Cordiant issues fresh profit warning and cuts 400 jobs

Advertising giant says trading conditions are extremely difficult as new study predicts further decline for the industry next year
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The Independent Online

As advertising executives gathered in New York yesterday for the UBS Warburg media conference, the sector was hit by yet another body blow.

Cordiant Communications, the advertising group which owns the Bates Worldwide agency, issued another profits warning and announced 1,100 job cuts. Many of the redundancies are expected to fall in the United States where the market is still reeling from the after-effects of the 11 September terrorist attacks.

And as UK industry leaders including Cordiant's Michael Bungey and WPP's Sir Martin Sorrell lined up to speak at the conference, a new study of the advertising outlook made for gloomy reading. The forecast by Zenith Optimedia predicted that the global advertising market would see further contraction next year after this year's steep decline.

Cordiant, demerged from Saatchi & Saatchi four years ago, has already cut its forecasts twice this year. Yesterday it went further still saying underlying revenues for the current year are now expected to fall by 9 per cent in the same period last year. This compares with a forecast of a 5 per cent decline given just two months ago. Analysts said the collapse in the company's fortunes would make it vulnerable to a takeover once confidence in the sector improves.

Cordiant said trading conditions remained "exceptionally difficult". It added that the global economic slowdown has led to "an unprecedented rate of decline in marketing expenditure, which has accelerated across the second half of the current year". The shares fell 5.5p to 88p on the news.

The slump has forced Cordiant to take the axe to its cost base with a further 400 jobs set to go on top of the 700 announced in September. The cuts are equivalent to just over 10 per cent of the workforce.

However the UK business is expected to escape relatively unscathed as it has performed well, including winning the Sky account earlier this year. The cuts will fall heavily on the US, which accounts for 35 per cent of group revenues. The redundancies will lead to an exceptional charge of £25m compared with the £10m previously announced.

Cordiant said the decline would lead to a further reduction in profit expectations for the year. WestLB Panmure cut its full-year forecast from a profit of £9m to a loss of £9m.

Lorna Tilbian at Numis Securities said Cordiant was paying the price for a string of deals struck at the top of the market last year, including the acquisition of the Lighthouse media business which included the Fitch design operation. "Cordiant is suffering disproportionately. It's all got to do with the quality of acquisitions," she said.

Andy Boland, Cordiant's deputy finance director, admitted yesterday that the group was seeing very low levels of activity in areas such as branding and design with discretionary projects being cancelled.

A further problem has been over-reliance on some clients. In South Korea, Hyundai accounts for about a third of the fees at the Diamond advertising agency acquired by Cordiant last year. Parts of that contract are now being put out to tender.

Cordiant's cuts are the latest in a string of downbeat statements from the advertising sector as it undergoes its most savage downturn since the early 1990s recession.

Havas, the French group, which includes the Euro RSCG network of advertising agencies, will have cut 1,700 jobs, or 8 per cent of its workforce by the end of this year. However, the group is confident it has taken the pain. "We feel we have done our restructuring and we don't foresee any more," the company said yesterday. WPP, owner of Ogilvy & Mather and Young & Rubicam, has also made widespread cuts but has not released a total figure.

Zenith Optimedia's new study forecasts advertising expenditure this year to be down by 5.8 per cent on last year, with North America the worst performer with an 8.4 per cent fall. The market is forecast to shrink again in 2002 with a 1.3 per cent fall before recovering in 2003 with a 1.2 per cent rise.

This will be boosted mostly by a stronger return to growth in Europe and the Asia-Pacific region with North America continuing to contract in 2003.

Opinions are divided on the timing of an advertising upturn. Zenith says it expects "at least the beginnings of a recovery in 2002". It points to relatively low unemployment and low interest rates in the major advertising markets as grounds for optimism.

Doug Flynn, chief executive of Aegis, the media buying group, has also been optimistic. Last month he said: "We expect an upturn in the second half of 2002 – sooner than most people expect."

His remarks were supported by better than expected results from Publicis, the French advertising group which owns Saatchi & Saatchi.

But others are more gloomy. Sir Martin Sorrell, chief executive of WPP, says it is too early to call the turn but feels a recovery is some way off. He is indicating a U-shaped or bath-shaped recovery curve rather than a faster V-shaped bounce-back.

In October WPP reported a 6 per cent fall in underlying revenues for the third quarter. Sir Martin also said WPP's operating margin target of 15 per cent was unlikely to be met this year.

Havas said yesterday that a recovery may not appear until "the end of 2002, early 2003".

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