A Slow Climb Upward in 2003

Analysts at two major media conferences last week were positive, but not particularly buoyant, about the Big Four ad holding companies meeting their margin goals for 2003. Fueling the modest hopes were top forecasters' projections that a "soft recovery" is under way.At UBS Warburg's annual Media Week Conference in New York, Robert Coen, director of forecasting at Interpublic Group's McCann-Erickson, sounded one of the more upbeat notes. He predicted a domestic ad spending increase of 5 percent over 2002's projected $237 billion and a similar global spending jump of 5 percent to $470 billion. Coen said he thinks the stock market and dot-com shakeouts of the past two years have finally reached bottom.John Perriss, chief executive of media holding company Zenith Optimedia, was more restrained, projecting lower growth rates. For U.S. adspend he forecast a rise of 2.2 percent over $146 billion this year and for global spending, a 3 percent rise to $320 billion. (Perriss' numbers are based on major media only, while Coen looks at the whole spectrum.)"There is no election and slower GDP growth, plus I'm not certain that consumer demand—which has been the driving force behind the economy—will continue to hold," Perriss noted.This year's domestic spending will end up close to 2 percent ahead of 2001's $143 billion, Perriss said. Coen predicted a 2002 increase of 2.6 percent over 2001 spending, to $237 billion.At Credit Suisse First Boston's Media Week Conference, also in New York, the sessions focused on holding-company margins and category projections. Analysts later noted that in many cases, the holding companies, along with their clients, will see slight growth in 2003 because of the fiscal diet the companies have imposed on themselves the past two years."This is a cost-driven recovery," said Alexia Quadrani, a managing director at Bear Stearns & Co. "Executives are realizing that they're not going to see high double-digit growth in the revenue line to prop up their earnings, so they're doing it by cutting costs."Analysts said expectations for the holding companies have been lowered to a realistic level. "In theory, IPG has the best near-term margin potential, but Omnicom will be steady," predicted Lauren Rich Fine, first vp at Merrill Lynch. "As clients are demanding benchmarking and efficiencies in return for giving agencies more business, I think it will be harder to improve margins."IPG, which has seen its operating margin erode from 14.3 percent in 1999 to 10.3 percent through the third quarter of 2002, is shooting for a 13 percent margin next year, a return to what CEO John Dooner termed "historical levels." "[IPG CFO] Sean Orr said that this was just a working assumption at this point," said Quadrani. "And if you look at it, it's a pretty big step up from where they are now. I would say it is achievable, but it's not a guarantee."IPG was the most pessimistic of the holding companies as far as revenue projections, forecasting flat growth for next year. WPP expects revenue growth in the range of 0 to 3 percent. CEO Martin Sorrell said he is aiming for an operating margin of 15 percent after two straight years coming up just short of that figure. Publicis Groupe CEO Maurice Lévy also set a margin goal of 15 percent and projects a 2 percent revenue growth. Analysts expect that Omnicom, which did not present at the conference and has not released margin projections, will achieve a 15 percent margin this year and slightly exceed that number next year. (An Omnicom rep said that while executives attended a CSFB investors dinner, they were not available for the daytime conference sessions.) Historically, Omnicom has posted the highest operating margin among the holding companies.Because the holding companies have many costs and contracts locked in for the next year, significant margin improvement will have to wait till 2004, cautioned Christopher Dixon, global media strategist at UBS Warburg. "They will see improvement in their operating expenses lag that of the economy until there are material signs that the business climate is a lot stronger," he said.As for client spending, retail and autos are the most uncertain categories, analysts said, forecasting that an ad recovery will be led by the enter tainment, pharmaceuticals and packaged-goods sectors.David Verklin, CEO of Car at USA, noted the strength of the auto sector this year in terms of TV spending, but pointed out that the offers of 0 percent financing that have dominated car ads cannot last for the long term. "Auto sales have already started to slow significantly," said David Doft, executive director for advertising and marketing services at CIBC World Markets.The pharmaceutical sector looks solid for 2003, Doft said, noting that about two dozen prescription-drug patents are expiring, opening up competition for those brands. And with Claritin available over the counter, the allergy category could heat up.

Brand Marketing

A Slow Climb Upward in 2003

David Kaplan

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David Kaplan