Agencies feel pinch as clients stare down fiscal cliff

As the newly re-elected president and lawmakers confront the so-called fiscal cliff, some corporations have cut back their marketing and PR budgets, citing that and other political and economic factors.

Agencies feel pinch as clients stare down fiscal cliff
As the newly re-elected president and lawmakers confront the so-called fiscal cliff in Washington, some corporations have cut back their marketing and PR budgets, citing that and other political and economic factors.

Still, agency and holding company executives tell PRWeek they are optimistic the US economy will regain its footing and clients will hold steady with budget increases planned for next year.

In its third-quarter earnings statement, Paris-based Publicis Group CEO Maurice Levy said his holding company “saw a downturn as sharp as it was unexpected” in September, although it reported 2% overall revenue growth in the third quarter.

Olivier Fleurot, CEO of Publicis-owned PR network MSLGroup, tells PRWeek that he cannot pinpoint a single reason for the sudden swing, “but one assumption is that most companies were very cautious in September and October because of the uncertainty of the US presidential campaign.

“A lot also realized that their operations in Europe were seriously affected by the recession there,” he adds. “They decided to cut their marketing and communication spend, not only PR. It seems to be a slow recovery, which tends to make CEOs very nervous - and yes, the US needs an agreement on debt reduction.”

Still, Fleurot points out that, historically, the end of a recession brings robust economic growth. “To me, the fundamentals of the US economy are still strong, without being brilliant,” he says, adding that MSLGroup anticipates 5% growth in the US next year, with about “half of that coming from an increase in market share.”

If the president and Congress do not agree on a new budget deal by the end of this year, a combination of tax hikes and automatic spending cuts will automatically go into effect on New Year's Day. Economists have warned that the country could fall back into a recession if Washington doesn't act.

In its third quarter, WPP Group, which owns and operates Ogilvy Public Relations, Hill+Knowlton Strategies, and Burson-Marsteller, among others, reported a 1.7% like-for-like decline in PR and public affairs revenue, attributing it largely to softness in North America.

When contacted for comment by PRWeek, WPP CEO Martin Sorrell said everything he had to say is “all there in gory detail” in interviews he did with CNN, CNBC, and Fox News, among other networks.

Sorrell told CNN that there was a “quantum change” in clients' attitude toward discretionary spending in the third quarter. He blamed the looming fiscal cliff, as well as the re-election of President Barack Obama, who he said must do more to engage “frustrated” big business

“As a foreign observer, I can't recall any male or female CEO saying they wanted Obama to win,” he said.

Omnicom Group, whose PR agencies include Fleishman-Hillard, Ketchum, and Porter Novelli, also reported disappointing third-quarter revenue from its PR holdings. PR revenue was down 0.3% organically in the period. 

When questioned about the revenue decline in an earnings call with analysts, Randall Weisenburger, EVP and CFO of Omnicom, said: “I certainly haven't heard anything, serious negatives or slowdowns or things from our firms. I think it's a pretty modest decline, 0.3%.”

Omnicom President and CEO John Wren added that the company expects to see a boost in PR revenue soon. “I don't know when this starts to show up in the numbers, [but] increasingly clients, especially in a social media environment, are talking about doing more PR as part of overall campaign planning,” Wren stated on the call.

Andy Polansky, the newly minted CEO of Weber Shandwick, says clients are keeping an eye on what is happening in DC, “but we have not seen major cutbacks overall, nor have we seen an immediate impact on our business.” He says third-quarter revenue growth at the agency was in the high single digits “and we anticipate having a strong Q4 as well.”

Interpublic's PR firms, which in addition to Weber also include GolinHarris, DeVries, and Current Lifestyle Marketing, among others, reported organic revenue growth of 5.9% in the third quarter compared with Q3 2011. Overall, Interpublic's US business, including advertising and marketing, saw organic revenue of $940.5 million in the third quarter, down 5.4% year-on-year.

Miles Nadal, CEO and chairman of MDC Partners, says he has not seen clients' mindsets negatively affected by the economic uncertainty. “I think there's an understanding that the fiscal cliff will be dealt with,” he explains.

Nadal, whose holding company's strategic marketing services unit saw 12.5% organic growth in Q3, suggests clients are looking for alternatives to big agencies, noting that smaller, entrepreneurial firms are more nimble and cost less. 

“In this environment, that is a real asset,” he suggests.

MDC – which owns majority stakes in firms such as Allison+Partners, Kwittken & Co., and Sloane & Company – has less than 2% of the US PR market, says Nadal. He adds the company's PR business is growing at a faster clip than the rest of the organization, with annual growth in the high single to low double digits.

On the corporate side, Chris Hosford, executive director of corporate communications for Hyundai Motor America, tells PRWeek the automaker is optimistic “that there will be some sort of compromise on some of the fiscal issues, if not all of them.” 

“There is a willingness from both parties to put forth actions that will avoid a dramatic impact to the economy,” he says.

Hyundai has forecasted a 4% increase in North American auto sales. As a result, the carmaker has committed to a modest increase in PR spend for 2013 on the heels of a more substantial bump this year compared to 2011. Ketchum is the PR AOR for Hyundai North America.

“Even in the worst circumstance, where there is absolutely no action and every single spending bill gets cut and every single revenue bill is not passed, overall we continue to think that PR will be critical,” says Hosford. “If the economy completely fell off the cliff would it impact sales? Probably. Would we shift some of our resources within our marketing budget we've planned for 2013? Yes, no question...but for now we will continue to keep our budgets firm for 2013.”

Representatives from Edelman, Omnicom, FTI Consulting, and Hill+Knowlton Strategies were contracted but could not be reached for live interviews.

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