With US marketers slashing ad budgets, output and employees in the depths of the worst recession since the Great Depression, New York's storeyed advertising agencies are struggling with unprecedented economic circumstances.
This has resulted in thousands of lay-offs as well as a fast-forwarding of restructuring plans to achieve a leaner, more flexible model. According to the US Bureau of Labor Statistics, 32,858 jobs have been lost recently from the ad industry.
And while no-one in advertising talks numbers when it comes to budget cuts, the headlines say it all - ranging from the government slashing Chrysler's ad budget, to American Express announcing in May that it was cutting $500 million from its global marketing budget.
According to John Seifert, the chief executive of Ogilvy North America, which has reported cutting 10 per cent of its staff: "When we've cut staff, we do the remixing and reduction in the same breath. We've cut more deeply in areas less relevant for the future. We were already restaffing, hiring more digital talent and investing in analytics and consulting to prove to clients the value of their spending."
Dealing with recession
Ogilvy, which handles the likes of American Express, IBM, Kraft and Unilever, has also been diversifying into social media, and ramping up talent in retail activation and shopper marketing programmes.
Seifert adds: "Most of our clients are Fortune 500 companies, and they're just managing in terms of cash management. This recession is unprecedented in its severity. The impact of digital, the internet and new marketing and media trends further complicate things. Clients are unsure what to spend on. There is tremendous uncertainty about what is effective and efficient."
Lori Senecal, the president of McCann Erickson's New York office, which has MasterCard and the telecoms giant Verizon Communications, notes that budget cuts are not across the board: "Some clients never cut back that much in the first place. With technology and telecommunications, people need connectivity even in hard times. It's a competitive market, and difficult to take your foot off the accelerator. People will give up premium coffee, but not their connectivity because it's such a big part of their professional and social lives."
The New York office, which has reported 30 lay-offs, has fared better than some other cities. "We don't do automotive or banking, and just the fact that we weren't exposed in those categories has helped us retain business and revenue," Senecal says.
As for restructuring, McCann has added two new positions to deal with brand growth and innovation. "We need to be as aggressive and proactive with existing clients as with new clients," she says. "So we're using those skillsets on our existing clients. Retention and organic growth are so important. We have to be more involved day-to-day, just to know what's in their heads in this difficult time."
Also, clients are looking for more efficiencies. She continues: "Technology and media are informing strategy, so it's critical to work in bunches instead of lines. Clients are talking about new compensation models. 'How can we get value-based, versus labour-based compensation?' Our ambition is to come out of this stronger, with better people, less travel, more technology and sharing best practices."
TBWA\Chiat\Day, which has cut 40 people from North America, says it already had retooled, even before the recession. "Our plan was to restructure the agency into a one-agency model," Mark Figliulo, the chairman and chief creative officer of the New York office, says.
"We don't have a digital department or company, but digital is something we do, as well as media, As Lee Clow (chairman and chief creative officer of TBWA\Worldwide) says, we're a media arts company, so we hired people with that in mind. One positive out of many negatives is that it's forced big agencies to change, but it's harder for them to change as quickly."
The necessity of new business
New business is difficult to come by, not just because of the recession, but because of conflicts and the complexity of many pitches. "Holding companies are increasingly getting involved because clients require ancillary services often beyond any one agency group," Seifert says. "You've got big pharmaceutical companies going directly to Omnicom, WPP or Interpublic and saying: 'We want you to figure out how to bring the dream team of operators together.' But it's also a day-to-day choice of which opportunities you go after. New business has become a necessity because when clients cut spending so dramatically, to grow you have to be more aggressive."
TBWA focuses on its areas of expertise. "We had telecoms expertise with Sprint, and when we went our separate ways, we turned that into a win with Vonage," Figliulo says. "We've got a good track record this year, so we're doing pretty well. The momentum behind TBWA is strong and we're getting on to a lot of pitches."
A Time for optimism
Just as in the US economy at large, there are also green shoots of recovery on Madison Avenue. "We had clients laying low in the first quarter of 09," Senecal says. "Now, we're seeing more coming back into the market. There are indications that the worst is over."
According to Seifert: "Two things give us optimism. President Obama is reaching out to business leaders saying they're part of this solution. Our biggest clients are thinking differently about how they market their corporate brands. Some clients are defining their business strategy in collaboration with the government agenda.
"Obama is calling CEOs with 48 hours' notice and saying: 'We're going to talk about the new green energy future in two days and I want you to stand beside me and talk about how your business strategy is in line with that.'"
Not that he's called on any agency people yet. "Because the Obama marketing machine is considered best in class within our industry, and because he's so adept at using new media, big business recognises that they can be part of the agenda, or they can stand back at their own risk," Seifert says. "I think you'll see more corporate brands emerge with more investment and engaging marketing.
"Most of our clients are consolidating around their most successful, powerful brands. While spending less, they realise they can't sit and do nothing. They have to invest in brands that will carry them through the recession."
American Express, for example, is focusing on its main charge-card business. Kraft and Unilever are also focusing their efforts on their main brands.
TBWA has been optimistic from the beginning. "Confidence is returning," Figliulo claims. "People realise this is no time to be shy. We've had fewer lay-offs and we had early corrections before the economy turned, to restructure for the agency of future. Digital is going to be huge, so is design, media and strategic capabilities. Agencies have to change how they do business. The argument is not how much, but when and how quickly?"
Next week: Who's leading Madison Avenue's creative renaissance?
OPERATING PROFITABILITY
Operating profitability Normal target % 2009 estimate %
Loss 0.0 12.4
Break even 1.0 14.3
Between 1% and 5% of gross income 4.9 18.1
Between 6% and 10% of gross income 15.5 18.1
Between 11% and 15% of gross income 25.2 16.2
Between 16% and 20% of gross income 35.0 14.3
More than 20% of gross income 18.4 6.6
Source: 4As 2009 Economy Agency Implications Survey.
STAFF CHANGES
Staff changes over the next six months
% change % total
-21 or more 5.9
-16 to -20 3.9
-11 to -15 2.9
-6 to -10 13.7
-1 to -5 21.6
No change 33.3
+1 to +5 12.8
+6 to +10 2.9
+11 to +15 1.0
+16 to +20 2.0
Source: 4As 2009 Economy Agency
Implications Survey.
THE RECESSION BITES
- According to a survey of US agencies undertaken by the 4As in April, the recession is having an impact on client spending and is increasing procurement pressure on agency compensation.
- Seventy per cent of respondents projected that revenues would be down over the coming year. Nearly a quarter said the decline would be more than 20 per cent.
- Profits have also been hit. Twenty seven per cent of respondents expect to lose money or break even in 2009.
- Two-thirds of agencies have cut payroll and headcount over the past six months and half plan to do so in the next six months.
- More than 60 per cent of respondents have not increased base pay over the past six months. Three-quarters will not increase it over the next six months.