The US economy started to decelerate sometime late last year, and
the marketing services sector - ad agencies, PR operators, sales
promoters and a raft of other practitioners - began its own dive as a
The two largest European economies - the UK and Germany - are cooling
off, and others are forecast to follow. Is it reasonable to expect the
US ad market's softness will be aped in counterpart markets around the
world? Might the US ad market's weakness be causing a global industry
The US is the world's most ad-saturated economy, whether measured as a
share of the gross domestic product (at around 2 per cent) or in terms
of money spent per capita (more than dollars 200 - although some might
prefer their dose in cash).
The industry here is well established and relatively mature and in most
respects it can serve as a model of where the business side of
advertising is heading pretty much everywhere else.
Like it or not, America dominates this planet's ad industry, whether
defined narrowly to include only those who craft commercials, or more
broadly to embrace all who help get messages across and move merchandise
and services through competitive markets. Based on data assembled
variously by Zenith, WPP and McCann-Erickson, the US accounts for
between 40 and 50 per cent of total spending - depending upon whom you
ask and what you're measuring. Anyway, it's a lot. Beyond that, about
two-thirds of global spending is "controlled" by US-based entities. WPP
pointed out in its annual report for 1999 that 15 of its 20 largest
clients have headquarters in America.
So conditions in the US frame the world view of top corporate
decision-makers, the folks whose fingers are on the spend buttons of the
world's largest marketing budgets. And when client-side executives sense
a loss of enthusiasm among consumers to consume, they typically turn
cautious. There's a certain logic that says the thing to do in the face
of customer reticence is step up the marketing pressure.
But when economies slow, folks cut back on their spending to conserve
cash. Advertising at them is not going to assuage their concerns over
income insecurity or job loss. And it's not as if consumers don't know
about all the products waiting for them to buy; they're just reluctant
to spend the money. Advertising can be a wonderful solution, but not to
the problem of consumer ecophobia.
On top of that, when corporations get pinched by slowing sales, managers
feel compelled to do what they can to preserve profitability. Cutting
marketing outlays is one of the few things that can produce a near
immediate benefit - even if a cutback leads to a further decline in
sales, that's a crisis many managers will defer to another day. And who
knows: by then the economy will be in rebound, they can rationalise, and
the problem of weak sales and constricted profits will have solved
itself. In the meantime, let's save the money by trimming the ad budget.
Layoffs, another economy move, often come with the penalty of severance
payments, which socks profitability even more before providing any
relief. They also mean losing key people who will surely be needed back
in a while, but who may no longer be available, maybe because they're
now working for the competition. Occupancy costs such as rent are very
difficult to modulate over the short term. The ad spigot, however, can
be turned on and off pretty easily.
There's also a phenomenon found in advertising (and, curiously, in the
stock market, and probably nowhere else) that contributes to the
deterioration once the business starts to weaken. The major advertisers
and their agencies rarely buy advertising one unit at a time, nor do
they pay the rate-card rate for anything. Typically, an agency or an
advertiser will lay out an ideal ad schedule and wait for the medium to
come back and propose a price. If the bid is lower than expected, rather
than jump on it and seize the bargain, the advertiser typically
hesitates, fearing something must be wrong. For its part, the medium
lowers the price further, hoping to entice the next customer who,
perversely, shows even more reluctance. It's like investors in the stock
market who can't sell a falling stock fast enough, thereby sending
prices even lower. These may be the only two markets - ads and stocks -
where, when the merchandise goes on sale, customers run out of the
To the extent that the world's developed economies are linked - which is
considerable - and the economic weakness now measurable in the United
States is spreading to economies elsewhere, and to the further extent
that managers around the world have learned to think like Americans, the
slowdown in the US is having a profound ripple effect across all the
world's ponds and it may get worse before it gets better.
The drop in the US is looking fairly steep. Results this term are being
compared with those of a year ago when the ad business was still soaking
up the money being sprayed around by the internet and dotcom crowd.
Spending from that source, though never more than 5 per cent of the
total, disappeared at a stroke. In countries that never felt that surge,
the fall off may be less of a swoon, but the economic cycle is clearly
having a depressing effect on the industry.
But it will recover. While advertising may be treated as a discretionary
expense over a short period, it is truly a structural expense for
companies operating in all developed economies. The factors that limit
established businesses' growth - the slow pace of population expansion,
the relative infrequency of breakthrough new products, the ease with
which any truly new offering can be knocked off by competitors -
dictates that marketers continue to fight for market share and share of
mind. Once consumers loosen up again, marketers will chase them with
renewed vigour. And those who cut back on their marketing support will
find a need to catch up with their more steadfast competitors.
And the happy times will soon again prevail across adland.