It should come as no great surprise to find in the * on global agency performance that, when Omnicom’s revenues fell by 12.3% in 2009, post-tax profits fell by nearly 21%.
Or that a revenue decline of 13.4% at Interpublic was accompanied by a profit decline of 59%.
Even the smaller 3.8% revenue setback at Publicis provoked a fall in profit of almost 10%.
The reason is quite simple: when revenues decline, it takes time (and can cost extra money) to reduce staff levels and it’s almost impossible to prune back fixed overheads like rent. So operating margins get squeezed.
Yet many agencies still fail to make adequate contingency plans, such as keeping sufficient cash resources available to tide the business through the inevitable cyclical troughs.
The same survey showed that companies like Australia’s Photon Group (owners of Naked and various other UK agencies) and Media Square lost US$69 million and $37 million respectively. Both groups had to restructure their finances to survive.
Smaller privately owned agencies that rely entirely on retained profits and kindly bank managers would do well to take note.
Recessions are as certain as night follows day, and it’s better to build up a cash reserve that will fund several months’ costs in case the going gets tough than to hope that another recession will not happen.
Worse still, it is not unknown for a big client loss (or retrenchment) as well as economic recession to strike at the same time - as the once cash-rich Cossette discovered to its cost.
Global giants like Omnicom and WPP will argue that part of their financial success derives from how efficiently they manage their money and that they will make more profit by borrowing funds to facilitate acquisitions.
Undoubtedly they have proved their point. And in doing so they have sometimes squeezed suppliers as far as is commercially sensible to help keep the borrowings to a minimum.
It’s all a matter of degree. If companies borrow too much and their businesses fail to generate adequate profits, size alone will not protect them from trouble.
Revenue and profit movement compared 2009
Note: Revenue after deducting bought in direct costs
Take a look at WPP. Its revenue (net of bought in costs) grew by 13.3% in 2009 after acquiring Taylor Nelson Sofres, but profits did little more than stand still.
Recessionary pressures knocked operating profit margins down by 16% (or by 23% if asset impairment and amortisation charges are included). At the same time borrowing costs absorbed over 15% of those operating profits.
It’s a wonder the group even managed to keep its bottom line results unchanged.
* "The Global Greats: How the recession affected the financial performance of publicly listed marketing groups around the world"
Bob Willott is editor of Marketing Services Financial Intelligence