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Ad agencies struggle to survive second quarter of 2020

The advertising industry, closely tied to macroeconomic conditions, is going through one of its biggest crises ever. The second quarter of 2020, largely dominated by uncertainty, lockdowns and an economic standstill, led advertising agencies to experience what is expected to be the largest single-quarter revenue drop of the year, reaching revenue declines similar to those experienced in the second quarter of 2009 following the financial crisis.

The four biggest global advertising groups, Interpublic Group of Cos. Inc.WPP PLCOmnicom Group Inc. and Publicis Groupe SA, (links require a subscription) all reported negative organic growth in the second quarter. Still, results were not as negative as initially predicted. Omnicom, which only reports total revenues, including third-party service costs, reported an 11.7% organic revenue decline year over year in the first half of 2020, with 0.3% growth in the first quarter and a 23.0% drop in the second. Overall, second-quarter revenues were significantly affected by the reduction of third-party service costs. Since the first quarter, agencies have not given statements for full year or 2021 expectations, yet WPP commented it is expecting a 10% to 15% hit in net organic revenue for the full year.

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Diverse portfolios provided a cushion for the agencies, with some industries increasing budgets during the first half. For IPG and WPP, healthcare, retail, food and beverage and technology and telecom clients provided positive revenues in the second quarter. Other industries that were hit the hardest, such as auto and travel, led to significant losses. For IPG, these top-performing industries accounted for 61% of revenues at year-end 2019, while for WPP they accounted for 56% in the second quarter of 2020. Omnicom, which reported revenue changes by industry, also saw better performance from healthcare as well as technology and telecommunications clients, which together accounted for 30% of its revenues in the second quarter, while consumer products and financial services experienced the most significant declines.

Regional revenue performance varied across the agencies in the first half of 2020. In North America, revenues fared better than in other regions. Omnicom's organic revenue in the U.S. slipped by 9.8%, while IPG's net organic revenue declined at 3.6%. WPP and Publicis saw North American net organic revenues decline by 6.1% and 3.6% respectively.

Omnicom saw its markets in the Middle East and Africa and Europe take the biggest hits declining by organic growth rates of 33.2% and 16.6% respectively, while the Latin American and Caribbean segment declined by 15.0% and Asia-Pacific by 8.9%.

For Publicis, Europe and Latin America experienced the biggest net organic revenue drops of 16.5% and 15.7% respectively, while Asia-Pacific declined by 3.9%.

Asia-Pacific and the Middle East were the worst hit for IPG, with -10.0% and -9.1% respectively, whereas Europe declined by just 5.4%. On the other hand, Western Europe was one of the lowest performers for WPP with -11.7% net organic growth, similar to rates for Asia-Pacific and Latin America.

Better performance in the U.S. aligns with Magna Global's advertising predictions for the full year. Limited lockdowns, in addition to the presidential elections in November, boosted ad spend and cushioned the fall for the region. According to Magna Global's Ad Forecasts published in June 2020, North America is expected to see net ad spend decline by 4.4% this year. Globally, growth is expected to be at -7.2%, with Western Europe experiencing the biggest fall at -10.3%, similar to the -10.1% seen in 2009 following the financial crisis. Forecasts show, however, that all regions will return to growth by 2021, a prediction agencies agree with, with global growth expected at 6.1%.

All four agencies were forced to reduce staff in an effort to cut costs. By June, IPG reported that it had cut 2,100 employees accounting for 4% of its total staff, Omnicom reported letting go 6,100, and WPP reduced staff costs by 5%, laying off 5,000 employees. Overall, operating costs for Omnicom, IPG and WPP declined by 6.5% to 7.5%, while operating margins fell by 51.9%, 63.0% and 38.1% respectively. For Publicis, the integration of Epsilon during the first half of 2020 led to the increased operating costs and profit margins since comparable numbers are not available.

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All four agencies were forced to reduce staff in an effort to cut costs. By June, IPG reported that it had cut 2,100 employees accounting for 4% of its total staff, Omnicom reported letting go 6,100, and WPP reduced staff costs by 5%, laying off 5,000 employees. Overall, operating costs for Omnicom, IPG and WPP declined by 6.5% to 7.5%, while operating margins fell by 51.9%, 63.0% and 38.1% respectively. For Publicis, the integration of Epsilon during the first half of 2020 led to the increased operating costs and profit margins since comparable numbers are not available.

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