WORLDWIDE ADVERTISING: Chain reaction - The downturn in the US economy is being felt across the globe, as other countries begin to show signs of reining in. Alan Gottesman explains why the US has such an influence

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

consequence.



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

malaise?



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

store.



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.



Topics