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Ad Industry Preps for Pain in '09

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The unprecedented events of the past quarter, with the bailout of America's financial institutions and two of its automakers, changed assumptions about what otherwise would have been considered a typical U.S. cyclical downturn for advertising industry holding companies. The unpredictability of the year ahead could bring the kind of challenges that have never been experienced by the current generation of executives running marketing communications companies. One sign of that volatility: Zenith Optimedia's quarterly advertising forecasts will now be done on a monthly basis.

Industry seers have generally been more optimistic than outsiders, with current 2009 estimates ranging from a decline of 3 to 6 percent in U.S. and North American ad spending. Others take a harsher view: Fitch Ratings believes industry weakness will extend into 2010 and be similar to the drop in 2001, when ad spending slipped 6 to 9 percent in real terms.

Even the quadrennial stimulus of the Olympics and presidential election couldn't boost spending this year in the world's largest ad market and analysts are predicting project work could have dropped by 30-50 percent in the fourth quarter. Factor in the industry's exposure to Detroit automakers and charges related to layoff severance costs and it's small wonder that industry shares are trading near their 52-week lows. Citi Investment Research says the three-year period of 2007 to 2009 is shaping up to be the longest stretch of weak and, now declining, advertising growth since the end of World War II.

"It's different now because this is a credit-driven recession, which is going to have a deeper impact on just about every industry. This is not just a corporate-led downturn, not just consumer led," says Catriona Falon, a Citi Investment Research analyst. "Previously, companies with declining sales could take on debt. Now they have contracting consumer spending and capital acquisition restraints. Consumers could draw upon their credit cards and home equity loans, but not now. Some of the levers to fix economic downturns are being restrained and it's hard to say when a turnaround will occur."

In the current credit environment, liquidity and capital preservation may take precedence for marketers over earnings, and ad spending has always been one of the easiest fixed costs to cut.

Historically big ad spenders like automotive manufacturers and dealers, finance companies and retailers are being especially hard hit. The industry's ties to automotive clients are legion. By Wall Street estimates, they account for 14 percent of Omnicom's revenue; 13 percent of Publicis' and 10 percent of WPP's. (Publicis works for General Motors and Toyota, with declining sales, but not the extensive problems of U.S. companies.)

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