Holding Cos. Brace for Car Spending Cutbacks

NEW YORK As Detroit’s Big 3 automakers drove hat in hand to Washington, D.C., last week, seeking $34 billion in federal aid, advertising agencies braced for the grim prospect of even greater cutbacks in car client spending.

Declining auto sales compounded by the difficulty of potential car buyers getting loans has severely impacted the auto category which is the top spender on media in the U.S.

While the focus is on agencies that work for Chrysler, General Motors and Ford, any shop with a car client that either creates ads or plans and buys media has serious concerns heading into 2009.

Amid historic sales declines, automakers are laying off tens of thousands of workers, shuttering plants and looking to shed brands. Major dealers — long a source of significant ad revenue to newspapers, radio and TV — also are closing, creating revenue holes for regional media outlets already challenged by the recession.

Now, as agencies set their budgets for next year, many expect their car clients to spend less. The only questions are, how much less and how much will shops have to cut back to remain profitable? “It’s going to be disproportionate pain,” said a source.

Agency layoffs already have occurred. For example, Omnicom’s BBDO in Troy, Mich., a major Chrysler agency, last month cut 22 percent of its staff, or 145 employees.

Car business supplies about 14 percent of Omnicom Group’s total revenue, which last year was $12.7 billion, according to JPMorgan analyst Alexia Quadrani. The holding company’s agencies work for a half-dozen brands around the world, including Chrysler, Nissan, Volkswagen, Mercedes-Benz and BMW, and doesn’t break out the size of the Chrysler business. Sources, however, estimate that Chrysler generates nearly 2 percent of Omnicom’s global revenue, making it the second-biggest client after PepsiCo.

At WPP Group, where Ford is its top global client, its auto business accounts for roughly 10 percent of its global revenue, which stood at $12.4 billion last year, according to Quadrani.

General Motors is the No. 1 client at Interpublic Group, supplying more than 5 percent of its $6.6 billion in global revenue.

Publicis Groupe, meanwhile, gets about 13 percent of its $6.3 billion in revenue from car clients such as General Motors and Toyota.

Questions about belt-tightening are just as relevant to car-dependent independents like davidandgoliath in El Segundo, Calif. — Kia Motors America’s lead creative agency.

While the car industry slowdown will have a negative impact on these agencies, the positive is automakers will not stop spending. Ford, whose lead agency is WPP’s Team Detroit in Dearborn, Mich., is said to be planning seven car launches next year, many of which will be supported with major media buys.

Also, even if one of the Big 3 plunges into Chapter 11, marketing will still be necessary to rebound. In fact, the oversight under bankruptcy proceedings “puts it all out into the open and they have to be a bit more open and regular about it,” said Quadrani.

The prospect of carmakers spending less in major media is nothing new, just potentially more dramatic, given that Chrysler and GM are running out of cash. Between 2005 and 2007, Chrysler’s annual media spend plummeted 19 percent, from $1.41 billion to $1.14 billion, according to TNS Media Intelligence. In the same period, TNS figures show that GM’s annual spending also plunged 19 percent (see chart).

The picture in the first nine months of 2008 was equally bleak: Ford’s spending dropped 37 percent compared to the same period a year ago, Chrysler’s fell 34 percent and GM’s was down 17 percent, according to TNS.