Ad agencies told: adapt or die

The grandees of Soho must think outside the box to reverse falling profits and stop new, more innovative rivals stealing their market. Sonia Purnell reports

The sharp minds and even sharper suits of Britain's advertising industry are looking to none other than President George W Bush to rescue them from an otherwise bleak future.

Only when the Texan starts to pump up the US economy ahead of the next presidential elections in 2004 do they expect to see any significant upturn in business after the worst advertising recession in living memory.

Sir Martin Sorrell, WPP's chief executive and the world's undisputed adver- tising titan, will urge colleagues and investors alike to be patient tomorrow when he announces an expected £100m fall in profits for last year to £395m. Even at one of the best-run global agencies, he will have to reveal underlying revenues down about 6 per cent and margins squeezed.

Once again Sir Martin will set the general tone by painting a gloomy picture for the near future, if not one totally without hope thanks to spin-offs from next year's other big events: the Athens Olympics and football's Euro 2004 in Portugal. But with over half the top 20 agencies in the business still reporting falling billings, the champagne days aren't back.

However, some people, including Dominic Mills, editorial director of Campaign magazine, believe Sir Martin has used "this excuse of bad markets for too long to hide the fact that he overpaid for Young & Rubicam three years ago".

Even so, Sir Martin cannily avoided the worst excesses of rival marketeers such as Cordiant and Interpublic, which splashed out cash fortunes on agencies at the top of the market, and now have bank loans they cannot service at the bottom. Both have now been forced into humiliating fire sales just to survive.

"This is so typical of the cyclical advertising market," says Lorna Tilbian, an analyst at Numis Securities. "Groups sell off peripheral assets when times are tough, often to management buyouts. Those managers then work a lot harder, grow the business and sell out again at the next peak of the market."

But few would deny that even the best ad agencies have got their work cut out more than usual over the next few years. Apart from problems in the general economy, they face threats and challenges on many fronts, not least the newly installed ban on tobacco advertising in Europe. There is also the increasing power of new media such as text and picture messaging and online advertising, sectors growing fast but which the established agencies have been slow to tap.

A recent study by Professor Patrick Barwise of the London Business School, for the French marketing group Havas, predicted that conventional TV and press advertising (most agencies' bread and butter) would increasingly give way to interactive media, direct mail, public relations and sponsorship. A survey of more than 700 advertisers found many are disgruntled with the traditional campaign – and the agencies that devise them.

"We don't get value for it, and profit from media spend is poor" was a typical verdict, while many judged text messaging and online advertising as "more cost-effective and better targeted".

The problem for the agencies is that many clients, such as the confectionery giant Nestlé, are bypassing them and going straight to the specialist text-messaging or online boutiques to run their campaigns. Some agencies have responded by setting up specialist teams, only to disband them again after realising that not enough of their clients wanted these services to justify a dedicated department.

"It's like turning round an oil tanker. Many large agencies are too set in their ways to adapt quickly enough, and are not prepared or able to try new methods," complains one industry insider.

"On the whole, clients bypass their agencies and come straight to us," says Andrew Jones of Aerodeon, a text-messaging specialist. "While business is not exploding here, we're not suffering like the mainstream agencies are."

The advent of picture messaging – still an expensive, minority activity but expected to pick up fast – is likely to lead to further growth in this area.

Meanwhile, after the ignominious collapse of the dot-com world, it is perhaps surprising that another "green shoot" sector is online advertising. Yet, admittedly from a very low base, more advertisers are now revisiting the idea of selling their message on the net, though now through more sophisticated methods.

A recent moneyspinner for Yahoo! and Google, for instance, has been sponsorship of search words and terms. Someone seeking bed-shopping websites will be given the normal list, but down the side will be larger entries for those paying for a higher profile.

Other advertisers, such as Kinder Eggs and Ferrero Rocher, have set up popular websites complete with cartoons and games to sell a lifestyle package to their target audience and raise their brand profile into the bargain. "Advertisers are prepared to experiment with these ideas, even in hard times, as they are relatively cheap," explains Ms Tilbian at Numis.

Other departures from the classical TV or press campaign are increasing use of product placement in films, advertising in public toilets such as in Granada service stations, direct mail and roadshows. "Overall, there's a remorseless if gradual shift of money away from conventional media to these new channels of communicating to people, which are seen as more accountable, producing more direct results," says Mr Mills at Campaign.

"That is putting pressure on agencies to think outside the advertising box, to think up new ways of reaching people, from organising private seminars to sponsoring TV programmes. Agencies will have to adapt to survive, as well as the TV companies and press who also stand to lose out. At the moment, many clients just don't trust them to do so."

There are newer, edgier smaller agencies, such as Mother, which have bucked the trend and doubled in size in a year. But fashion is fickle and the last hottest agency in town, St Luke's, is now looking distinctly lukewarm. It is hard to remain edgy, of course, once the millions start rolling in.

But there won't be too many advertising, or TV, execs crying into their Chardonnay in the bars of Soho this spring. Despite the number of channels now fragmenting the industry, TV ad revenues are already beginning to pick up and there is even hope of a modest renaissance at some point.

"These new media will never totally displace the old ones, and often eventually remind people of the strengths of what they had before," says Mr Mills. "If you have a mass-market product to sell, conventional TV is still by far the quickest and most efficient channel through which to promote it. But probably it would be still more effective if it were combined with a newer, more direct approach to drive the message home. It is up to the agencies to put forward a more attractive and broader package."