In Silicon Valley the recession is over. Houses are selling, people are being hired and consumer spending is up. While the same may not be true of the rest of America, or of many countries in Europe, it’s clear that most of the major economies are clawing their way out of recession. This creates an interesting challenge and opportunity for brands, not just in terms of financial gain, but also in terms of how they are positioned. During recessions consumers behave differently, they measure brands differently. In recessions price, for example, is king. Other factors such as what the brand says about our status, matter a lot less. In other words consumers are wired differently in recessions and will listen to different messages and join in different conversations about brands.
So what should brands do when the good times return? First, they shouldn’t wait. Any brand that hasn’t already defined how it will adapt as the economy improves will get left behind. But to do that brands need to understand the exactly what their customers are talking about now that they weren’t talking about six months ago. This kind of research can be done by analyzing social networks and other online communities but it has to be done properly and taken seriously. Indeed I’d argue it that this research in to the attitudes and opinions of the post recession customer is the most important act a marketer can undertake right now. Good research will provide the platform for the brand for the coming years. And let’s face it the next few years are crucial in the brand wars. To make the point, I worked with brands that studied how customers attitudes had changed going in to the recession. This research changed their messaging and their behavior at a crucial time. One of these brands has since been widely recognized as a poster child for dealing with a recession.
Of course the research is only the first step. Brands need to figure out how how to act on that research. They need to decide what conversations they can now leave and which they can now join, how to behave in those conversations compared to the past. In short it’s a whole new playbook. For brand heads sitting there without a post recession playbook, this ought to be a worrying time. For those with one in hand, these are the good times. Enjoy!
PR people tend to be glass is half full people. This means that when the recession started they tended to put a very brave face on it and were almost in a north African river (denial). Indeed it was only when things had hit the bottom that many PR heads would really talk about how bad it had been. But has the industry really started a recovery? Here are some arguments for and against:
1. Clients have released project dollars that had otherwise been held on to
2. Budgets cuts are no longer taking place and in some cases clients are modestly increasing their spend
3. Staff are starting to get recruited as agencies feel more confident of their revenue streams
4. Staff who are moving are starting to look at agency work rather than in-house. In-house is often considered the safe place to be in a recession (relatively)
5. New business opportunities have improved for agencies and the process has become more normal (number of agencies involved and budgets are back to normal)
1. The release of project dollars is potentially just a year end phenomena. Many clients have calendar fiscal years and so they are now starting to think about their budgets for 2010. If they don’t spend their ’09 budgets they will have a challenge getting $$ in 2010.
2. PR budgets are generally linked to the sales of companies. Given sales are still sluggish, across the board rises in PR spend are unlikely for quite some time.
3. While the new business environment is much improved it is still very tough relative to a non-recessionary environment. Procurement departments have used the recession to sharpen their teeth and get better deals. It will be some time before agencies can get back the concessions made during the recession – if ever
The above would suggest that as an industry we are still in the early stages of the recovery (assuming you are still a glass is half full person). But what it really says to me is that we should not be looking at the recovery as a chance to get back to where we were but rather as a reminder that we need to innovate and come out of the recession offering a better solution to the one we did going in. This is easier said than done and I suspect that many agencies will look at progress in social media and feel that they can tick the box called innovation. I’d urge them to think again. The shift towards digital is important but every part of the industry has embarked on that mission. Real innovation is spotting the less obvious challenges and embracing them along with the obvious. Good luck in that challenge. Oh, and if you figure it out, do let me know!
All recessions are not created equal that’s for sure. While it is pretty clear that many businesses are feeling the effects of the global recession that is upon us, some are feeling it more than others. Sector to sector comparisons are obvious. I’d rather be in the technology business than the car business for example. However, even within sectors there are businesses that seem to be doing relatively well, while others in the same sector are crashing and burning. Some are losing because they are selling the wrong product and some are losing because they have the wrong customer base. Some are losing because they do all their business in one country, while others are winning for the same reason, they simply operate in a different country. The reasons why people are winning and losing can be due to good or bad management, or down to history. The physical markets people are in were decided a long time ago in many cases – long before the financial markets crashed and took the economy with them.
All of this unevenness (is there really such a word?) makes for some interesting management challenges. For example the cost of leaving a market can be higher than the short term savings achieved by getting out. Equally, changing your customer base isn’t easy when markets are like they are right now. Put another way it is hard for executives to marry the short term financial goals of a business, with the right long term business goals. As a result, I would expect some pretty lumpy performance from companies in the next year or two. This isn’t what financial markets like but for many companies it will be unavoidable. The most important thing is that businesses run their businesses profitably and conserve their cash during a period like this. It is then also important that they learn from this recession. Recessions expose the weaknesses of a business. Ignoring those weaknesses is perhaps the worst mistake a management team can make. All business leaders hate recessions but they are a great test of you and your team and of the business you are running. How well you do is interesting. How much you learn from the test and apply to your business is really important.
It would seem that supply and demand economics rule. For years the valuation of commodities have been driven by this, while the valuation of companies have clung to various guiding metrics such as PE ratios or multiples of EBITDA. All this seems to have changed as the stock markets around the world essentially ignore all multiples and focus instead on whether there is actually someone willing to buy a company’s stock. Classically it has been quite normal for businesses to to have PE ratios of between 10 and 20 and yet right now there are hundreds of companies with PE ratios of 5 and below. Many of these companies are small cap stocks which investors fear because of their liquidity. Ironically though many of these businesses are better run than large companies because a) the managers have some meaningful stock interest in the business and b) because these same managers are closer to the real customers and therefore simply run their businesses better.
