Advertising agencies are finding that organic growth will be a difficult objective to achieve in the near-term.
One contributing factor comes in the form of marketing spending constraints on the part of advertisers. Why? Organizations are feeling pressure to control costs in the wake of lack luster market conditions that are limiting growth and reducing margins.
The key economic indicator driving advertiser concern is “slow growth” which is impacting many sectors of the economy:
- GDP growth of 1.2% during the 1st quarter and 2.6% in the 2nd quarter (short of the sustained 3%+ growth rate promised by the White House).
- U.S. retail sales, excluding auto and gasoline, rose 0.5% in July ’17.
- Fast-Casual restaurant sales fell more than 3% in the first quarter of 2017.
- U.S. automotive sales have fallen for seven straight months (Jan. – Jul.).
- Homebuilder confidence sank, posting HMI’s lowest reading in over 6 mos.
Two CPG giants have announced dramatic moves, which reflect the nature of this challenge. Unilever signaled its intent to reduce the number of agencies on its roster by 50%, while cutting the quantity of ads produced by 30%. Procter & Gamble Co. indicated that it would trim $2 billion in marketing spend over five years as part of an enterprise wide expense reduction initiative.
It is worth noting that there are motivations beyond “cost reduction” driving these decisions by advertisers. Consider fast-food giant McDonald’s, which earlier this year trimmed the number of agencies that it works with from 60 to fewer than a dozen. Their goals included streamlining marketing and improving the consistency of their output… in addition to reducing expenses.
Unfortunately, the impact of slower spending by advertisers is being felt on Wall Street. According to an August, 24 article in the NY Times, WPP which had earlier cut its revenue forecast saw its share price decline by 10.9% in London, with Omnicom Group and Interpublic Group falling 7% and 6.3% respectively in the U.S. and media stocks are generally lower as a sector.
Interestingly, advertisers have made a conscious decision not to fuel marketing spend to counter slowing sales, but to cut spending to protect margins, which is particularly concerning to the ad agency community.
With increased competition from non-traditional players (i.e. management consulting and technology firms) and the continued fall-out from an industry transparency crisis, the lack of confidence on the part of marketers regarding advertising’s ability to drive profitable revenue growth is certainly a worry.
Whether or not this slowdown in organic growth on the part of ad agencies portends a slump, remains to be seen, but at the very least the macro-economic uncertainty will serve to increase industry volatility. Perhaps the industry can find some solace in the words of Yogi Berra the hall of fame catcher and manager of the New York Yankees: “Slump? I ain’t in no slump… I just ain’t hitting.”