In a new report, Barclays Capital is calling 2012 a “low growth environment” for the ad agency business. The financial firm is forecasting that agency organic revenue growth next will average 2.9%, down sharply from the 5.6% that the firm believes agencies will achieve in 2011.
The predictions are based on combined average organic growth for the agencies at the major holding companies, including WPP, Omnicom, Interpublic, Aegis Group, Havas and Publicis Groupe.
Separately, Barclays initiated coverage of both IPG and Omnicom, citing a current preference for IPG, given its greater overall “upside potential.” The firm stressed that Omnicom is "world class," and indicated that the preference for IPG was tied, in part, to the fact that for several years it was in a slump, triggered by an accounting scandal. Now, IPG is showing signs that its turnaround strategy is working, although not complete.
Despite the bumpy ride expected next year for the industry, Barclays said that agencies generally are well-positioned to rebound with the economy.
“Overall, we believe that the agencies have become more valuable in an increasingly fragmented and complicated world and that the tailwinds from digital and emerging markets offer structural growth in an environment where cyclical growth may be hard to come by,” the investment firm stated.
Barclays also cited what it termed the “Wal-Mart Effect” on advertising, which it described as the shift of ad dollars from local to national media, as big marketers continue to seek greater efficiencies from their marketing budgets.
“National advertising has been gaining share of the total spending pie steadily since 1980, driven by the consolidation of media and advertising companies, not to mention the consolidation of corporate America,” the Barclays report stated. “We expect national advertising will represent approximately 38% of total U.S. advertising expenditures this year, up from 25% in 1980. Local advertising has lost 19 percentage points of share during this time.”
The ad holding companies, along with national media, such as network and cable TV, the Internet and the major cinema chains, will be the main beneficiaries from this continuing trend, Barclays said. The firm cited local TV and radio, newspapers and outdoor media as “potential losers” as the shift continues.
The firm reiterated its total U.S. ad spend growth projections for 2011 and 2012 of 1.4% and 4.0% respectively, which in both cases, is below the firm’s estimates for U.S. nominal GDP growth of 4% and 5%.
Those forecasts are directionally in line with other recent ad spend predictions. Publicis Groupe’s ZenithOptimedia, for example, estimates that 2011 U.S. spending will be up 2.2%, while 2012 growth will reach 3.5%.