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Starting to ad up

When the economy dips into recession, businesses have two choices - lay low or fight hard, says Steve Drongowski, chief executive of Fahlgren Inc.

Fahlgren was lucky in 2002, Drongowski said. Clients such as Cooper Tire & Rubber Co., the National Auto Parts Association and regional McDonald's Corp. restaurant operations each responded to an uneven economy with aggressive marketing campaigns. That meant more work - and more revenue - for the Columbus ad agency.

But with the threat of a war in Iraq looming and the economy still struggling, Drongowski is unsure whether Fahlgren can duplicate that performance in 2003.

"We're trying to run our business smart, and we're pitching (to new) business that we can uncover," he said. "But the big variable for 2003 is the war and terrorism. No one knows what (their) impact will be on the economy."

And the wild card is always war.

Licking their wounds

Advertising spending has fallen from the glory days of the late 1990s. In 2001, U.S. ad spending declined to $231 billion from $247 billion in 2000 when the recession began, said the Vienna, Va.-based Newspaper Association of America trade group and Universal McCann, the media services operation of McCann-Erickson Worldwide.

Ad spending for 2002, when it's finally tabulated, likely will show 2.6 percent growth to around $237 billion, said one prognosticator, Robert J. Coen, senior vice president and director of forecasting for New York-based Universal McCann.

Coen is banking on the American economy expanding this year, which would promote ad spending to $249.3 billion.

"In the closing quarter of 2002, there (was) a noticeable upturn in ad momentum," he said. "Except for the uncertainties over Iraq, we would expect a much improved rate of growth for U.S. advertising.

"The shakeout in high-tech, financial and dotcom spending (was) a drag on ad growth in 2001 and into 2002, but the worst appears to be over," he said.

Talk among members of the American Association of Advertising Agencies is that this year will be filled with variables and a complete industry recovery probably won't arrive until 2004, Drongowski said. John Wolfe, the New York association's senior vice president, said the trade organization's expectations could be derailed by a war.

"If it wasn't for the war, people would be a lot more optimistic about spending," he said. "Even without the war, it's not a rosy situation. Agencies are still struggling to some degree. ... 2001 and 2002 were disasters for the industry."

U.S. newspapers saw ad revenue plunge $4.3 billion to $44.3 billion in 2001 from $48.6 billion the prior year, but advertisers began returning in 2002, said the newspaper association.

Third-quarter retail advertising and national advertising each were up from a year earlier. But third-quarter gains in auto and real estate classified revenue was offset by a 19.4 percent drop in job recruitment ads.

The trade association is still collecting information for the fourth quarter.

Jim Conaghan, the newspaper association's vice president of business analysis and research, said if U.S. businesses expand, newspaper revenue could grow as much as 6.1 percent this year. At the very least, newspaper ad revenue should grow 3.2 percent, he said.

"But the caveat here is what happens overseas," said "A lot of economic projections are based on that."

TV already hot

While newspaper pages published expand and contract with advertising demand, there is no built-in shrinkage for broadcast advertising. Some businesses that delayed ad spending during the recession are now clamoring for network ad slots, which are limited. That is making advertising on network TV more expensive.

Upfront buying, the blocks of advertising purchased a year in advance, occurred during three days around the Memorial Day weekend, said Paul Hnidka, senior vice president and media director at SBC Advertising Ltd. in Westerville.

"(Time slots) moved aggressively," he said. "You saw the rates go up."

And advertisers that booked upfront time aren't exercising options to sell back unused time to the networks. That means there is also a tight supply of the so-called network "scatter market" and what time is available is expensive.

"That scatter market is up dramatically in pricing, sometimes 20 percent to 50 percent higher, depending on the day part and what you're trying to buy," Hnidka said. "Network TV is doing extremely well. It continues to be in high demand."

Colleen O'Kane, executive vice president and corporate media director at Fahlgren, said demand filters down to the local market.

"The upfront network market is usually a bellwether," she said. "If the upfront market is strong, it pushes people out of network TV and into network cable. And if that tightens up, it pushes them into spot TV. ... This one is a bonanza for the networks.

The biggest concern is what happens should war erupt and networks pre-empt scheduled programs in favor of commercial-free news coverage.

"When that happens, they have to make those spots good, so it will overburden an already difficult broadcast situation," she said.

Michael Fiorile, chief executive of the Dispatch Broadcast Group, which owns TV station WBNS, said that won't be a problem for local station affiliates.

"We cancel commercials," he said. "But good, competent advertising departments at broadcast stations make up that (ad) time at other times. Typically, advertisers want their ads run. ... They're comfortable with rescheduling."

What worries Fiorile is a war's influence on consumer confidence.

"If you go to war, people get nervous and stop buying big-ticket things, like furniture, automobiles, houses and all that stuff that goes in houses. If the goods aren't off the shelves, advertisers pull back," he said.

Auto dealer mindset

Automobile dealers, one of the largest marketing groups, use ads to drive sales. Every year, their goal is to spend less on ads to sell more vehicles, but promoting incentives is a typical response when sales decline.

"If we're not driving the traffic, we need to reach our goals. Sometimes we have to tweak our advertising," said Rick Germain, general manager of Germain Lexus in Dublin and at Easton. "We don't intend to spend more money in any year. We do forecasts, and the idea is to generate more traffic and spend less money, but that doesn't always happen."

"Anytime a new product is announced, especially high-dollar products like automobiles, you have to spend money to announce the arrivals," said Fred Ricart, co-owner of Columbus-based Ricart Automotive.

But car and truck advertising is also driven by competition. Ricart said interest-free financing, first launched by General Motors Corp. to help its Chevrolet division in 2001, fueled local car ad spending last year.

"A lot of the additional spending (last year) was due to factory incentives, which essentially forces a dealer to advertise more," he said. "Competition forces the market."

Though the dealers track sales weekly and adjust their ad spending, 2003 could become a tricky path.

"If we go to war, I think everyone is hopeful the market will be less panicked than they were for Desert Storm," Ricart said. "Everybody is treading carefully. Buying (ads) in times like this, you have to make quick changes and manage media carefully."

George Byers Jr., chairman of George Byers Sons, isn't making any predictions.

"The last war we had didn't last long," he said. "It didn't affect us much. ... But if it lasts six months, (the economy) will have serious problems."

Excerpts posted on aef.com: February 20, 2003.


Kathy Showalter, bizjournals.com. February 14, 2003

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