Advertising Armageddon is averted, but recovery is elusive

The advertising industry narrowly avoided catastrophe during the recession, according to Sir Martin Sorrell, but the fear factor remains. Nick Clark reports

Don Draper, the dapper advertising executive, outlined his views in the first season of acclaimed TV show Mad Men. "Advertising is based on one thing: happiness. You know what happiness is? Happiness is the smell of a new car. It's freedom from fear. It's a billboard on the side of the road that screams reassurance that whatever you are doing is OK."

For Britain's advertising industry, last year was a long way from OK. Sir Martin Sorrell, the founder of WPP, the world's largest advertising group, said the industry had narrowly missed "Armageddon" and described some of the talk at the darkest hour of approaching "apocalypse now".

The evidence was plain in the company's full-year results announced yesterday. Sir Martin was more upbeat, but said it had been a "brutal year". Revenues rose 5 per cent in constant currency to £8.6bn, but headline pre-tax profit fell 16 per cent to £812m. He defined 2009 as "a game of two halves". Revenues had spiralled lower in the first half as recession-hit clients had pulled their marketing budgets. During the second half, those declines became "less worse". Britain makes up about 12 per cent of WPP's revenues. Its operations stretch from advertising and media-buying to public relations and brand consultancy, but growth in the country was down.

While the company expects a more stable year, "advertising remains challenged by clients' continued demands for efficiency", though WPP is confident that clients will have to return to marketing in the longer term, underpinned by "the need for our clients to continue to differentiate their products and services both tangibly and intangibly."

Sir Martin said: "The apocalypse was avoided, and it was followed by the less worse phase. We are in the stability phase, but have not returned to growth yet."

The Advertising Association said total spending was down 12.7 per cent year on year in 2009, representing the worst recession for the industry since it started tracking the industry with Warc in 1982. Still, many across TV, publishing and online have at least been hailing the slowing decline in ad revenues in recent months.

"It's an interesting reflection on the times when a slowing rate of declines is greeted by optimism and good cheer," said Rory Sutherland, the president of the Institute of Practitioners in Advertising. "The fundamental question is when better times return for clients, does that trickle down to the agencies?"

Mr Sutherland expects the US to return to growth faster, saying advertisers in the UK were more cautious. "There's possibly more of a cost-cutting and finance-driven mentality here than across the Atlantic."

Archie Norman, the new chairman of ITV, is worried about the post-general election landscape. The broadcaster predicts advertising revenues could be up 20 per cent in April but reminded anyone preparing to break out the bunting that the comparatives were particularly weak. Mr Norman added that potential rises in VAT and the potential "austerity budget" could well derail any rebound in advertising.

Tess Alps, chief executive of Thinkbox, the UK's marketing body for commercial broadcasters, said the industry was "anxious not to get overexcited". She said: "The last two years have been so bruising for all media in terms of advertising, but it has been marginally less so for TV as viewing is still growing." Ad revenues for TV retreated about 10 per cent, while the wider industry was down about 13 per cent. She also pointed out that with the proliferation of niche channels, advertisers can more actively target the demographics they want. She added. "TV is often an early indicator of where the market is going."

Cinema advertising had a surprisingly strong year, up 10 per cent year on year according to the Cinema Advertising Association. But this reflected cinema admissions that hit seven-year highs and box-office takings that smashed through £1bn for the first time. Other forms of traditional media are suffering heavily. Outdoor advertising, such as on billboards, suffered double-digit falls last year, with the nadir coming in the second quarter when revenues fell 24 per cent to £238.4m, according to the Outdoor Advertising Association.

Publishing companies are also struggling to deal with the worst advertising recession on record. While many have hailed the slowing declines in ad revenues – such as Trinity Mirror which reported results this week – others are more pessimistic. United Business Media, which reported yesterday, said 2009's economic conditions "accelerated the long-term structural decline in print-advertising revenues" with its print business falling 23.1 per cent as a result. "Traditional media will not return to pre-crunch times," Sir Martin said. "The overall market will grow, but parts will contract."

Online advertising has continued to grow throughout the downturn, although not at the same explosive rates as before. Of that, 60 per cent is search advertising, a market dominated by Google. Ian Carrington, industry director for Google in Europe, Middle East and Africa, said: "One of the reasons search has fared well is because advertisers can track its users. Everything is accountable." He added that there was no sign of the growth hitting a plateau.

Still, despite all the perceived threats and the desire to be cautious, the industry is more optimistic. The Advertising Association predicts that after nine consecutive quarters of year-on-year decline, ad spending will return to growth in the third quarter. Tim Lefroy, chief executive of The Advertising Association, said: "The underlying data show not just the painful recession effect overall but the dynamic reshaping of the UK advertising landscape." PricewaterhouseCoopers predicts another year of declines in 2010, before returning to growth the following year.

Media partner Nick George said: "After a violent storm, you get a slight sense of calm, but people don't necessarily run straight back onto the beach."