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Car Crisis Rolls Into Ad World

Will Hartman was an award-winning copywriter working at one of the largest advertising agencies in Los Angeles. But he lost his job when Ogilvy & Mather, a subsidiary of WWP Group, announced a 10 percent across-the-board staff reduction earlier this month.

What’s more, his former clients said they will now produce their own ads. That means there won’t be freelance work for him, which in the past was something copywriters could count on to soften the blow of a layoff.

“For me it was a double whammy a 10 percent cut in the work force, and the clients I did a lot work for took the business in-house,” said Hartman. “Fortunately, the agency was generous with me in terms of severance and benefits.”

Hartman sees the job loss as a normal consequence of the advertising business cycle, but this time the cycle is dipping abysmally low. ZenithOptimedia, the media buying unit of Publicis Group, estimates U.S. ad spending fell 3.8 percent in 2008, and predicts a 6.2 percent decline in 2009. Media planning firm MPG North America forecasts the biggest decreases in local media such as radio and newspapers.

The downturn is having a significant impact in Los Angeles, because the area ranks as the second-largest advertising hub in the country, surpassed only by New York. About 800 advertising agencies and 300 media-buying and related companies are in the area, based on data from the 2002 Economic Census. The sector accounts for about $6.4 billion in revenue. Between regular employees and freelancers, advertising employs the equivalent of 41,000 full-time people in Los Angeles, according to a study last year by Otis School of Design.

Furthermore, a major portion of the advertising industry’s woes stem from the near collapse of the auto sector. General Motors Inc. plans to cut 20 percent, or about $400 million, from its ad budget this year. Ford Motor Co. also has announced a 20 percent reduction after a similar reduction last year, representing a $700 million reduction over two years. Toyota and Chrysler have announced significant trims.

The meltdown in auto spending has a disproportionate impact in Los Angeles because many vehicle ads are created here, said Jack Kyser, chief economist at the Los Angeles County Economic Development Corp.

“If you watch automobile commercials, you’ll recognize so many Los Angeles locations,” Kyser said. “That translates to jobs, and then you have post-production and the people who put the ads on the air. It has a huge impact here.”


‘Cut,’ say studios

Film studios, which are another significant ad buyer in the L.A. market, are having trouble getting financing, so they, too, are cutting budgets.

“It’s tough, real tough,” said Zachary Rosenberg, general manager of the western region for Horizon Media, which bought about $1.8 billion worth of media last year. “I know of one profitable independent studio that had their line of credit frozen, so they can’t market their films.”

Larger agencies tend to suffer more during a downturn, said Rosenberg, because they are public companies under pressure to deliver profits; private companies such as Horizon can wait out the downturn.

“That’s our opportunity in this down environment,” said Rosenberg. As a result, he hasn’t had to resort to layoffs.

Most of the large agencies have already announced layoffs. Ogilvy’s 10 percent trimming amounted to about 150 people, due in part to the loss of the client Wachovia, which was purchased by Wells Fargo & Co. BBDO, an agency owned by Omnicom Group, has cut nearly 190 people in connection with the Chrysler account. Likewise, Interpublic Group of Cos., which owns the agency Campbell-Ewald, may cut as many as 100 jobs in conjunction with the shrinking sales at Chevrolet, its biggest client.

“The big agencies are the most vulnerable because they have the most overhead,” said Hartman, the laid-off copywriter. “When our clients tighten their belts, the first thing they cut is advertising. It’s a domino effect. Anytime business is lost, it’s a sure bet jobs will be lost.”

But some clients feel it’s essential to keep advertising.

“The economic meltdown of the past three or four months has caused people to trim, but we haven’t seen wholesale budget cuts,” said Eric Johnson, president of creative boutique Ignited in El Segundo. “The smart marketers know you can’t stop advertising.”

And some agencies are still landing new accounts. Mike Sheldon, president of Deutsche, said he’s gained three clients in recent months.

“This is a shaking-out period,” said Sheldon. “The agencies that are successful will become more successful and those that are marginal will really hurt. The marginal ones will be taken out.”

Deutsche hasn’t had to lay off any of its 250 employees, but if revenues fall, that could happen.

“In this business, staffing always follows client fees,” Sheldon said.

The slowdown has had an impact on content and strategies. Sheldon said traditional sales-goosing techniques such as coupon discounts, 2-for-1 deals and limited-time offers “are back with a vengeance.” Brand image ads are on hiatus while measurable advertising such as Internet ads and direct-marketing pitches rule the day.

Johnson estimates ad spending won’t return to healthy levels for another 18 to 24 months, followed by a resurgence in brand marketing.


Survival advice

Robert Ancill runs Next Idea, a marketing consultancy in West Hills that specializes in restaurant and food industries. When the economic slowdown hit full stride, Ancill developed a product called Innovative Recession Economics, or IRE, to help clients survive.

IRE starts with an itemized cost analysis of the company, followed by reductions that will make a company’s costs proportional to its revenue.

Ancill performed an IRE on his own company, and found employees were flying on brand-name airlines when they could travel more cheaply with regional or discount carriers. He also consolidated his phone services to save money.

For advertising agencies, their talent pool is their main competitive advantage, so Ancill believes agencies should avoid firing people. When labor costs need to shrink, he advocated reducing overall pay rather than losing people permanently.

“Most corporations have an administrative staff and that’s an easy target for reductions,” Ancill said. “Let’s say you’ve got 10 people on staff, and you decide to lose two people. If everyone took a 10 percent pay cut, you wouldn’t have to fire anyone. We’ve proven that it works.”

Ancill also believes companies should try to reduce interest and rent costs.

“Landlords are just as scared as anyone else,” said Ancill. “We’ve seen them give more latitude in the last year than ever before, including reduced rents, rent-free periods or totally re-negotiated contracts. There’s no point in waiting until you’re handing in the keys to talk to them.”

Hartman, the newly unemployed copywriter, has already made good use of his unexpected free time. Last February he sold a concept for a TV show to Fox Broadcasting, and now he plans to develop it without the distractions of a day job.

He’s an optimist, so he believes he’ll return to copywriting, perhaps as soon as the spring.

“I’ve seen several rounds of layoffs, and I’ve seen people come back to work,” Hartman said. “I have no doubt I will be hired back at some point.”

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