29 Apr 2020 18:29 IST

Coronavirus can spur ad companies’ transformation

For ad giants, a painful fall in revenue may speed up the tough decisions needed to return to growth

Henry Ford once said a man who stops advertising to save money is like a man who stops a clock to save time. He was probably not thinking of a global pandemic. In a lockdown, there’s little point marketing what you can’t sell. For advertising giants, however, a painful fall in revenue may speed up the tough decisions needed to return to growth later.

The coronavirus crisis has hit big groups like WPP, which on Wednesday reported a 4 per cent decline in first-quarter revenue. Ailing travel and leisure companies brought in about 4 per cent of the London-based company’s business last year while the automotive industry, which is also suffering, accounted for a further 15 per cent. Consumer goods, which represented a quarter of WPP’s client base, will be a mixed bag. Drinks groups Diageo has cut spending to a minimum while companies like Unilever are taking advantage of cheaper online rates. Healthcare and technology, which represented 28 per cent of net sales, may prove more resilient.

Investors are fearful. WPP has lost close to half its value since the start of the year, while shares in rivals Publicis, Interpublic and Omnicom are down between 28 per cent and 32 per cent. Robust balance sheets provide something of a cushion. Disposals helped WPP cut net debt to 2.1 billion pounds at the end of March, half the level a year ago. Suspending dividends and buybacks will save Chief Executive Mark Read 1.1 billion pounds. Publicis, which is still digesting its acquisition of US digital marketing outfit Epsilon, has net debt at a manageable 2.1 times 2019 EBITDA.

Speeding the shift to new areas

Cost-cutting will help conserve cash. WPP is reducing expenses by up to 800 million pounds, or about 6 per cent of last year’s revenue. US rival Interpublic has also unveiled “unavoidable” job losses. The painful cuts may have a silver lining. Advertising groups have long been overexposed to slow-growing traditional advertising and underweight faster-growing services based on technology and crunching user data. The crisis may help ad groups speed the shift into new areas, like building e-commerce platforms.

But it won’t be until clients start spending again that investors will be able to judge whether the crisis has helped Read and his rivals speed up the transformation. When that will be is something even Henry Ford would have struggled to predict.