EUROPEAN LEAGUE TABLES 2003: Taking Stock

Rob Gray reports on a tough year of squeezed budgets and falling headcounts

There is no disguising the fact it has been a tough year for Europe's PR industry. This is clear even without being able to make direct comparisons between many of the leading agencies, due to the Sarbanes-Oxley legislation stopping large PR agency groups of listed US parents releasing revenue figures this year.

While 2002 was tough, there are indications the first half of 2003 has continued in much the same vein. Stock market volatility has persisted across the continent, reducing the number of IPOs to a trickle. The war against terror, launched in response to the September 11 attacks, led to major conflicts in Afghanistan and Iraq, while further terrorist outrages in Bali, Kenya, Morocco and Saudi Arabia have undermined confidence at a corporate and individual level.

The downturn that followed the dotcom slump has lasted longer than many economic and business sages had predicted. Germany - Europe's biggest economy - has had to contend with rising unemployment and economic stagnation.

In the first quarter of this year, according to figures from the Organisation for Economic Co-operation and Development, German GDP actually fell by 0.2 per cent, following on from zero growth in the first quarter of 2003. And Germany is not alone. All the major European economies have experienced low or static growth. Clients remain skittish, with many cutting back on spending and retrenching operations in line with a wide-ranging fall in business confidence.

'We went into 2002 with a bad general economic picture and the psychological effect of 9/11,' says Burson-Marsteller European co-CEO Carlos Lareau.

'But as we moved into the year, the expected recovery in the second half of 2002 didn't occur.'

'The reality, and this probably applies to the whole of Europe, is that the marketplace is tough - mainly because it's very unpredictable,' notes Porter Novelli Europe CEO Neil Backwith. 'There's not a huge amount of confidence being shown by clients. It's a picture of change, rather than a picture of depression, and while it's not all grim, the focus is very short-term. Clients really want to see results now rather than next year.'

Many agencies, faced with flat or even falling income, have had to take drastic action. Redundancies have been made. According to Edelman president of international operations Alison Canning, the agency has cut headcount by between 15 and 20 per cent across Europe over the past year. Changes have been far-ranging, with six of its nine European country heads departing, including former president and CEO Europe Rosanna D'Antona, who has set up her own agency in Italy.

Surviving in the current market

Canning says Edelman is deliberately using the downturn as a time to make changes so that the agency will be in a stronger position when better times arrive. She expresses surprise at the extent to which some of the large owned groups are cutting their prices in an effort to secure business, describing some of the prices she has heard being offered to clients as 'bizarre'.

Lareau concurs, citing Italy, Spain, Germany and France as territories where he has seen 'very aggressive' price cuts, especially by smaller firms, sometimes in the order of a 25 to 30 per cent discount on previous rates. 'If you are going to go with a price like that, it will have implications for the quality of the work,' he says.

There is little doubt clients have become a great deal more cost-conscious.

Budgets have been squeezed as finance directors look to rein in spending.

Value for money has become something of a mantra among clients.

'The environment has proved an opportunity for PR networks,' claims Kinross & Render executive chairman Sara Render, who is also a board director of independent agency network ECCO. 'These have the international account management systems, experience and infrastructure you need to deliver good pan-European programmes, but without the overheads or premium pricing of more established single-brand PR operations.

'We are getting a look-in with brands that would probably have looked no further than the top three owned multinationals if the economic environment didn't call for a focus on better value for money. ECCO picked up more international project and retainer work in 2002 than ever before, although 2003 to date has been quieter, as I suspect more of the owned operations are quietly cutting their prices to stop clients jumping ship.'

Strategic Alliance MD Nigel Parker, whose hi-tech agency opened an office in Spain last year to add to its three in the UK, France and Germany, concedes his business has had to be 'more flexible on pricing'. This, he says, does not mean the agency will over-service but rather it's being more 'modular' in its service offer.

Two years ago, Strategic Alliance was achieving £2m in fees across Europe; last year it was down to around £1.5m. The last six months of 2002 were especially hard, says Parker, with many US clients simply disappearing as they either went belly-up, pulled out of Europe or pared budgets to the bone.

Swiss-based international agency group Trimedia Communications has had a similar experience. 'It's been a difficult year,' admits Trimedia partner Marion Starck. 'We saw quite a lot of budgets being cut by existing clients and quite a lot of clients decided to take their PR in-house. There's been a little bit of a loss of confidence in longer-term PR programmes.'

