Advertising agencies are walking a tightrope as they attempt to meet operational challenges amid a pessimistic outlook for 2020. Discover the report: Effects of the Coronavirus on the Agency Market.
We hereby present a second report based on a new survey by Ad World Masters that highlights how the coronavirus is affecting creative agencies. As we’ve done in the past, we invited over 200 agency owners and top managers to delve deeper into the issue, highlight their expectations and help us understand the situation that creative firms around the globe are facing. We hope that the report will help agencies, marketers and martech companies understand what their peers are thinking and planning. Many of the conclusions may be surprising.
- 57% of agencies expect that their annual income will be lower than in 2019, whereas 27% of agencies expect that they will increase their business this year in spite of the coronavirus, 16% of the agencies predict no change of income in 2020 vs. 2019 (By income we understand overall revenue. We do not mean the agency profit).
- Agencies presume that “The pandemic will affect the agency market temporarily and after a few months most things will get back on track”. 53% of agency owners and top managers think this way. As a result most of them decided not to reduce the size of their teams, with the expectation that they will be prepared to resume when the business peak is back. 47,8% of agencies are not planning any crew reductions. 11,9% find it very unlikely, whereas only 4% are planning to do it. 6,5% already reduced their teams and 12,4% find that reduction is likely.
- Taking the business risk of covering human resources costs on their shoulders, 42,1% of the survey participants think that “In 2020 many agencies will go bankrupt as a result of the economic crisis caused by the pandemic”. When we combine this pessimistic vision with the risky business strategy of agencies aiming at a fast market come back with full team presence, this prediction may come true for quite many of them. In such a scenario a lot seems to depend on how fast the marketing budgets are unfreezed.
Most of the agencies taking part in the survey are middle size agencies from North America, Europe and Asia. In total, agencies from 55 countries and from all the continents participated in the survey. In part IV of this report we are presenting the key facts about those agencies. You will find out what countries they represent, how many employees they have, what kind of services they offer and what industries their clients are representing.
On this occasion, we also reflect on old agency problems (difficulties in gaining new business, challenges related to RFI / pitching process etc) from a new angle. We have also looked for new trends in agency business. The results are presented in part III of the report.
Opinions on the financial situation of agencies vary. Most agencies (16,3%) do not expecting any changes in 2020. Others are more pessimistic and predict a decrease in revenue: -10% (12,9%), -20% (12,4%), -30% (10,4%). There are also optimists who expect an increase in revenue: +20% (9,4%), +10% (6,9%). The votes between the agencies who see a drop and a growth are split: 57% vs. 27%.
Agencies that took part in the survey mostly declared growth in 2019 when compared to 2018. 28% of the agencies increased the annual income in 2019 vs 2018 by 20%, 23,5% increased by 10% and 13,5% increased by 1%.
In conclusion, last year most of the agencies declared an increase in revenue, while in 2020 most are expecting to face the challenge of business reduction.
“The market is tough and volatile but as ever if you are highly attentive and proactive with your clients and prospects your agency will cope, maybe even prosper. Even big agencies are SMEs and we need to remember what we do best – be fast, be commercial, be creative – those traits all lend themselves to turbulent times.”
Chris Woodward, managing director, Dare, UK
Agencies are mostly blaming the coronavirus for the situation (58,4% of them). However, 23,8% of agencies say that the business change results from the economic results of the coronavirus pandemic combined with the marketing industry transformation in the last few years. So, problems that predate the pandemic are influencing the agency market and outlook. We will go deeper into this in part III of the report.
42,1% of agency owners and top managers think that in 2020 many agencies will go bankrupt as a result of the economic crisis caused by the pandemic.
Another problem that agencies anticipate is a price drop. 35,1% of agencies think that prices for agency services will decrease in 2020-2021, whereas only 12,9% expect an increase in prices.
“The biggest impact so far from the Coronavirus has been on cashflow, we are finding some clients cannot pay, others are looking for long payment terms while others are seeing to pause work until they can see the way forward. On the flip of this we have some sectors increasing their marketing – especially health and fitness if online – while others are trying to introduce ecommerce into their business if they did not have it already there. The sad thing is the ups are less than the downs as I feel after this initial push – it will get quiet again. Some industries have been very badly damaged such as travel and tourism or anything related to this, so if an agency specialised in this – they will be particularly hit. How bad it is – depends on how quick the economy rebounds. Without a doubt some agencies will not have the cash flow to maintain their current staffing or maybe even their business.”
