But what does the global financial crisis mean for agencies and what should they be doing about it?
The key driver of advertising budgets is profitability: when profits are under pressure marketing budgets inevitably get cut. The implications for agencies with clients in vulnerable sectors such as airlines, automobiles, banking, financial services and property are obvious. But the thing about downturns is that they have a tendency to accentuate the strengths and weaknesses within companies. The strong find opportunities.
Recessionary times drive clients to re-evaluate how they’re spending their budgets and to consider whether they should be doing things differently. They prompt marketers to be more open to new approaches and to seek them out with greater vigilance than when things are going well.
Agencies may not be able to defy trends in the advertising market, but they can influence the way they run their businesses so that they are stronger and more resilient on the other side of this financial crisis.
The challenge for agencies is on the one hand to be conscious of costs and accountability (because clients need that), and on the other ensure they aren’t paralysed by it. Business models have to be sound and investment plans able to withstand short-term economic shock. But while ‘batten down the hatches’ is so often the call of a downturn, such times can also be the most powerful catalysts to structural change.
Media groups have been taking on structural reintegration of services. At most agencies, digital has been bought into the core of services, and many say that analytics, CRM, data management and shopper marketing will follow. This model will be more structurally healthy and better equipped for the future. Whether or not consolidation cuts deeper and holding companies move to cull the mass oversupply of agency brands that was their response to growth and conflict management remains to be seen.
One thing’s certain: the credit crunch means there is less cash available - and unprecedented caution among investors. The demise of cheap credit should somewhat slow down the series of acquisitions we’ve seen in recent years. The pressure will now be on holding companies to create more effective organic growth, rather than value creation through deals.
As a result, leaner and fitter agency businesses will emerge. Marketers will be looking for agency partners that are more creative, differentiated and proactive in difficult times. The key, however, will be to use the downturn to concentrate on fundamentals, and avoid the temptation to hack investments that will allow brands to come out the other end fighting. The tricky bit, of course, will be finding areas to cut that do not impact the clients that agencies serve.
TNS reluctantly waved the white flag and in an abrupt reversal last week recommended that shareholders who hadn’t already done so accept the WPP offer to buy them out. The research company may still believe that the US$2 billion offer undervalues it. Even so, it’s victory for Sir Martin Sorrell. Market research is an attractive area, and while not immune to recession, it is less exposed to the cyclical nature of the ad industry. At the very least, it should continue to attract budgets in the areas of effectiveness and innovation. The TNS board’s change of heart will round out WPP’s research offer geographically, reinforcing key markets of India and Japan, while strengthening services in Southeast Asia where TNS leads. It will also give WPP the firepower to create the world’s second-biggest market research group after privately held Nielsen, and finally challenge Omnicom Group’s position as the industry’s largest holding company.