Dusseldorf The war in Ukraine clouded Florian Haller’s optimism. Haller is head of the Serviceplan agency group, with 4,500 employees the largest owner-managed communications agency group in Europe. Before the outbreak of war, Haller thought double-digit sales growth was possible. He expected catch-up effects because many companies had reduced their advertising spending during the corona crisis.
These are unlikely to materialize now, and growth will be lower. “Companies are cutting or shifting advertising budgets,” says Haller. How quickly the funds of the companies reach the pre-war level again depends on the course of the military conflict. “A medium-term recovery, perhaps from May, is conceivable.”
The entire advertising industry is looking to the coming months with concern. “I fear that the effects of the war will be more resounding for the agencies than with the corona crisis,” said Ralf Nöcker, general manager of the industry association GWA, on Tuesday when the annual forecast was presented. “The tension in the agencies is extremely high,” added GWA President Larissa Pohl.
Although two-thirds of the agencies stated that they were expecting sales to increase, the survey took place shortly before the Ukraine conflict escalated. The numbers have to be corrected downwards, according to Pohl. The advertising market is now threatened with the next crisis, after the consequences of the pandemic only just seemed to be overcome: According to the GWA, sales fell by 1.3 percent in 2020, but the association determined a significant increase of eight percent for 2021. Two thirds of the agencies surveyed increased their sales.
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“After the hard Corona period, the order situation has picked itself up again in the past few months, there was a spirit of optimism,” says Pohl. However, as a result of the war, the economic situation clouded over again, and companies were struggling with rising prices for energy and raw materials. That is why the first companies have cut their advertising budgets, and others are likely to follow. Advertising agencies as service providers are directly affected.
Uncertainty like at the beginning of the pandemic
Both customers and marketers are in a situation similar to that at the beginning of the pandemic. You can’t make any reliable forecasts now either, says Florian Adamski, head of the US agency Omnicom Media Group. “This is a situation that we have had to get used to and have gotten used to over the past two years.”
“After the hard Corona period, the order situation has picked up again in the past few months, there was a spirit of optimism.”
The advertising market in Russia in particular is idle. Many Western brands have withdrawn there or suspended their advertising activities. It is true that Russia and Ukraine account for only one percent of global advertising expenditure. However, according to Adamski, the effects are already being felt in companies that generate large sales in the region or are dependent on the supply chains of the crisis area. The industry is hearing about campaign shifts from car and food manufacturers, and there are also effects in the travel and energy sectors.
>> Read here: Production stops and supply gaps: This is how the war drives the economy into crisis
The customers of the German Omnicom subsidiary BBDO have not yet stopped their campaigns, reports Marianne Heiss, head of the German group. The long-term effects of the war could not yet be assessed. “Even in times of crisis, companies want and have to stand up for their position.”
The example of Edeka shows how complicated this can be. The supermarket chain wrote on social media the slogan “Freedom is a foodstuff” in the colors of the Ukrainian flag, which are also their own. Edeka received a lot of criticism for wanting to use the war for advertising purposes. Many companies avoid Ukraine reporting as an advertising environment. Others have to adjust the tonality of their campaigns, which halts or delays orders to agencies.
Consolidation is likely to intensify
The war is likely to exacerbate industry consolidation. Industry expert Pohl fears that the market adjustment will “accelerate significantly”. In 2019, the Federal Statistical Office still counted 27,000 advertising agencies – a quarter fewer than ten years earlier. This is also because companies tend to work with fewer agencies in order to minimize the coordination effort and also speak with one voice globally. Some companies even require tailor-made agency solutions that are tailored to their needs.
The head of the Serviceplan agency group says: “Companies are cutting or shifting their advertising budgets.”
(Photo: service plan)
That can only be done by large agencies. The industry is characterized by many small providers and a few large ones. Two thirds of the agencies make less than 250,000 euros in annual sales, 90 percent employ fewer than nine people. Such small providers will have a hard time in the future.
Irrespective of the effects of the war, the industry is suffering from an ever-increasing shortage of skilled workers. The industry association warns that the agencies are short of more than 10,000 employees. A good 80 percent of the agencies see the shortage of staff as the greatest obstacle to growth, and almost 60 percent can no longer accept new projects due to a lack of staff.
Pohl reports that some agencies are themselves looking for junior positions with headhunters. Agencies have been struggling with a bad image of long working hours and poor pay for years. In addition, many applicants do not have agencies as employers in mind.
Opportunities for growth in digital business
Despite the negative signs, the digital business is a growth driver for the industry. Digital forms of advertising, for example in e-commerce or on social media, have become even more important as a result of the pandemic. At Omnicom, 60 percent of all investments are now in this area, two years ago it was 35 percent.
>>> Also read: Live blog on the Ukraine war – all developments
Expenditure on technology and employees who have the relevant know-how are currently very high, says CEO Adamski. But: “Agencies that don’t transform themselves digitally by now at the latest will have a hard time.”
In the digital business, personalized advertising is particularly important, adds Haller, head of the Serviceplan group. Consumers are increasingly demanding individually tailored products. The advertising industry is trying to address this with suitable, personalized approaches. This seems more necessary than ever. “Brand loyalty has fallen sharply as a result of the corona crisis.”
Haller also sees potential in the area of sustainability. Consumers are increasingly interested in the sustainable positioning of companies due to Corona. More and more companies booked sustainability campaigns to position themselves. That means business for the advertising agencies – as long as the orders are not canceled as a result of the war.
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