What's Wrong With the Advertising Industry?

Companies growing online dont believe they need the big advertising and marketing agencies. And the Fortune 500 companies which are the big agencies traditional clients are cutting back as they try to figure out the digital marketplace. JL

Sapna Maheshwari reports in the New York Times:

With major American companies like Procter & Gamble facing sluggish growth, traditional providers of mass marketing like agencies and television networks are feeling the effects. The disruptive companies threatening established players are growing online without the help of agencies and TV ads. "We’re seeing a substitution of the Dollar Shave Clubs of the world for the Gillettes of the world. It’s the digitally native brands that are taking share, both from a consumer level and also when it comes to spending on advertising.”

WPP, the world’s largest advertising group, cut its growth forecast for the year as clients led by consumer goods companies cut back on marketing budgets, raising broader concerns about the health of the industry.

With major American companies like Procter & Gamble facing sluggish growth, traditional providers of mass marketing like agencies and television networks are feeling the ripple effects. At the same time, the disruptive companies threatening those established players are typically growing online without the help of agencies and TV ads, at least in the beginning.

“To the extent that we’re seeing growth in the total advertising market, we’re seeing a substitution of the Dollar Shave Clubs of the world for the Gillettes of the world,” said Brian Wieser, a media analyst at Pivotal Research Group. “It’s the digitally native brands that are taking share, both from a consumer level and also when it comes to their spending on advertising.”

He added, “The advertisers that are growing are not the ones who benefit disproportionately either from TV or from agencies.”

WPP, which owns agencies including Y&R and Ogilvy & Mather, said annual net sales may be flat or grow up to 1 percent as it reported that the measure shrank in the first half of the year. The company’s stock tumbled 11 percent in London and its closing price was the lowest in more than a year.The company said that consumer packaged goods companies, which account for a third of its revenue, cut spending in response to pressure from digital competition and activist investors. But Martin Sorrell, WPP’s chief executive, said in an earnings call on Wednesday that the company believed its clients would have to spend more on media and agency fees once the marketing cuts began affecting their sales.

Others in the industry are not so sure.

“The way I think about advertising is it’s in secular decline and I need to think about products and services much more than I need to think about communication,” said Rishad Tobaccowala, chief growth officer for the Publicis Groupe.

He added that it was now so easy for start-ups to compete with entrenched brands online that “marketers are going to have to invest more money into transforming their businesses and coming up with superior products and services.”

“They’re probably going to have to spend in fees somewhere,” he said, “whether it’s to agencies or system integrators or consulting companies to help them rethink things and come up with new ways of doing stuff. But I’m not convinced that the way out of this is to spend more money in traditional or other media.”

WPP’s clients include Unilever, which rebuffed a takeover attempt by Kraft Heinz this year and said recently that it would cut the number of creative agencies it works with by half and produce 30 percent fewer ads. (Unilever bought Dollar Shave Club last year.)

WPP’s report, which followed muted results from rivals including Publicis and the Interpublic Group of Companies, came after two quarters of declines in national TV advertising. Time Warner said this month that it expected ad sales at Turner to “decline in the low single digits” in the third quarter because of softening ratings.

That says something about the health of agencies’ biggest clients, said Michael Nathanson, an analyst at MoffettNathanson. “I’ve never seen national TV this weak in two consecutive quarters of declines in national TV advertising. Time Warner said this month that it expected ad sales at Turner to “decline in the low single digits” in the third quarter because of softening ratings.

That says something about the health of agencies’ biggest clients, said Michael Nathanson, an analyst at MoffettNathanson. “I’ve never seen national TV this weak in two consecutive quarters absent a recession,” he said.

He sees the issues facing major ad agencies as similar to those confronted by the companies selling TV commercials. Both tend to serve Fortune 500 companies that can afford their services. Much of the advertising growth of digital players like Facebook, though, is coming from a plethora of small- to medium-size businesses.

“For traditional people, they’re kind of stuck with a limited number of clients that are not expanding their marketing spend,” Mr. Nathanson said. “At the same time, the digital companies are really benefiting from companies that are maybe internet-only advertisers.”