For Madison Avenue, the new normal is not going to be very normal – it’s going to be unfamiliar and harsh
In 2015, MDC, a mid-size advertising holding company, was trading for $30 a share. A Bantamweight, it own some of the most admired agencies on Madison Avenue – Crispin, Porter, Bogusky, 72andSunny and Anomaly. Last Friday it was trading for $1. That perhaps provides some perspective for what happened to Madison Avenue in recent years.
While the recent carnage on Wall Street was universal, the fragile advertising sector was decimated. Since the start of the crisis last month, Publicis Groupe’s lost 45% of its value and WPP 49%, before rebounding slightly. These two holding companies posted a revenue decline each even before the COVID-19 crisis. Omnicom shrunk by 33% and IPG by 39%. For perspective, the S&P 500 declined “a mere” 23% in the last 30 days.
Wall Street’s prognostication is that the ad industry is facing severe challenges. During the Great Recession of 2008, advertising spend declined by 13%, and it took Madison Avenue 3 years to regain its footing. The looming recession will be more painful, and it could take the agencies longer to go back to status quo, perhaps as much as 5 years. Ad spend could decline by as much as 20%, and agencies will cut back staff by 15-20%.
Even Omnicom, the biggest and most financially healthy holding company, issued a warning in yesterday’s 8-K report that “[It] has been reining in costs to mitigate the impact of the virus, but it may have a material impact on operations and liquidity.” In plain English, this means layoffs.
Liquidity problems are also exacerbated by the recent trend of clients to seek longer pay terms to agencies. The flight to cash means that even successful companies will encourage their procurement people to renegotiate contracts. What used to be a 60-or-90-day payment, could easily become 120 days.
I think much will depend on what kind of a recession we are going to have. The drop will be steep, and it yet to be determined whether the rise will be as steep, as in a “V” shaped recession, or, a more flattened, and prolonged bottom, a “U” shaped recession.