Most economic indicators are telling the same story: the US economy is back.
Yet while that trend is reflected by the soaring dollar relative to other currencies, its ascent isn’t without drawbacks for US-based businesses, including agency holding companies and PR firms with significant footprints overseas.
Agency executives predict the plunging value of international currencies against the greenback will put a dent on their consolidated revenues for 2015. The currency fallout means foreign earnings are at risk of shrinking, and sometimes dramatically so, when converted back into the dollar.
While the strength of the US dollar has surged, the currencies of Mexico, Brazil, Canada, Australia, and Japan, among others, have all slid to their lowest levels in many years. Earlier this month, the euro also plunged to its lowest value against the dollar in 12 years.
And in addition to shrinking global revenues caused by unfavorable foreign exchange rates, executives say a strong dollar can also make global players less competitive in some markets because local firms do not have to factor in losses on foreign exchange into their pricing.
In mid-February, Omnicom Group, whose PR holdings include Fleishman, Ketchum, and Porter Novelli, warned that a strong dollar could negatively affect revenues by as much as 5% this year. Interpublic Group, which owns and operates Weber Shandwick, Golin, DeVries Global, and Rogers & Cowan, followed with a similar warning to investors.
Victor Malanga, CFO of Edelman and Zeno Group parent DJE Holdings, says "our consolidated revenue and earnings will certainly be impacted by the strengthening of the US dollar."
"For the most part, you can have operational hedging in place but chances are you’re likely to still be exposed on global programs. Financial hedging is cost-prohibitive and you’re likely to guess wrong in any case," he explains. "Instead, we’ve just paid much closer attention to settling inter-company transactions on a timely basis and ensuring our global contracts have some mechanism to adjust rates when currencies fluctuate outside an acceptable range."
It isn’t just US-based companies that are feeling the pinch.
WPP, the London-based holding company of Burson-Marsteller, Ogilvy Public Relations, Cohn & Wolfe, and Hill+Knowlton Strategies, last year "had a currency-translation headwind of 6% to 7% due to strength of the pound against most currencies," CEO Martin Sorrell says.
However, this year, the strength of the dollar "benefits us on translation [into pound sterling]," he adds. "Asymmetrically, weakness of the euro doesn't help translation. So far this year they balance themselves out."
Sorrell also points out that costs have fallen in those markets hit by currency drops.
"We do not have currency exposure as revenues are balanced by [lower] costs in each jurisdiction. It’s just a translation effect," he says.
Richard Tullo, research director at financial services firm Albert Fried & Co., which follows the marcomms sector, says some firms can also tap into their vast international networks to offset some of the impact.
"Spain is an economy based on the euro but Venezuela is not. So if you have a project in Spain, you can outsource some of it to Venezuela and capture some of the revenue and margin back that would have been lost in translation," he explains. "Many firms do that pretty aggressively."
He adds that what is more worrying for global comms companies is not the devalued currency in some markets, but what it signals in others, particularly in developing nations, which many companies had eyed for growth.
"Revenue headwind is one thing, but it is the underlying weak economy that is really the problem in those markets. A drop in demand for money, goods, and services is creating the weak currency," says Tullo.
He cites Canada as one example, which earlier this month saw the loonie plummet to its lowest level in six years against its US counterpart. Minneapolis-based retailer Target is in the midst of closing all its stores in the country, and last month, Canada’s unemployment rate hit a five-month high.
That spells bad news for a company such as Toronto-based MDC Partners, which reports in US dollars, but generates roughly 25% of its revenue from Canada, according to Tullo.
Not only will MDC, which has majority stakes in Allison+Partners, Kwittken, and Sloane & Company, potentially lose money when Canadian billings are converted into US dollars, but presumably there is less opportunity in the country due to its economy.
MDC executives were unavailable for comment when contacted by PRWeek.
"It is going to be tough on some of these companies," says Tullo. "Some will see as much as a 30% decline in revenue on some of their international business. And while they should see improvement on margins, if they can’t reduce expenses fast enough, then they are going to find their earnings compressed."
Brian Burlingame, COO of Miami-based JeffreyGroup, which works exclusively in Latin America, says "currency fluctuations are impacting our largest offices in Brazil and Mexico."
The Brazilian currency has depreciated 17% this year following a political stalemate and a corruption scandal involving oil giant Petrobras. The Mexican peso has also fallen to historic lows against the dollar.
"For US-based clients, marketing dollars can go further, and a strategic investment might help gain market share," Burlingame says. "But for a client paying in local currency, the bigger challenge is often the inflation rate since additional fees are needed to cover the increased costs."
Or, he adds, "We end up having to cut back on the program to meet the client’s budgets."
Burlingame explains that his firm encourages clients to find the advantages of centralized programs for Latin America paid for in dollars when the currency is strong to get more out of budgets.
Some PR firms, however, are enjoying an uptick as a result of the strong dollar.
Text100, which is owned by London-based Next Fifteen, reports its global consolidated results in sterling.
"The consolidated global earnings in sterling have seen uplift primarily due to the strengthening of the dollar and the size of our business in North America," says Text100 CEO Aedhmar Hynes.
Slightly more than 40% of Text100’s revenue came from the US last year.
"We have ensured in markets that most contracts are in local currency so revenue and costs are in the same currency, avoiding exchange implications, and for those contracts that do have more than one currency involved, we contractually include foreign investments," she explains.
Hynes adds that the firm sets a range of acceptable foreign currency fluctuations and requires adjustments if the rates go outside that range.
"What can be further done is to provide contracts, or hedging, against significant fluctuations, though there is a cost to this and it is no guarantee but intended to limit foreign currency impacts," she explains.
Yet despite the wild currency changes, Hynes notes that multinational budgets have remained in-tact.
"Our clients have not yet significantly adjusted their budgets globally amongst markets due to the anticipated economic consequences of the foreign currency strong fluctuations," she says.