Ciaran Connolly, CEO, ProfileTree, UK
Although most of the participating agencies view 2020 in a gloomy light, they do not plan to reduce their team size. Surprisingly, 47,8% of the agencies are not planning to do this in 2020 and 11,4% say that it is very unlikely to happen. Only 4% are planning a reduction and 12,4% are considering it and say that it is probable. This strategy does not fit the business predictions. How do we explain this? When agencies were asked if different statements are true or false, 53% of them declared this one to be true: “The pandemic will affect the agency market temporarily and after a few months most things will get back on track”. Agencies count on a fast come back to their previous level of business and they need qualified staff to keep the operational ability. This can be a risky strategy for them if the pandemic hits the market more deeply than they estimate or if the lockdown comes back later this year, This would be tragic for the markets. Most agencies are taking a risk, and this strategy might take place in many other industry sectors.
Agencies considering reduction in workforce point primarily to the following areas: administration 25,4%, client service 17,2%, management 14,9% and art direction 14,2%.
Bigger agencies with higher annual income are much more willing to reduce their staff than mid-sized or smaller agencies.
12,4% of agencies are planning to employ new staff and 16,9% are considering this as very likely.
Agencies that are considering new hires are mostly considering social media employees (35,5% of votes), web / app coders (29,5% of votes), new business (27,9% of votes), client service (27,3% of votes).
“I believe this pandemic situation will open a lot more doors for digital agencies due to the following points:
1. Brands and large companies are looking to get their employees work from home as it saves a lot of infrastructure, utility and transportation costs for them, the word in-house and the benefits that come with it are going to reduce.
2. Brands do not want to increase their staffing at this point in time, they would be looking more to utilise special services from specialised agencies to take their company forward.
3. As a lot of businesses have been impacted, there is going to be a surge in online consumption of services and products.”
Vinodh Ramakannan, Spinta Digital Solutions, founder & CEO, India / USA / UK
What is interesting is that 29,2% of the agencies think that “As a result of the pandemic many small agencies will gain, and a lot of larger agencies will suffer or even go bankrupt”, but not much more than half of this percentage (17,8%) thinks just the opposite: “As a result of the pandemic many large agencies will gain, and a lot of small agencies will suffer or even go bankrupt.”
Agencies were asked whether broad competencies or narrow specialisations are an advantage for the new times. What do agencies declare? 34,7% of them believe that those with broad competences will gain revenue in 2020-2021, whereas 23,8% choose narrow specialisations as a better business strategy.
Quite many respondents (33,7%) are afraid that brands will continue to build in-house competencies for marketing in 2020-2021. Moreover, 28,2% of them think that brands will use more freelancers in 2020-2021 than they did before. 35,6% of creative companies’ leaders feel that in-house marketing of brands is decreasing marketing budgets. This is a problem for agencies. Growing in-house marketing and using freelancers by brands will decrease the number of agency projects. In addition, agencies will have to adapt to an environment in which they collaborate with client’s different marketing divisions, freelancers and other agencies. Agencies do not have to assume a leadership role. Instead, an agency’s role is more often secondary and functions like a module, easy to replace when it does not meet the client’s desired criteria.
Platforms that match agencies with clients, which are a relatively new thing on the market, are growing in popularity. 16,3% of agency leaders think that platforms that match agencies with brands will play a bigger role in the market in 2020-2021 than they have before. The agencies’ top managers were asked “What martech services are you using or are going to use in 2020?” 29,6% of them pointed to agency directories / rankings / platforms. This is definitely good news for AdWorldMasters.com. It seems that after digitalisation of many services (e.g.: taxi service, hotel rentals, flight tickets or even beauty services) it’s the turning point for advertising services. We believe that agency services will be purchased via platforms, which indeed is our main mission. According to the Global Capital Confidence Barometer – a report by Ernst & Young, the coronavirus will speed up digitalisation and automatisation in the economy.
“The Coronavirus pandemic represents a lot of challenges — both known and many unknown just yet — for both marketing agencies and the brands they support worldwide. In the end, I believe it will speed the rate of phasing out both brands and agencies with dated, generalist marketing & advertising practices that have barely been working to date. It will then become a matter of time before many of those sink, and those that can swim continue
swimming stronger than ever as we return to a “new normal.”
