For Holding Cos., Flat Is the New Up


WPP Group CEO Martin Sorrell doesn't share the enthusiasm of those who get excited about incremental improvements in negative numbers. Last week, he used the phrase "Once bitten, twice shy" to explain his reluctance to celebrate any signs of recovery in the advertising marketplace. That's because a year ago he predicted flat organic growth for his company in 2009, only to have to lower his projection as the recessionary head winds stiffened.

"I don't understand this degree of optimism," Sorrell last week told investors at UBS's annual Global Media and Communications Conference in New York. "Basically, things are less worse than they were."

Several holding company CEOs point to extreme client cost-cutting as the main reason why flat organic growth may be the best the industry can expect in 2010.  Clients want more for less and extreme pricing pressure has surfaced in particular during reviews for media accounts.

And while the recession may have triggered the cuts, compensation changes such as Unilever's decision to halve the upfront profit margin it pays to agencies, to 5 percent, and Coca-Cola's shift toward a performance-based model won't likely be undone by a rebound in the economy.

"It's a reaction to the current environment," said an industry analyst. "But I don't think it's cyclical. It's here to stay."

Media spending forecasts for 2010 only reinforce the gloomy picture. On a worldwide basis, WPP's GroupM and Publicis Groupe's Zenith Optimedia are projecting client spending growth of less than 1 percent next year (see chart). Until spending picks up, agencies will have little to celebrate beyond the feeling that the marketplace is "less worse."

Could it be worse than this year? In the first nine months of 2009, total U.S. major media spending amounted to $83.4 billion, down nearly 12 percent from $94.3 billion in the first three quarters of 2008, according to The Nielsen Co. One big drag on the numbers, of course, was automotive spending, which plummeted 31 percent.

As Sorrell, who's projecting an "even Steven" 2010, put it, "The only way out of the box is for the economy to grow. The procurement department is not going to get [clients] where [they] want to go."

Naturally, Sorrell (pictured) and peers like Interpublic Group CEO Michael Roth and MDC Partners' CEO Miles Nadal, who also spoke during the UBS conference, are hoping clients realize that cutting costs won't grow brands long term. Clients are "going to have to spend more money going forward," Nadal said. "They're just going to do it in a more efficient way, even as the economy shows signs of improvement."

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