Article - What Does 2020 Look Like For Agencies? – An Optimistic View

READ: 5 mins
AUTHOR: Robert Craven

Before I discuss how 2020 might pan out it's important to understand what your point of view is. Is the glass half full or half empty?

Depending on how your agency is currently coping will determine the actions you need to take to respond to the current and forthcoming business environment.

The question I pose to you is this, ‘What kind of agency are you?’ Are you thriving? Or surviving? Or struggling? Or dying? It is important to know which type of agency you are because this will determine how you make decisions in the future.

The breakdown of the agencies that I am seeing is fascinating. Roughly 50% are what I would call above the line of breakeven and 50% are beneath the line. 50% are surviving or thriving. 50% are struggling or dying.

To quote Ian Dury, I believe there are ‘reasons to be cheerful’. The pandemic has been like an asteroid strike. There will be casualties. To put it another way, the earth will survive but some dinosaurs will die. The dinosaurs that die will be those unable to make the changes. Unable to recognise how the environment has changed and unable to respond appropriately and quickly enough.

The newspapers are covered with doom and gloom about how the pandemic has affected business. Most agencies are seeing significant reductions in revenues. I believe that roughly 10% of agencies are saying that they are seeing increasing revenues and roughly 10% are seeing revenues crashing through the floor to the extent that the business may close. If I were to suggest an average, I would say that the majority of agencies saw revenues reduced by 20-50% in Q2 of 2020.

 

Reasons to be cheerful #1

The statistics are fascinating. Global ad spending is expected to be 10% lower in 2020 (according to GroupM). Despite a slump like no other, ad spending may fall by less this year than it did in the financial crisis in 2009 where it dropped by 11.2%.

 

Reasons to be cheerful #2

A quick review of Google's financial report for Q2 2020 reveals that Google Search and Ads revenue went down 10% year on year. If one were to assume that that 10% reduction was evenly spread across all brands then one would expect agencies to see a 10% reduction in fees. (I know I'm making lots of assumptions there.)

 

 

 

Reasons to be cheerful #3

A reshaped and different advertising world is emerging. The over-used phrase is ‘the new normal’ but I hate that phrase! The reality is that offline ad sellers have been long in decline. It can certainly be argued that the creative agencies are being pinched from both sides. Their business, which is essentially that of middle man between the advertising platforms and the brands, is facing gradual extinction.

The Economist observed that most advertising dollars that were pulled in the 2001 and 2009 recessions never came back. They never returned. This time, however, may be different. Moffett Nathanson believe that this time they may return to pre-pandemic levels as early as next year!

 

 

Reasons to be cheerful #4

One factor that underpins an optimistic approach to the future is that digital advertising has become, in effect, the new rent. It is what you pay to do business. The pandemic made the need to be digital or to digitally transform of paramount importance for every business. It has never been a better time to be running a digital-focused business.

 

Reasons to be cheerful #5

An additional factor that underpins an optimistic approach is the decline of offline. In past recessions, brands would pull radio and print advertising as they realised that they didn't need them and then that they could survive without them. As a consequence, advertising spend rarely returned to the previous pre-crisis levels. This may well be true now for TV advertising. 

 

 

Reasons to be cheerful #6

Another factor supporting an optimistic view is that digital advertising is more resilient now than it has ever been. In the past, advertising was not aligned with how we spent our time. For example, we spent 5% of our time looking at print and yet advertising spend represented 25% of total spend. Nowadays, ad spending is very closely aligned to how people spend their time. And so it should be even more effective.

 

 

Reasons to be cheerful #7

The evidence suggests (eg the Economist) that TV advertising will start to crack. Google and Facebook are on track to increase their share of the worldwide digital ad business to 70%. And the digital ad business is squeezing the more traditional ad platforms out of business. And while TV, radio and press advertising appears to have nowhere to go, digital advertising has ample if not bottomless capacity to display more ads on existing and new platforms.

 

 

A lot of agencies are under a lot of pressure. However, it's better to be running an agency than running a hotel or a restaurant right now. Fixed costs are clear and variable costs and labour are bought in line with revenues. I've seen many agencies lose 30% of revenues but they have been able to furlough staff and/or borrow money to mitigate the pain.

Despite the painful background of many agencies’ suffering, I think there are reasons to be cheerful.

Agencies are better placed than any other industry to adjust to the new world. We are more digitally transformed, we are more ready to work from home and we can measure inputs and outputs better than most.

I will finish with a quote from Rishad Tobaccowala from Publicis Groupe, ‘Agencies are like cockroaches and not like dinosaurs. We scurry around, we figure out the new world.’

It is time to figure out the new world.

 

 

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