Recessions lead to inflection points, accelerating already existing secular trends. After the 2008 Great Recession, several media sectors that were already under secular pressures, went into steep decline. The radio industry began its current decline after the 2001 Dotbomb recession, but permanently lost 25% of ad revenues after the 2008 recession. Similarly, the 2008 recession accelerated a consumer shift to digital from print, thereby resulting in a two-thirds loss of advertising revenues in the newspaper and magazine industry.
Television could find itself in the hot seat this time around. Pressure has been growing as the audience declines and ad pricing steadily accelerates. This recession could be an inflection point for two reasons: Excess inventory may reset pricing sharply lower, and the emergence of streaming video services will ”steal” eyeballs. While consumers are watching more “television” than ever, they’re watching mostly ad-free streaming services such as Netflix, Amazon Prime, and Hulu.
Advertising is highly correlated with global GDP. When consumer demand for products and services had plummeted and the global economy had descended into recession, advertisers responded by cutting back on marketing spending. Forrester had predicted that advertising spending in the U.S. would decline by 25% this year and would not recover until 2023. This is a stark contrast to the 7.1% increase predicted pre-outbreak.
Agencies’ difficulties started even before Covid-19. Their fee-based business model hasn’t evolved in decades — and that is a significant factor in the industry’s struggle to manage costs. With clients suppressing fees, asking for longer payment windows and seeking more project work, rather than long-term Agency of Record relationships, agencies may need to reimagine their business model.
Since Covid-19, as companies have looked to cut back or pause expenses. Some agencies have been told that their payments will be delayed by as much as 90 or 120 days—thereby putting an already weak industry in a situation that could threaten many agencies’ existence.
It is estimated that advertising agencies will shed more than 52,000 jobs, 15% of their workforce, through 2021 as a result of the Covid-19 pandemic. It is almost as big, proportionately, as the loss of jobs in the travel industry or in hospitality.
This tightening will have far-reaching implications as to the way CMOs work with their agencies. Smaller, more rudimentary agencies staffed with younger, cheaper people will most likely hinder CMOs as they try to navigate the increasingly complex marketing challenges. Even before the Covid-19 crisis, brand marketers detected weaknesses and were increasingly looking to bring some marketing functions internally, and that trend will accelerate as they become more frustrated with external agencies.
With smaller, fewer agencies, technology will fill some gaps. We’ll see accelerated marketing automation, AI and data analytics play a more prominent role for both agencies and corporate marketing teams. Agencies will need to acquire tools for audience segmentation, channel selection and measurement.
That is not going to happen by itself. Advertising is an industry that is constantly boasting about wanting to transform itself, but it is, instead, constantly sticking to very traditional approaches. Digital marketing feels like a “bolt-on” for some creative agencies, and the up-front market, where media agencies negotiate buys a year ahead of time, is a woefully out of date model.
Many agencies will emerge from the pandemic even weaker than they were prior to it, when they were first hired. Others will go bankrupt, limiting choice of hiring the right agency. Expertise regarding strength of agencies will be at premium and will require hiring consultants to assess agencies.
CMOs meanwhile, need to take an active role on how their agency is structured, and how it recruits, train and retain, talent. CMOs need to take on compensation as part of their broader transformation initiative. Otherwise, they’ll face a significant risk for any company in a recovery to meet the pent-up demand that consumers are expected to unleash when Covid-19 starts to abate.
To help agencies restructure and have a relevant model, CMOs need to start thinking about how they compensate agencies: based not on labor hours, but incentivizing agencies for adopting tech, data analytics, for software creation, managing business strategy, and innovation. Companies should reward directly the people who’re responsible for the success of their business. CMOs should look at compensation as an initiative that drives growth. Otherwise, agencies will remain just commoditized vendors.
CMOs need also to look at their roster of agencies. Not through the lens of a rearview mirror, but, with an eye to what’s next, as informed by marketplace changes. Most agencies are not adapting well so far to this post-recession’s inflection point. They are typically complex, slow, and lack transparency. Once companies start moving briskly to address pent-up demand, agencies could become a hinderance. Do conduct an evaluation and review now, before we are in full recovery.
The pressure on CMOs is increasing, as the long-established trend of their tenure continues to shorten. In its 2020 analysis of CMO tenure for the top 100 most advertised brands, the executive search firm, Spencer Stuart, found that, the average CMO tenure in 2019 fell from 43 months to 41 months, while 60% have been in their role for less than three years. The pressure to perform makes the need to align with agencies even more critical than ever before.
I believe that, pre-pandemic secular trends will continue to impact the industry, well into the economic recovery. In particular, I expect increasing audience fragmentation and the shift toward digital advertising to accelerate. This will create opportunities for small, independent, digitally focused advertising agencies, and for consulting and technology companies, to increase their share at the expense of scale-intensive traditional competitors. I expect this increased competition will continue to pressure fees in certain parts of the advertising agency market.