Pressure On Ad Agencies Expected In 2002, Say ABN Amro Analysts

The broker is expecting ad spend to decline by 1.9% next year, with marketing services growth coming in at around 1%. New business began to slow during H2 2001 and this trend looks set to continue. This will make it difficult for agencies to grow market share, a good way of weathering a broader market downturn.

Pressures on agencies There are a number of pressures on ad agencies, says the broker, in addition to the general slowing of adspend – itself possibly set to worsen in 2002. There are also fee pressures, including the burden of fixed-fees in a market of declining business wins. In 2001, agencies benefited from fixed-fee contracts as they prevented revenues from declining as quickly as billings. However, as we move into 2002 ABN predicts that there will be an element of ‘catch-up’, whereby advertisers may put the squeeze on their agencies.

Reductions in headcount, made recently to balance the effects of the poor trading conditions, may retard the benefits of an advertising pick-up in 2003, say the analysts. Agencies which have made the least personnel cutbacks are likely to be ‘fastest out of the blocks’ when the recovery does come. ABN names WPP and Omnicom as in ‘good shape’ in this respect, whilst Interpublic Group (IPG), Cordiant and Havas may have made ‘potentially damaging’ levels of staff cutbacks.

Market valuations are too high From a market perspective, ABN believes that the current valuations (share prices) in the ad agency subsector are too high and do not account for the risks outlined above. The wider media sector has recently rallied and as a result the advertising sector now stands at a 30% premium to the market, based of expected earnings for 2002.

Advertising forecasts Advertising growth forecasts by ABN Amro are shown below. The broker is expecting a -5.3% growth in 2001 and -1.9% in 2002. The risk of further downgrades to these figures is greater than the possibility of upgrades.

ABN Amro advertising growth forecasts
	2000A	2001F	2002F
North America	11.3	-8.2	-2.7
Europe	9.5	-4.6	-0.9
Japan	6.9	-1.0	-3.6
Asia Pacific (exc. Japan)	11.1	-2.9	-0.6
Latin America	11.9	0.0	0.7
TOTAL	10.3	-5.3	-1.9
Source: ABN Amro, 12/01

ABN indicates three possible factors in forcing the figures down. Firstly, a vicious circle can operate during an ad slowdown, whereby advertisers expect prices to fall and so bank on achieving the same share for a reduced budget. Secondly, the European economy may prove to be more sensitive to the recession of the US than currently appears to be the case. Lastly, the broker’s expectations of the beneficial factors of the Winter Olympics in the US and the World Cup in Asia may be too high.

Comment ABN’s forecasts sit pretty much in a mid-ground, with many commentators, particularly those from within a US environment, expecting a poorer performance than predicted here. Zenith Media, on the other hand, is more optimistic with its latest set of global ad growth figures (see Forecasts).