Curt Cuscino, founder & CEO, HypeLife Brands, USA
Agencies are looking for solutions in the evolving market. 25,2% of them assume that the agency market will be much more product-oriented, which means creating and selling agency services as products. This view does not reflect the market offer yet, but shows a new trend which might appear on the market.
“Agencies depend on brands that depend on consumers. With a self-inflicted depression, this will readjust the ad model, how it is created as well as how it is delivered.”
Michael Migliozzi, managing partner, Forza Migliozzi, USA
34,7% of survey participants believe that the biggest market players: Google, Facebook, Amazon, Microsoft and their ads systems will gain in 2020-2021. Only 10,4% have an opposite opinion. When we combine these opinions with the increased use of in-house marketing teams, the first, bigger group of respondents might in fact be right. Some brands are already used to spending their marketing budgets more efficiently even before coronavirus. This tendency may be increased and accelerated by brands wanting to get back to their sale levels and market share with the lowest possible marketing costs, which may mean eliminating agencies and media houses from the projects and moving budgets from creation and production on digital media, spent directly with the biggest ads systems’ owners.
Many agencies believe in the power of the current advertising system. 25,7% of them think that the advertising market is developing fast and creating a lot of new solutions to reach target groups in an effective way. 18,8% of the respondents guess that, as a result of bigdata and martech, know-how marketing services will become increasingly effective.
“Post lockdown brands will look more to agencies that can deliver performance-based marketing, removing the uncertainty of retainer-based models.”
Markerle Davis, CEO, Soap Media, UK
Following the digitalisation trend, which many people expect to speed up as a result of COVID-19, we also asked the agencies “what martech services are you using or are going to use in 2020?” It is not surprising that most of them are familiar with many types of martech solutions. The most popular are social monitoring / listening / management tools (60,2%), video / photo stocks (58,7%), web / app development tools (56,6%), e-mailing tools (55,1%), digital media buying / optimisation tools (49,5%). Martech usage seems to be growing.
“(…) During the period of Covid, agencies should pay much attention to permanently changing the agency’s way of doing business and using digital tools more effectively in the post-virus period. (…)”
Cihan Gediz, account director, Judo, Turkey
Ad World Masters has recently rolled out an initiative, including a dedicated website, that presents martech discount offers. Many martech companies have prepared exceptional offers for agencies. The goal of these initiatives is to make the Coronavirus period easier for agencies to survive and to speed up the adoption of martech tools.
Previous agency problems reflected during COVID
Agencies were asked to identify key problems that agencies need to tackle in order to increase their business in the long term (2020-2025). Respondents were free to provide as many answers as they wished.
Agencies complain about the RFI / pitching process. In their opinion, the RFI / pitching process consumes too many resources and time (42,3%). More than one-third (35,6%) of survey contributors say that the RFI / pitching process is not transparent enough to for the best offers to win. As much as 51,5% of creative firms’ leaders experience difficulties in attracting new clients. These are old, well-known advertising industry problems and nobody has been clever enough to find a good solution for them. Will the pandemic find a way to deal with these threats, or only make them worse?
“Over the past 12 months we’ve seen a number of agency challenges become more prevalent, meaning we’ve had to constantly pivot and position our business to stay competitive, but most importantly, necessary. From industries facing decline, clients bringing marketing and design teams in-house, through to rising competition from freelancers and smaller outfits, this global crisis only compounds existing market challenges, while throwing a whole host of other seismic societal shifts into the mix for good measure.
We believe the businesses that emerge on the other side will not be the same, because the people that make them up will not be the same.
We expect to see ways of working continue to evolve and adapt, and the desire for taking stock of brand foundations, values and positioning to be top of mind for those returning to the coal face, with Marketing Managers and business leaders focussing on audits, strategy and planning to refresh and refocus their battle for relevancy.”
Charlie Hughes, strategic account director, AgencyTK, UK / USA
These new insights suggest that agency leaders think there are too many agencies on the market. 36,6% respondents believe competition is too big. At the same time, as mentioned earlier, quite a few are afraid that many agencies will go bankrupt in 2020.
Over one-third of agencies (34%) assume that “clients think they know better” and find this problematic for their business. In contrast, 29,4% feel clients have a low level of expertise, and view this as a handicap for agency growth. During and after the pandemic, clients will feel huge pressure either to increase their sales or keep their jobs, which can mean an even more challenging environment for agencies.
