Mike Fromowitz
May 14, 2012

The state of the ad industry - what you need to know.

Many of us are totally consumed by our jobs—answering emails, writing marketing and advertising plans, blogging,  making ads, designing websites, sitting in meetings, taking phone calls...So, most ...

The state of the ad industry - what you need to know.

Many of us are totally consumed by our jobs—answering emails, writing marketing and advertising plans, blogging,  making ads, designing websites, sitting in meetings, taking phone calls...

So, most likely, you may have missed these vital news stories in the press about our industry. These are tough economic times, and though cutting-back agency spend is not new, one gets the feeling that this time the clients’ intention is more long term. Perhaps ad agencies need to redefine their value add for clients.

Proctor takes no Gamble.

Procter & Gamble Co. Proctor & Gamble Co. Chairman-CEO Bob McDonald recently said the company will cut costs totaling more than $10 billion over the next five years, including $1 billion in external marketing spending and a reduction of more than 5,700 jobs in non-manufacturing areas including marketing. The 5,700-employee headcount reduction includes more than 4,000 next year in addition to the 1,600 previously announced for the current fiscal year ending June 30. And even as the company cuts jobs, it will continue hiring in high-growth countries such as China.

The marketing savings will come from a combination of having fewer marketing executives and spending more efficiently, including using more lower-cost digital marketing channels to reach consumers one-to-one; and more multi-brand group marketing initiatives such as its program around the 2012 Summer Olympics that spans 30 brands.

The cost-cutting aims to streamline P&G to compete amid slow growth in developed markets and aggressive expansion in developing markets, such as expanding its toothpaste brands, including Oral-B and Crest, to just about every country in the world except Japan, Korea and Pakistan, by 2015.

The cuts don't just focus on media or agency costs but on all areas of marketing. Marketing costs are the company’s third-biggest spend pool, behind people and materials. To cut costs without sacrificing impact, P&G is using technology to shift spending from more traditional vehicles like TV to digital and mobile advertising and more efficiently target consumers to build one-on-one personal relationships.

Upon reading this news from P&G , one reader commented: “After decades of investing to build some of the world's most powerful brands, big Bob decides it's time for him to slash marketing, boost short-term earnings, and stuff his pockets with bonuses for creating quick profits. Then on to his next corporate "turn-around." He and P&G's board of directors are the epitome of America's 1%.”

Despite revenue surge, PepsiCo announces 8,700 job cuts

PepsiCo (PEP) proposed a devastating strategy to its employees by announcing it plans to cut 8,700 jobs, or about 3% of its workforce. This, it says, is to offset higher costs for ingredients and to shift more of its spending on advertising to North America—by $500 million to $600 million in 2012.

It expects the restructuring will save the company $1.5 billion by 2014. That's on top of $1.5 billion in cost cutting it previously announced.

Pepsi announced the layoffs as it reported better-than-expected fourth-quarter profit, but forecast a decline in adjusted 2012 earnings.

Like most snack and soda makers, Pepsi is facing higher costs for materials it uses to make, package and transport its products, including aluminum. Many companies raised prices last year to offset the higher costs. But consumers are still cautious about spending in the uncertain economy, so some companies are moving on to Plan B: cost cutting.

PepsiCo expects 2012 will be the second year in a row that it will encounter higher-than-average costs for commodities.

CEO Indra Nooyi said although it's cutting about 3% of its 300,000 worldwide work force, the reduction is spread over 30 countries. The company typically adds 10,000 to 15,000 jobs in any one year.

One analyst questioned whether Pepsi should spend more of its advertising dollars in other countries, including emerging markets like India. While Pepsi's snack business is stronger than Coke's, he reasons, PepsiCo has been losing ground to Coke on the soda side as its ramped up its overseas business.

Unilever cuts agency spending to get leaner faster

Unilever, the world’s third largest consumer products company with 180,000 employees worldwide, recently added to the writing on the wall for advertising agencies when it announced that it had cut spending on advertising agencies and production companies. Whilst Unilever boosted marketing spending a modest 2% last year to $8.2 billion,  the agencies and production companies didn't fare nearly as well from the giant cuts.

The company significantly reduced its production costs and agency fees. Surprisingly, they said this is “money that's not directly driving the exposure of our brands to the community and consumers." To make its ad spending stretch farther, they pointed to digital spending rising 15%, much faster than the overall rate.

Unilever achieved some of its savings in "non-productive" costs following a production roster review and consolidation. Currently, Unilever works with hundreds and hundreds of production companies, and thus launched a review in March of 2011, hoping to bring them down to a manageable number and to get efficiencies.

In February of this year, Unilever warned that 2012 would be a difficult year as growth in emerging markets slows and demand in Europe and North America stays flat at best.

The gloomy outlook sent the company’s shares price lower as it was revealed that emerging markets had slowed around 1 per cent over the past year after the group matched 2011 sales growth forecasts. Emerging markets are showing a little bit slower growth than two years ago.

Unilever controls subsidiaries in at least 90 countries. In England, Unilever workers at UK factories were on strike in mid-January, and the company refused to talk to unions about alternatives to its unacceptable and unilateral decision to close the final salary pension scheme. Unilever was founded on positive social principles but has aggressively followed a strategy of job cuts and outsourcing of over 100,000 of its global workforce over the last ten years, removing any semblance of social responsibility over work terms in the production of food and household goods.

