Dark Before Dawn

It was a year like no other. In its final weeks, 2001 was a period of time everyone simply wanted to end. Industry CEOs didn't need to plumb market research to tap into popular sentiment. From the country's boardrooms to its living rooms, Americans were amazingly consistent in their need to look ahead. Even if many don't quite believe predictions of economic recovery in 2002, the distance of a new year at least promises some measure of emotional recovery. After riding a dizzying roller-coaster of dot-com boom and bust and unimaginable terrorism on U.S. soil, Americans seem only to crave normalcy. Amid the country's embrace of heroic firefighters and all things Norman Rockwell, it's as if all those IPO billionaires—previously the sum of our collective aspirations—ended up as nothing more than canceled programming on CNBC."It's like the '90s never happened—we went from the roaring '90s to a fairly severe slowdown," observes Omnicom CEO John Wren. "This has woken everyone up. It's as if the clock has been reset and the principles we believed in before the '90s have come back into play. We're going back to what is normal and right."It will take a while, however, to excise from the economy the legacy of Wall Street's digital frenzy. The year's end sparked some champagne-fueled optimism, but there were no concrete signs of a rebound from this manufacturing-driven recession, triggered by the collapse of the technology sector. Novem ber data brought another month of disappointing news. Production had fallen 13 months in a row, the longest decline since the Great Depression.The effects of the slowdown were felt quickly and sharply by Madison Avenue, the beneficiary of six buoyant years during which the average rate of growth in ad spending outpaced that of the overall economy. Given the unclear economic outlook, there's little industry consensus about the coming year. Universal McCann forecaster Bob Coen projects that worldwide ad spending will increase by 2.2 percent, with the U.S. showing a 2.4 percent rise. His counterpart at Zenith Optimedia, John Per riss, estimates a slight overall increase of 0.8 percent but a drop in the U.S. of 1.5 percent.There's no disagreement about the abysmal condition of the industry in 2001. The speed and scale at which ad spending dropped was unequaled. Coen somewhat optimistically estimates a 4.1 percent drop in the U.S., while Perriss estimates 6 percent, in line with industry consensus. That would mean 2001 experienced the worst spending decline since 1937, which saw a dive of 8.1 percent."Whatever numbers you believe, everyone agrees this is the worst market since World War II," says Perriss. Today, however, a downturn has wider-ranging effects. "It's more global, because we operate in a more global economy," says Perriss. "In the last recession, from '90-'91, nine global economies went into recession, 10 in '91; in 2001 we saw 23. Look at the rapidity with which this has spread from the U.S. to Europe—what used to happen in years now occurs in months."From where he sits in London, WPP CEO Martin Sorrell says he agrees with the school of thought that expects a long-term reduction in global growth rates because of terrorism, which will act as a "tax" on globalization. Sor rell sees no "green shoots or rays of sunshine" in the year ahead. But he expects 2002 to be less tough than 2001, with flat growth. The new world realities borne of the Sept. 11 attacks accelerated an economic decline that was well under way after 10 years of the most sustained economic expansion in U.S. history. Even before the official start of the recession last March, the ad industry was grappling with the impact of marketer cutbacks. Early on, it was unclear whether budget cuts indicated a correction of sorts after the dot-com bonanza or signaled the beginning of a more significant downturn.First to feel the pain were companies with technology clients or those in technocentric areas like Northern California. Soon, everyone was forced to tighten belts as corporations began to downgrade profit projections. In the first quarter, marketers like Procter & Gamble, Unilever and General Motors were already paring their budgets.Since then, there's been little doubt we're in a prolonged decline. During the first nine months, U.S. ad spending in major media plummeted 7.8 percent to $68.8 billion, according to CMR. Heavyweights like GM and Philip Morris chopped budgets by 28.4 percent and 20.6 percent, respectively. Clients including Coca-Cola, PepsiCo, Chrysler and Quaker sought efficiencies through account consolidation. Not surprisingly, the tough financial climate is taking a toll on client/agency partnerships. In an annual relationship survey from Salz Consulting, measuring the mood as of last spring, respondents were already reporting nearly twice as much tension, twice the focus on money and twice as many hassles. Company principal Nancy Salz, whose clients include GM, Ameri can Express, Clorox and Kraft, sent the survey to the industry's top 200 marketers and 100 agencies."I think it comes down to tension," says Salz. "There's less teamwork when everyone has pressure on them. Marketers who said in the survey that they were greatly affected by the economy rated their advertising lower than those who said they were not so affected."It's a time-honored tradition that when clients' profits get squeezed, marketing costs are among the first to be cut, since those savings immediately affect the bottom line. The impact on Madison Avenue was sudden. After the ad-spending largesse of recent years, agency payrolls had bulked up as shops competed with the dot-coms for talent. In a business where 60 percent of revenue goes out the door in paychecks, the current bloodbath has been unlike anything in recent history."The cuts that have been made are extraordinarily deep—deeper than in my 25 years in this industry," says New York recruiter Bonnie Lunt. "The industry has been making layoffs for the past 16 months. The first round affected marginal people—they were performance-related—but the latest ones have cut into flesh."Recruiters like Lunt are see ing a slight boost in hirings of those with specialized skills. They're also seeing more hiring in regional markets like Dallas, which have been increasingly able to attract top talent. As could be expected, new-business executives are in demand, albeit