Industry prospects in 2009 and 2010

Although the US Presidential Election, the Beijing Olympics and the UEFA football championship had the usual positive maxi-quadrennial effect on client spending in 2008, worldwide advertising and marketing expenditures only rose about 2-3% in the year.

Despite the overall slow-down in the industry growth rate, three engines of relative growth remained. Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe, iconically represented by the BRICs and those of the Next 11 markets where we are present (Bangladesh, Egypt, Indonesia, Mexico, Nigeria, Pakistan, Philippines, South Korea, Turkey and Vietnam), continued to grow faster and now represent almost 27% of the Group’s approximately $15 billion pro-forma (including TNS) revenue. As did new media and the application of technology in the form of internet, PC, mobile, video content and social networks, which now account for almost 25% of Group revenues. And finally, as did consumer insight and information, insight and consultancy, which now account for almost 27% of Group revenues, on a proforma basis.

As the first year of the quadrennial cycle, there are no mini- or maxi-quadrennial events in 2009 to boost client spending. It is true that 2009 was always likely to be a weaker year, but the unprecedented current financial crisis has triggered a vicious recession across the globe. Our budgets for 2009 initially indicated flat like-for-like revenue growth, but revenue out-performance in the fourth quarter of 2008 versus forecast and the prudent addition of further budgeted revenue contingencies, resulted in final budget revenues for 2009 being down 2% like-for-like, with relative decreases in costs. GroupM forecasts that global advertising spending (equivalent to approximately 40% of the Group’s revenues) will fall by over 4% in 2009 versus 2% growth in 2008.

The first half is budgeted to be weaker than the annual average, with a relative improvement in the second half, partly due to weaker comparatives in the second half of 2008.

Geographically, there are relatively brighter spots budgeted in Asia Pacific, Latin America and the Middle East, reflecting the continued relative strength of the BRIC (or more accurately BIC) and Next 11 markets. Central and Eastern Europe, as a whole, remains relatively softer, as Russia is under extreme pressure, exacerbated by the falls in the oil price and the rouble, although we expect Russia to recover quickly, when the oil price does. Discipline is already being restored. The US and Western Europe remain relatively weaker, with recession biting hardest there and in Southern Europe.

There are similar differences functionally. Media Investment Management, Information, Insight & Consultancy, Public Relations & Public Affairs, Healthcare Communications and direct, digital and interactive show relative strength, whilst Advertising, Branding & Identity and Specialist Communications remain under the greatest pressure.

Incentive plans for 2009 will place increased emphasis on operating margins in conjunction with operating profit growth, although objectives will continue to include improvements in staff costs-to-revenue ratios and qualitative Group objectives, including Group co-ordination and co-operation, talent management and succession planning.

At the time of writing, we have revenue and profit data for the first two months of 2009 and this does show a difference in the trend of revenues against last year, although operating profits were better than budgeted. The first two months of 2008 were, in any event, relatively strong months for like-for-like revenue growth, at almost 6%.