What kind of agencies took part in the survey?
There were 203 participants: top managers and agency owners who answered our questions.
Participating agencies deliver a broad range of services, either digital or offline. The most popular services were concept / strategy, graphic design, social media marketing, web development, copywriting, content marketing, digital media – each of these services collected over 50% of votes.
21,6% of agencies are from US, 13,1% from the UK, 6,5% from India. In total, all the agencies that took part in the survey represent 55 countries from all continents.
The average agency business perspective in 2020 in the United States is -6%, in the United Kingdom -8% and in India 2%.
The most optimistic agencies are from Argentina, Latvia, South Africa, Iran, Egypt, Australia, Uganda, Indonesia. They have higher growth expectations.
The most pessimistic agencies are from United Arab Emirates, Israel, Jordan, Panama, Germany, Nepal, Romania, Japan, Kuwait, Vietnam – leaders from those countries expect a decrease in business with a drop as high as -50% in 2020. Generally speaking, the level of pessimism among European agencies is rather high.
“The Coronavirus pandemic consequences will hit the communication and marketing agencies in Latin America as a tsunami, because of economic decrease, unemployment and change of consumer habits. Technology orientation, resilience, flexibility to rapidly embrace new changes, customer experience orientation and strategic thinking, will take a big role to determine those who can adapt and survive offering new capabilities and indispensable services.”
Veronica Hernandez, CEO, Smartcom Corp, Panama
What is the size of agencies defined by their income in 2019? There were 16,7% agencies with an annual income of 201.000 – 500.000 USD, 11,8% of agencies with an income of 101.000 – 200.000 USD, 11,3% of agencies with an income of 1.001.000 – 2.000.000 USD, 10,8% with an income of 501.000 – 1.000.000 USD, 9,4% with an income of 2.000.001 – 5.000.000 USD and 6,9% with an income of 5.000.001 – 10.000.000 USD. By income we understand the amount of revenue rather than profit. So, in the survey we had quite a broad range of agencies of different business levels with pretty good representative sizes.
Looking at agencies’ years of experience, 95% were funded during the past four decades. If we take a look at when the agencies were founded, there is a huge range, and they represent either new, middle age or well-established businesses.
We also spoke to agency leaders about the kind of industries their agencies represent. As indicated on the graph below, the most popular categories are B2B / SMB / local business – 65,5% votes, food and beverages – 49,3%, retail – 49,3%, finance / banking / insurance – 43,3%, online services – 42,9% votes.
“ (…) If your business serves B2C, your agency is going to see some negative implications of this pandemic on the revenue. For agencies depending on B2B, 30-40% of the revenue would be affected post Covid-19. Having said that, B2B model businesses would take a softer hit than B2C. (…)”
Vikas Tiwari, CEO, What a Story, India
Agencies were asked about the number of employees they have (including owners, but not including freelancers) 22,7% declared 11-20 staff members, 21,2% pointed out 6-10 members, 17,2% marked 2-3 people and 12,% between 21 and 50 employees. In conclusion, the creative companies that we invited to participate in our research project represent a wide variety in terms of human resources.
We also asked participating agencies how many employees they employ. What is surprising is that over half of the participating agencies utilize only 2-5 freelancers.
“It truly cannot be denied that the pandemic has set forth a chain reaction wherein we are plunged into a ‘digital first and forever’ state of living. Brands and organisations of all scales that may have slowly been adapting to from traditional to digital are likely to also have to either in-house trial and error their marketing and comm efforts overnight. Alternately, there may also be an uptake of agency dependency, the question is not if the agency is big or small at the end of the day it boils down to which agency has the right offering and service level suited to the organisation. Brands need to stop looking solely at price points and select partner agencies that understand them, have the ability to adapt and ultimately work cohesively to achieve objectives together in a symbiotic relationship.”
Shakthi DC, founder & regional director, Wisesight, Thailand / Malaysia
In closing, we are keeping our fingers crossed for agencies going through this uneasy period and hope that they are not seriously damaged. Please remember that you can find new clients via Ad World Masters. Brands can search agencies on our platform and determine compatibility with creative companies like yours. There is a dedicated module called “Chemistry Test” specifically for this purpose. Agencies can collect data about brand managers who have expressed interest via their Premium Account. If you do not have an account yet, you can register and add your agency. You can also consider purchasing the Premium version of your account. You can find more information here.
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