with a compensation twist. "It's high risk, high reward," says Lunt. "This is performance that is easy to measure." In recent years, companies such as WPP had already implemented a greater use of variable staff costs through incentives, freelancers and consultants. Sorrell regards this ap proach as key in recessionary periods, noting that historically those variable costs at WPP have been 7 percent of revenue, while currently they are 4.5 percent. Consolidation has made a major difference in the way this recession has affected the ad industry compared with past downturns. A majority of agencies are now under the umbrella of publicly traded holding companies, subject to shareholder scrutiny. So cost cuts are often spurred by the need to meet a parent company's numbers. Industry consolidation was supposed to better shelter holding companies this time around. With a greater number of diversified below-the-line offerings, marketing-communications companies were expected to reduce their exposure to clients who cut back on more expensive media advertising during recessions."It's a bit surprising that marketing services hasn't performed better," says Mer rill Lynch analyst Lauren Rich Fine. "Look at direct marketing—you see more evidence of return on investment. But I think there are two reasons: So many companies are already using these services in such heavy proportions, they can't use any more of them, and when profits are down, [client] companies have to cut somewhere."One improvement over the last recession is that the industry now has stronger financial underpinnings. During the previous crisis, major U.K. holding companies carried large amounts of debt.Financial observers like Fine are encouraged by the sector's prospects. "This business is cyclical; its companies are not," she says. "Good [marketing-services] companies can even gain share in down markets." Assuming some economic uptick—in "fits and starts"—in the first half, Fine expects an improvement in client spending levels by September. Retail and packaged goods may see an increase sooner, with autos lagging behind.On the surface, it's hard to see how the woes of technology companies led to a drop in the fortunes of those that sell ice cream or SUVs to consumers. It helps to remember the American corporate mentality of two years ago as the Nasdaq skyrocketed 86 percent. In that go-go atmosphere, the U.S. borrowed against future growth by creating jobs and opening factories sooner than they were needed. (Even as recently as a year ago, the production of high-tech gear—including computers, communications equipment, peripherals and semiconductors—was growing at a rate of nearly 60 percent a year.) That over capacity led businesses to cut back on investment and staffing this year, causing the economy's current troubles. Ironically, in this recession, consumer discretionary-spending power hasn't decreased, thanks to lower energy costs and interest rates. (Of course, even cheaper mortgages and gasoline are too expensive if you're unemployed. Still, unemployment, at around 5.4 percent, is half of what it was in 1982.) Underscoring the uneven nature of this economy, the housing market has stayed generally strong, and consumer spending—two-thirds of the economy—has held up fairly well until recently. So why aren't marketers enjoying healthier bottom-line results? Largely because demand is being satisfied by existing inventories and imports.After the attacks on the World Trade Center and the Pentagon, consumers—the remaining support in a shaky economy—were tested amid fears of further domestic terrorism and looming war. While the initial shock has faded, there will undoubtedly be more lasting repercussions to the new American mind-set."It's been an unprecedented year," notes Anne Bologna, director of planning at Fal lon. "As a country, America was like a teen ager. After Sept. 11, we were forced to grow up."Bologna sees an upside to the tragedy. "Things had become pretty crazy—we all knew the fact that people took celebrity lipstick as something important was wrong, but that was just part of the times we lived in," she says. "Now things are snapping back into their proper order."The implication for marketers seems to be that as consumers re-evaluate their priorities, their purchase decisions will also be rethought. "Brand and product integrity, as well as performance, will become more important," Bologna says. "You're not going to romance your way into consumers' hearts. They're not putting up with bad services; bad products; inappropriate, stupid, over blown, undervalued propo sitions. In the '70s, '80, '90s, it was all about a company's vision. Now companies need a bit of street smarts as well."It's uncertain how well those products have moved during the fourth quarter. Ameri can Express forecast that holiday spending budgets were down 7 percent. But in December, consumer-confidence numbers actually jumped after three months of steep declines. And Americans have shown a willingness to open their wallets opportunistically. Shortly after Sept. 11, Goldman Sachs projected a contraction in consumer spending during the final three months of the year. Now, thanks to a jump in auto sales due to 0 percent financing, the investment-banking firm thinks spending could rise by as much as 3 percent. After a glum shopping season for most conventional retailers, Yahoo! reported on the day after Christ mas that sales on its site jumped 86 percent from last year. Value leader Wal-Mart said its December same-store sales will beat earlier forecasts. Analysts are hoping that consumer spending will lead the economy back into a healthy growth cycle. But that could portend a slow recovery process, given the fact that since consumers have generally continued to spend, there's not a great deal of pent-up demand. It becomes a matter of perception, of creating want, not need among consumers struggling under the double punch of war and recession. "We don't have any control of the economy. It's all in people's minds—the shift from the rational to the irrational," asserts Martin Hayward, chairman of The Henley Center in London. "It doesn't matter what we do. It's what consumers think that matters, and that's scary."

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Dark Before Dawn

Noreen O'Leary

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Noreen O'Leary