The coronavirus crisis and an oil price war between Saudi Arabia and Russia is accelerating an economic slide that is spooking investors in just about every industry.
On Monday, trading was halted on the New York Stock Exchange for 15 minutes so investors could, according to NYSE president Stacey Cunningham, “have time to absorb information, better understand what’s happening in the market and make decisions accordingly.” By the end of the day, the Dow Jones Industrial Average closed down 2,000 points, effectively ending an 11-year bull-market run.
In the agency world, this scenario couldn’t have come at a worse time. With already stressed margins and minimal growth, holding companies traded on the NYSE and NASDAQ continue to see drops in stock prices.
As of 4 p.m. ET Monday, holding company stocks dropped an average of about 7.5% for the day.
IPG fell about 9%, while Omnicom lost over 8% and MDC Partners dropped just over 7%. Other holding companies, including Publicis Groupe, dipped more than 5%, while Dentsu Group lost more than 8% of its stock price on the day.
The consensus among industry analysts is perhaps predictable: The cascade of bad news and economic turmoil could not have come at a worse time. Yet, some analysts see silver linings, even in light of the challenges.
The impact of coronavirus
When holding companies reported their fourth-quarter and full-year earnings results last month, their CEOs largely focused on how the outbreak would impact their Chinese operations. As the epidemic spreads globally, it’s become increasingly clear that there’s no short-term fix.
Craig Huber, media analyst at Huber Research Partners, said the global nature of holding companies is undoubtedly contributing to hits on their stock prices, as local advertising markets in high-risk countries like China, Italy and South Korea are likely feeling the impact of the outbreak.
“I think the latest downdraft in ad agencies’ stock is due to the uncertainty of coronavirus and potential impact on local economies and advertising and marketing spending levels,” Huber said. “The added fear is does it accelerate any of the industry’s long-term pressure points?”
According to Huber, some of the ongoing trends that affect the holding companies—like marketers moving more work in-house and to consultancies—could potentially become exacerbated by coronavirus fears as brands retool their marketing strategies in light of the outbreak.
For agencies that help brands put on events, cancellations of large-scale events like SXSW and the 2020 BNP Paribas Open tennis tournament do not bode well. While experiential and event agencies only make up a fraction of holding companies—for example, Huber estimates IPG’s revenue from them is roughly 2%—the continued cancelation of events is an “added pressure point” that he said these firms must grapple with on top of everything else.
Jay Pattisall, principal analyst at Forrester, said it would be premature to say that the recent stock slides are industry-specific. Instead, he said, the holding companies are “experiencing the same volatility that all industries have experienced in the last two weeks” because of the outbreak.
“I don’t think there’s anything in particular about the advertising or the agency industry to suggest otherwise,” Pattisall said. He also noted that five of the major holding companies recently reported revenue declines for both the fourth quarter and 2019 as a whole, resulting in stock drops unrelated to the coronavirus.
Pattisall said it’s possible some forms of advertising, particularly television, streaming and digital, could see an uptick if “appreciable portions of the population” begin spending more time at home to seclude themselves from the virus. However, this could come at the expense of others such as out of home and experiential. Even so, since holding companies encompass a range of agencies and specialties, they could be shielded from the effects of ad spend reallocation.
“The holding companies have assets across all of these channels, so we can’t really point to one set of predicted behaviors that would disrupt any one particular holding company,” Pattisall said.
Adrien de Saint Hilaire, head of European research at Bank of America in London, noted that most holding companies (except for WPP) performed well or better than expected in terms of organic growth last year.
“There were concerns that we were entering into an economic recession [last fall], but in the end, it was fine and agencies delivered,” de Saint Hiliare said. “But with coronavirus, there are fears of a slowdown.”
Talent fears and structural issues
One potentially ominous sign is the effect the current climate has on talent within holding companies. De Saint Hilaire noted that as a general rule, brands view advertising as a discretionary part of their P&L, and any pullback on marketing activity could have a negative effect.
“What the financial markets like about agency holding companies is the flexibility of their P&L,” he said. “Most of their costs, however, are comprised of people. It’s unfortunate, but people can be more easily adjusted than factory output. You can reduce head count in times of crisis, which means that margins and cash flow are relatively protected.”
While the prospect of culling talent is challenging, it may very well be part of the process for agencies and holding companies to navigate an unprecedented time.
“This is an industry where, if you win, you hire, and when you lose, you fire,” de Saint Hilaire said. “Of course, we’ve seen plenty of restructuring phases over the years. It’s a very unfortunate thing, but commonly, we’ve seen agencies restructure their business to protect their bottom line by reducing the head count. It’s very unpleasant because obviously talent is at the core of what they are. [The issues today] are very acute and I think that one concern is that, as we go into 2020, if we start to see shifts of how dollars get spent, there’s no certainty that it will flow back to the old way when we get back to normal.”
Pattisall said he thinks a recession would hit the agency landscape particularly hard. “I think any downturn in the future would be a real challenge for the holding companies,” he said.
New York-based publishing, marketing and tech consultant Matthew Scott Goldstein believes the agency structure of the past decade is not well-suited to absorb such a significant economic change and is blunt about it.
“The [agency and holding company model] has been broken for the past three or four years,” Goldstein said. “There’s too much inertia for it to [fully collapse] overnight, but it’s another hole in the armor. You can’t fix this in a couple of years. It will take a multiyear approach. The status quo of the last 10 years and a good economy helped agencies significantly. Now, it’s going to get worse.”