Trimedia was one of the few agencies to go on the acquisition trail in the past year. In July 2002 it acquired Harvard Public Relations SARL, Harvard's French subsidiary, and at the start of this year it purchased Com.factory in Basel, a leading Swiss life sciences and e-communication agency. However, tough market conditions have cut the number of agency acquisitions across Europe, with prospective purchasers feeling the pinch and likely vendors reluctant to sell at a time when it is hard to achieve top dollar.

Economic uncertainty has also led to a greater degree of caution among clients, coupled with a more methodical approach to procurement. Backwith points to a growing use of specialist procurement departments by large clients in a bid to clamp down on cost. Agencies, he says, are facing 'heavyweight procurement pressure' for the first time. Most are unsure how to deal with it but are learning fast, he concludes.

As is generally the case in leaner years, pitch lists have swelled. Again this is a symptom of the budgetary pressure clients are under. 'It's about spotting the buyers from the browsers,' says Incepta chief executive Richard Nicols. 'There are a lot of people looking, the challenge is to convince them to commit the spend and convince them what we do will add value.'

European chairman of independent agency network Worldcom Steve Osborne-Brown agrees: 'Across Europe, we are finding that when you are pitching there are far more people going for the work, and there is greater diversity on the pitch list. You find yourself up against some multinational and some local agencies.'

Sectoral developments

Arguably, healthcare is the practice area that has held up best across Europe as a whole. Healthcare spending continues to grow ahead of inflation in many European markets. For example, Lareau cites the fact that, while the Spanish economy only grew by about two per cent last year, its health service pharmaceutical bill grew by ten per cent. A slowdown in the number of drugs in the pharmaceutical companies' development pipeline provides some cause for future concern but, in the main, healthcare has shown itself to be more immune to economic ailments than other parts of the agency business mix.

'Practice areas that are holding up well across Europe are healthcare and pharmaceuticals and the public sector,' says Render. 'Food and drink accounts are holding up reasonably well in the dominant European economies.

Other sectors are stagnant, and tech has seen a mammoth decline, with little evidence of recovery.'

Others are a little more sanguine about tech PR, identifying seeds of recovery following the ravages of 2001. But, undoubtedly, there are fewer tech clients than was the case a year or two ago, with some companies going out of business and others merging. Research carried out by Eurocom PR Network among senior IT executives across 12 European markets in the first quarter of this year found 46 per cent of respondents expected a recovery in tech markets by the end of this year - but 47 per cent believe it will be 2004 before the recovery kicks in.

FMCG and consumer durables marketing PR, on the other hand, has proved itself to be fairly resilient across Europe. Despite the macro economic travails, high-profile business scandals and widespread pension concerns, consumer confidence has remained surprisingly buoyant.

Financial comms continues to be hard going. IPO work has largely dried up, with few companies eager to float while Europe's stock markets remain mercurial. Given the dearth of deals, many agencies have shifted their focus to concentrate on ongoing financial communications and investor relations work.

'I'm curious to know what will really happen Europe-wide with IR and financial comms,' muses GCI Europe chairman Adrian Wheeler. 'In places like Frankfurt, Paris and Milan there seems to be a tendency to look for local support.'

Public affairs is currently an exciting area, with many agencies planning to extend their offer. Enlargement of the European Union is the catalyst, and is likely to spark opportunities both within Brussels and among member states old and new.

Hill & Knowlton Western European CEO Elaine Cruikshanks says the 'whole feel of Brussels is changing before our eyes'. Cruikshanks plans to recruit new personnel to be better able to deal with the accession countries and their issues. Elsewhere, Fleishman-Hillard Europe president and chief operating officer Jack Modzelewski says he is disappointed the demand for PA assignments in Berlin has not snowballed as he had expected, but is convinced it will take off over the next five to ten years. 'I'm confident about the public affairs arena, the question for us is how and to what extent we expand it as the EU enlarges,' he says.

Several agencies, including Weber Shandwick and Trimedia, identify corporate social responsibility as a key area where they expect to see growth across a number of European territories. Internal communication is also seen as offering great potential, as corporations focus on keeping their staff motivated and informed.

There is a polarisation of views among clients as to the best way to handle cross-border programmes. Wheeler points to a growth of multi-country assignments for GCI, which now has 58 clients working with it in two or more countries, up 13 on the year before. This includes PC company Dell, which hired GCI to cover 12 countries last year, and upped to 20 this year.