Global companies pull the trigger

Global companies from NEC Corp. (6701) to PepsiCo Inc. (PEP) and AstraZeneca Plc (AZN) are chopping jobs more than three times faster than they did in 2011. They are bracing for deeper recession in Europe and a slowdown in China. The announced workforce reductions surged to 94,369 in February 2012, up from 26,561 a year earlier. Employers based in Western Europe accounted for the biggest group of job-cut disclosures, threatening to add to unemployment in the euro area already running at a 13-year high.

Such firings are now running at the quickest pace to start a year since a 2009 peak, when the European and U.S. economies shrank amid the deepest slump since World War II.

Adding to the squeeze on global companies is decelerating growth in China, whose projected 8.5 percent expansion would be the least since 2001 after the government moved to squash inflation and prick a real estate bubble.

CEOs have learned to pull the trigger quickly on cuts to keep profit margins in line with expectations when economic growth cools,

Less than optimistic

According to Publicis CEO Maurice Levy of Publicis Groupe SA (PUB), the third- largest ad agency group, its European clients have scaled back marketing plans because of the recession. While they still see growth this year coming from the London Olympics and the European soccer championships, companies are being more cautious.

In the latest Bellwether report from the London-based Institute of Practitioners in Advertising, U.K. marketing executives say that companies are the most pessimistic they’ve been since the last recession and plan slower growth in ad spending.

British companies ranked their business prospects for the first quarter of this year as the worst in 11 quarters and said their planned increases for ad spending in 2012 are weaker than in any recorded year before 2009, according to a survey of 300 organizations. Digital marketing has become the fastest-growing part of the U.K. advertising industry as companies look for ways to save money, according to the institute’s report.

Chris Williamson, chief economist at financial data company Markit and an author of the Bellwether report said, “There are signs that companies have become increasingly reluctant to invest in traditional media campaigns, instead diverting money towards the Internet and direct marketing. This reluctance reflects lower-than-expected sales and profits in recent months, as well as growing unease about the economic outlook.”

To combat slower growth this year some ad agencies are planning to purchase more digital agencies in emerging markets where growth remains strong.

Should ad agencies brace for slowdown?

Data shows that ad growth eased in 2011 as sectors such as automotive, telecommunications, department stores and food companies pulled back their spending. This was due to lingering concerns about the general economy and health of consumer spending.

“The whole world is nervous—and nervousness usually leads to contraction, both for consumers and advertisers," said Bob Jeffrey, chief executive of JWT.

Though many economists wish to believe the economy will not fall back into recession, the risks of a double-dip economic contraction have risen.

Analysts say advertising cuts will most likely hurt traditional ad vehicles such as print and direct mail but online ads and TV advertising are expected to be more resilient. Stocks of advertising firms have taken a beating.

Fears about a deeper recession in 2012 are increasing. Despite the economic trends, many ad executives say they are surprised they haven't already seen widespread ad slashing by corporations.

However, ad executives aren't taking any chances. Many are keeping a very close watch on expenses so they are prepared for further cut backs by marketers.

"With the numbers I have in hand I should be at least feeling relaxed but I am not," said Mr. Levy at Publicis. While Mr. Levy hasn't reinstated a hiring freeze as he did during the last recession he has told his ad and marketing firms to be more "cautious" in hiring.

It is about making "sure we aren't getting too far ahead of revenue," said Laura Lang, chief executive of Digitas, a digital-ad firm owned by Publicis. Her agency is keeping closer tabs on expenses such as travel and training dollars.

During the last recession (2007-2009) when U.S. ad spending fell 16%, many global ad agency groups were caught by surprise and had to move quickly to reduce headcount to offset sharp drop-offs in revenue. While wide-scale layoffs aren't currently in the works, a hiring slowdown seems to be percolating, according to several recruiters. For the ad business, employees, the biggest expense, can represent more than 65% of an agency's expenses.

Cutting staff is a tough choice to make in today's environment,  but ad agencies are under extreme pressure to hire new talent as they try to keep up with the ever changing dynamics of a changing landscape.

Ad agencies have no choice really. They must continue to invest in talent.

It’s not wise to cut in a recession

Ad agencies have always argued that in times of recession it’s not wise s to cut spending.

A series of independent reports (compiled by the Financial Times) has demonstrated beyond any reasonable doubt that companies who maintain marketing spend – or even increase it – during recessionary times, perform dramatically better in the mid-to long-term than those who reduce it.

In a way, the logic behind these findings is simply common sense. When everyone around you is cutting their marketing spend and you are maintaining yours…your share of voice becomes relatively high and your brand share has a good chance of being greater when the good times return.

Spending during an economic recession is a brave thing to do. But it has its positive side.A recent McKinsey study identify a group of companies which ‘made strategic decisions that defied conventional logic’. During the recession, these companies maintained investment levels not just in marketing but in all key areas – deal making, R & D, advertising – arguing that tough times required greater effort and offered greater opportunity. Following that logic, many of them, perversely, had spent less in the above areas (relative to the competition) in the more benign market before the slowdown. The McKinsey study demonstrated that a contrarian approach to operating expenses improved the overall commercial performance of companies by no less than 17.4% relative to all industry averages between 1989 and 1992.

Less surprisingly, those market leaders who had maintained spend over the same period were shown to have extended their lead over their immediate challengers: whereas those who had cut back had lost share to their competitive challengers.

Given these facts, one could argue that it is self-evidently more cost-effective to attempt to build share during a downturn, than in economic high times.

Mike Fromowitz

OCTANE

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