Ad Agencies Register Concern on Economy

While not in panic mode, CEOs, national buyers closely monitor economy

On an "are-you-worried-about-the-economy" scale of 1 to 10 (10 being a repeat of the 2008 meltdown), agency chiefs are more worried than not that the glitchy economy will hurt their business through the rest of this year and into the early quarters in 2012.

So far, agency CEO and top media buyers are closely watching market indicators, specifically unemployment, consumer spending and confidence, and corporate profits. And while there’s much not to like about many of those benchmarks—on Friday, consumer sentiment hit a 31-year low, capping a week that saw the stock market lurch violently up and down—agency executives dismissed talk that the ad business was in any immediate jeopardy. The general read is that, unlike the great recession of 2008, which ripped a massive hole in the advertising economy, the recent volatility is not being caused by big banking juggling toxic assets, and therefore not as life threatening. Still…

“I have got that sort of sick feeling in the pit of my stomach,” said Bartle Bogle Hegarty CEO Simon Sherwood. “I’d put it at about 7 or 8.”

Some agencies are closely monitoring commodity costs because upswings there create margin pressures on big corporations, which can trigger fee squeezes on agencies. Coca-Cola, for example, is among the biggest buyers of sugar in the world, and the price of sugar has surged in the past year or so.

“The pressure is in the pipe and it’s coming our way,” Sherwood said. “It hasn’t yet impacted on consumer sales, but it’s coming down in the form of some big, big cost increases that companies are having to swallow. That puts pressure on us because obviously they look to at least hold [the line on] what they pay their agencies. And we’re just going to go into the last quarter of the year where we do all our negotiations for the next year. So, it couldn’t happen at a worse time.”

Others are a bit more sanguine.

“This time it’s different," said Bob Jeffrey, CEO, JWT. “Corporate America is in pretty healthy shape with much stronger balance sheets and more cash. They got lean in 2008, and so now they're running more efficiently.”

Nonetheless, Jeffery's still rates his concern a 7.

“The reason I’m giving a relatively high score on the ‘nervousness’ scale is that consumers' confidence is once again rattled," he said. "This means people may get conservative and cut their spending. Cutting spending turns a relatively healthy business situation into an unhealthy one.”

Merkley + Partners CEO Alex Gellert put his concern about the economy at a 5 because, with a roller coaster-like stock market, “there’s no pattern yet.”

“I’m certainly far from panicked, but my radar is up,” Gellert noted. “[Last week] was the first week I turned CNBC on the TV in my office since ’08 or ’09. So, I was definitely watching it a little more closely.”

The challenge, he explained, is that uncertainty about the economy—and the volatility of the stock market in particular—could lead to consumer paralysis, which, of course, would impact marketers and their agencies. “I think what we’re dealing with in terms of risk is potentially a frozen consumer,” said Gellert. “I don’t think we know if in we’re in a recession or not. I don’t think people know whether there’s going to be more unemployment. I don’t think any of that is clear yet.”

Perhaps the lack of immediate panic stems from frontline fatigue. Agencies have been battle tested by the last recession, so, in some ways, a double dip would be a continuation of life as they’ve known it since 2008.

“We live in a VUCA world—volatile, uncertain, complex, ambiguous,” said Saatchi & Saatchi worldwide CEO Kevin Roberts, who declined to rank his concern. “We and clients must adjust. Speed, flexibility, and the ability to surf the waves will define success.”

During the past recession, many companies shifted to working with agencies primarily on a project basis—the equivalent of a spot buy in the media world. The thinking was, why pay up front for something you can buy a la carte when and if you need it? Also, some marketers got used to shooting ads outside the U.S. to avoid the cost of paying union wages to actors. In all likelihood, such cost-control practices will continue—with or without a double dip.

Saatchi clients like Procter & Gamble, Toyota, and General Mills are “driving for share growth, upping innovation, eliminating nonvalue, adding complexity, and focusing on [the] new consumer,” Roberts wrote in an email. “The mantra is 'better faster scalable ideas (cheaper!).'” 

Still, for agencies, it’s a juggling act. They must adapt to the economic realities that marketers face but also need to make sure brands remain true to their core brand strategies. Easier said than done.

In the meantime, agency leaders track macro-economic indicators like the unemployment rate, consumer price index, and interest rates.

“If I look at the economy versus the market, we are still bouncing along, however unspectacularly, but we haven’t fallen off the cliff like in 2009," said Andrew Robertson, CEO of BBDO Worldwide, who also declined to rank his concern. "The U.S. jobs numbers were better last week, but they still have to get a lot better. [For the ad industry], consumer confidence and expenditures are more important than Wall Street. Am I nervous? Yes. Am I terrified? No. This is not the same as 2008 when you had a huge liquidity and credit crunch between banks and nations, and people were not able to get credit, and you had a 20-40 percent collapse in certain categories like autos.”

As for projected client ad spends, he said, "We can see one or two quarters ahead with some clarity and no one is panicking.”

But with a few more stock market plunges like we saw last week, that could change—fast.

Certainly, volatility among investors and the unwillingness of political parties to work together to grow the economy are enough to keep any agency CEO awake at night.

“What worries me is the same thing that worries the market: uncertainty,” said Arnold global CEO Andrew Benett, who puts his nervousness at a 6. “What if clients get spooked again and they decide that, you know what, they’re going to enter the first half of next year much more conservatively?”

Also, just as the recession changed how marketers and agencies behave, it also changed consumer behavior. Hyper-consumerism has generally given way to more mindful, meaningful consumption. Benett, for one, believes that change will endure.

“That behavior has been in place for the last two years now," he said. "So, I don’t think we’re going to see a dramatic change. The economy is definitely contracting, it’s slowing, but at the end of the day, are Americans going to still take a vacation? Yes. But they’re going to be more [choosy], and they’re going to do more research.”

Amalgamated CEO Charles Rosen draws a distinction between the noise around the political debt debate in Washington and how marketers and consumers are actually behaving. With the former, he rates his anxiety at an 8; with the latter, at 5½, maybe 6. “Consumer activity, consumer confidence, whether or not people are buying goods and actively participating in the economy—I don’t see that slowing down at any level like we had in 2008,” Rosen said. “What we’ve already started to see is companies, CMOs, and CEOs [saying], ‘We need to re-engage and get active again.’ They just can’t afford to sit on the sidelines the way they were doing in 2008.”

As a group, media buyers spoke on the condition of anonymity out of fear of spooking their clients, and in so doing, perhaps revealed burgeoning market jitters.

Generally speaking, there’s a gap of about six months between real-world cataclysms and the moment advertisers begin to cut back significantly on media spend. Marketers rarely make knee-jerk decisions based on short-term stock market fluctuations.

“We plan for contingencies; that’s a big part of what we do,” said one national TV buyer. “The assessments were made, and if the client absolutely feels like he can’t spend some of that money, he’ll pull out. But he does that knowing full well he’ll probably have to pay a huge increase when he tries to buy his way back onto [a network’s] prime-time [schedule].”

With a good five weeks to go before the conversion deadline, very few holds have gone to orders. Naturally, NFL inventory is getting nailed down and must-buys like Fox’ American Idol and The X Factor already have season-long commitments in hand. But for the most part, it’s hard to say how things will shake out in the next several weeks.

“We’re still getting our decks together,” the TV buyer said. “It’s early yet.” When asked how he’d characterize his own perspective on the marketplace, the buyer laughed ruefully. “We’ve been through this before," he said. "My anxiety level is always hovering at around 5. But if we’re talking about me personally, my 401(k)? I’d say 9.”

—Andrew McMains, Anthony Crupi, and Noreen O’Leary