recruitment, healthcare and yellow-pages advertising, can be double those of conventional ad work. And these areas are growing faster than "real" advertising to boot. The twin blades of roster consolidation and globalization may stir growth on this side of the business, as techniques that have been perfected in the mature U.S. market are adapted for use around the world and become more integrated into advertisers' global marketing plans. There has also been a significant degree of consolidation within the agency business. (Just ask the pizza-delivery guys who work near the industry's leading law firms.) The largest of the ad shops, taken as a group, have been increasing their share of the industry's volume through mergers and acquisitions. Major firms are buying allied outfits, such as Omnicom's acquisition of public-relations giant Fleishman-Hillard; some nonconventional operations, like CKS Group, are trying to integrate into the mainstream, as evidenced by its purchase of ad agency McKinney & Silver. We might be witnessing the industry's evolution into a two-tier structure, with a dozen or so global mega-players and an infinite number of specialty shops, wannabes and also-rans. Big clients are global and technologically sophisticated, and agencies need to keep up. (The agencies that can't either lose the business or get acquired.) The ones that stay in the major leagues operate in an arena of opportunity and relatively limited competition. They have a facility advantage in that they are able to service accounts on a worldwide basis. We are far more likely to see new global clients arise-who need that level of attention-than new agencies that can provide it. There are basically three ways for an agency to go global. One is to acquire units with the right geographic spread, although a survey of most regions shows there may not be a lot to buy. Another is to ride the coattails of a client's worldwide expansion, which begs the question of how an agency could win and retain such an account without having a global network already in place. And then there is the start-up route, which requires lots of money, lots of time and no small degree of luck. The barriers to competitive entry and the trade practice that limits an agency's ability to work for clients (who themselves compete with each other) guarantees that there will be a number-albeit a small number-of big shops to handle the work. A salubrious economic background, more ad-friendly behavior on the part of clients, consolidation of accounts among roster agencies, globalization, the growing importance of technology and media analysis are major factors underlying the industry's likely performance in 1998. And the outlook, clearly, remains bright.

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The Good Times Are Now: Wall Street and Madison Avenue are in Goldilock-step

Alan Gottesman

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Alan Gottesman