But Canning discerns a trend among clients towards cherry picking agencies for each individual market rather than opting for the network approach.

'If you are a global agency you don't want people buying a la carte. But I think it shows a step forward in the sophistication of clients, a lot of whom are ex-agency people with a lot of savvy.'

Lessons learnt

It continues to be a hugely challenging market. International consultancies organisation ICCO secretary general Chris McDowall admits 'practically everyone' had a hard year. 'Those that bit the bullet early, downsized early, got their back office and new business systems sorted out, they are the survivors,' he adds.

Some, such as Pinnacle Worldwide Network vice president Ruud Bijl, see this pragmatically as the survival of the fittest: 'To my way of thinking it's a shake-out; it can be good when the market is tougher. And if you don't survive, don't blame the market, blame yourself.'

Those agencies that managed to increase their fee income significantly against this gloomy backdrop have done remarkably well and should certainly be permitted some self congratulation. Not too much, however, as a great deal of hard work still lies ahead.

EURO CONSULTANCIES NETWORKS

Rank Company Fee income (pounds) Growth Staff Clients Location

2002 2002 2001 % 2002 2002

1 PROI 38,000,000 29,000,000 31 588 3851 Vancouver

2 Worldcom

Europe 28,540,057 33,124,470 -14 528 - London

3 Pinnacle

Worldwide 28,437,302 17,937,5002 59 396 - Minneapolis

4 ECCO 19,788,675 22,687,352 -13 637 537 London

5 Eurocom PR 9,272,000 - - 177 - Bucks

6 Euro PR 8,258,066 5,206,0002 59 134 155 London

- As a result of the Sarbanes- Oxley Act in the US, PR companies owned

by Grey, Havas, Interpublic, Omnicom, Publicis and WPP have not been

able to enter the European League Tables. Therefore, a Euro

Consultancies Owned Groups table has not been published. The following

consultancies, which appeared in last year's owned groups ranking, were

affected: Burson-Marsteller, Fleishman-Hillard Europe, GCI/APCO Europe,

Hill & Knowlton, Porter Novelli International and Weber Shandwick. All

figures relate to the year ended December 2002. Fee income = PR fees

only 1 Client number as submitted for PRWeek 2002 European Consultancies

tables 2 2001 fee income as submitted for PRWeek 2002 European

Consultancies tables

EU enlargement and beyond

By 2004, the number of European Union member states will have swelled from 15 to 25, with Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic and Slovenia all joining the fold.

Bulgaria and Romania will further enlarge the European community in 2007, subject to their meeting economic criteria laid down by the EU during accession negotiations. In December 2004, Turkey may be given the green light to begin its own accession negotiations, if it meets political and human rights criteria.

Although there have been four previous enlargements since several European states first came together in the 1950s, this is the most significant yet, as it will increase the EU's landmass by 34 per cent and boost its population by 105 million.

Accession to the single market is sure to stimulate trade across the region and precipitate inward investment in the new member states. 'There will be a lot of work to be done in explaining what EU accession will mean,' says GCI Europe regional director Central and Eastern Europe Katerina Wheeler. The agency opened an office in Slovenia last year, taking its total of owned offices in CEE to seven, supported by a further six affiliates.

The so-called core markets of the Czech Republic, Poland and Hungary have matured over the past decade, and have a solid base of home-grown agencies. But the dramatic growth of the mid- to late-1990s has slowed considerably.

Some of the owned groups have found the going tough. Burson-Marsteller, for instance, pulled out of its operations in Poland and Hungary, leaving its parent, WPP-owned Young & Rubicam, to run them for a while before selling them to MMD Central and Eastern Europe earlier this year.

Privately-owned MMD is believed to be the largest PR agency across CEE, with 13 offices, including a Croatia office opened in early 2002. MMD acts as an affiliate to B-M, Brodeur Worldwide and Weber Shandwick in various parts of the region.

'In the last three years, we've had about 15 pre- and post-privatisation projects in the region, in terms of multinationals buying former state-owned assets,' says MMD CEO Alistair McLeish.

McLeish says many multinational clients are still doing well across the region, but some are seeing their marketing budgets cut by their global head office.

According to Wheeler, there is solid growth across the Balkans, where corporate and healthcare PR are doing well, and the Baltic states of Latvia, Lithuania and Estonia. The face of Europe has changed - and is still changing fast.

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