Sadly for small business owners this shift to supply and demand valuations is unlikely to change anytime soon. This has broader implications than simply unrealistically low share prices for businesses. The ability of many companies to carry out acquisitions is tied to their valuations. When they are highly valued, companies can use paper (stock) as a means of buying other companies, either by issuing stock to the shareholders of the company they want to buy, or by getting investors to buy a new issue of equity, the proceeds of which can then be used for the acquisition. When stock prices plummet so do the possibilities for these companies to do any buying. As a result, the supply and demand economics then starts to impact the value of private companies. In the PR world there were quite a number of deals done last year based on high multiples. These prices would simply not get paid today unless there ended up being an auction. I therefore confidently predict that the market for acquisitions will become very quiet in the next year. This isn’t because there aren’t companies for sale or companies looking to buy. It is simply because until the valuations of public companies start to rise, a key currency (new shares) will not be available for purchases. At the same time, the better companies will likely defer sales until conditions improve.
Of course companies can still be bought for cash. Here again there is a problem. The global credit crunch has made it harder for companies to raise debt. At the same time, shareholders who, in good times, encouraged businesses to gear up are now demanding that debt be paid down. As a result, companies are hanging on to cash or ignoring the potential of their banking facilities, thus again taking a currency (a very real one) off the table for acquisitions.
You could describe this as the perfect storm for small companies looking to do deals. I would suggest that this storm may be with us for while. Then again I’m British so I’m used to bad weather.
If you read the latest PR Week UK front page news that Creston has pulled out of the US you may have come to the conclusion that the US was a dangerous place for PR agencies to be right now and that firms such as ours and Huntsworth must be struggling. I’d like to refer back to our recent AGM update where we talked in positive terms about our business here in America and also refer people to Huntsworth’s update where they suggested they too were trading well.
The story inferred that large agencies are going to find it harder if a recession strikes (shocking news) but fails to make a coherent argument as to why – there only real suggestion is that in tough times people go to smaller less expensive firms. As an agency head that has worked through a recession or two I’ll tell you that in recessions clients get cautious, which means they tend to want to work with firms they know will still be there when a recession ends. Equally, better talent tends to also play it safe and opt for agencies that are likely to survive and that tends to be the bigger firms. So as you can see I’m not really following the logic of this news piece.
My next observation is that even having read the following paragraph several times I’m still not sure what it means: “Agencies under the umb¬rellas of mid-sized conglomerates such as Chime, Next Fifteen Group and Huntsworth, which are reliant on central costing, could now find their budgets under close scrutiny from clients, according to analysts.” What exactly is “central costing?” Do they mean that PR budgets are somehow managed centrally by big customers across the globe? If so I suggest they interview a few clients and they’ll soon learn that the vast majority of budgets are set market by market.
My last point is that I’m rather surprised PR Week didn’t contact the midsized holding companies they referred to for a perspective on this news. Perhaps if they had the Creston spin would have been exposed. My hat goes off to Creston though. Let’s face it, they did manage to deflect some pretty bad news and suggest that they were now better placed than others to deal with the US. I just wonder who really bought that news.
Reuters just published a piece saying: “Goldman Sachs on Wednesday said it expects the U.S. economy to drop into recession this year, prompting the Federal Reserve to slash benchmark lending rates to 2.5 percent by the third quarter. In a note to clients, Goldman said real gross domestic product would contract by 1 percent on an annualized basis in both the second and third quarters. For all of 2008, the investment bank said GDP would rise by 0.8 percent. The unemployment rate will rise to 6.5 percent in 2009 from the current 5 percent, it said.”
We all hate to read pieces like this as they suggest we are set for a year where belts/purse strings will be tightened. Of course, the reality of markets is that some businesses will thrive during a period like this and some will truly suffer. The challenge we all face (assuming GS is correct) is how to make sure we are in the first category. At the end of last year I wrote a piece on what agencies should do when recessions loom. I’d like to reiterate the advice in that but I’d also like to add some other points:
1. Make sure your work is focused on the same things the board is worrying about. If you don’t know what they are worrying about you should be worried. You need to know. Now of course we are all aware that in many businesses getting to the board is tough. That said, there are always access points so make it your mission.
2. Worry about the small things. When markets are bad people get nervous and look for the mistakes. Avoid making them. Good agencies have their share of good detail process people, people who can spot a tiny mistake. Give these people a voice and make it clear that they need to be listened to.
3. Provide insight. Recessions are like fog. They reduce corporate visibility making it hard to plan and even more difficult for businesses to act. Keep clients aware of what is going on around them. Give them data and some appropriate analysis that helps them understand what is going on. Decision making in the good times is easy as it gets less attention. In tougher times, everyone questions everything. The more insight you can give, the more you can help people feel good about the decisions they are making.
Of course it could well be that Goldman has it wrong. Over the holidays I met a couple of investment bankers from Merrill Lynch and Morgan Stanley. Interestingly they both said they have several “chief” economists to make sure that they can never be wrong. In other words, as long as their economists don’t agree on the future one of them will be right!