C.M.O. 5.5.2010

Credit Market Overview

May 5, 2010

On this day in 1862 4,000 troops in the Mexican Army led by General Ignacio Zaragoza beat of force of 8,000 of French Count Charles Latrille’s soldiers at Puebla in Mexico, winning their independence in the process.  That the majority of folks think of today as a marketing gimmick sponsored by Corona is not due to a lack of respect for our neighbors to the south but more a result of the power of advertising.

For some the age old adage; “It takes money to make money”, brings to mind visions of robber barons, corporate titans and all those populist pariahs that work on Wall St. but  the saying is equally true in the advertising business.  For the producers of most products the way to get it to sell is to inundate the consumer with ads using all types of media and messages.

As we entered 2010 things were looking far less promising than they are today.  ZenithOptimedia, the media buying arm of Publicis, had reported a 10% drop in global ad spending in 2009 with the U.S. experiencing a 13% drop.  “It’s ‘the worst’ the business has seen since Zenith began tracking ad spending 21 years ago and ‘likely the worst since World War II’”, was how Zenith’s CEO, Steve King put it.  Ad spending by Detroit was also on the scrap heap with YoY ad sales comparisons dropping for a record 17 months.  “That kind of drop-off is virtually unprecedented”, Jon Swallen, SVP of research for TNS Media Intelligence, a division of WPP said at the time.

Things seem to be changing now as recent economic statistics show spending on durable goods surpassing the pre-recession peak set in November of 2007 and real consumer spending rising by 3.6% YoY in 1Q10 while the savings rate fell to 2.7% YoY in the same period.

While much of this may be attributed to necessity as regardless of how well things are maintained they eventually wear out and need to be replaced; the 20% increase in “consumer impressions” (a nicer way of saying “ad blitz”) planned by Proctor & Gamble (PG) shows that companies are not afraid to spend a little of their money if they suspect the consumer is ready to part with theirs.  Part of PG’s plan is to introduce 30% more “significant” innovations in its products this year.

On a broader level Ali Dbadj, a Sanford C. Bernstein analyst, expects consumer-product companies to spend about 9.7% of their annual sales on advertising this year up from 8.6% in 2009.

Advertising takes many forms but one area where companies spend a good portion of their ad dollars is television and there are signs that things might be improving in this arena as well.  The cost of last-minute ads is rising and people on both sides of the transaction are saying the yearly “upfront” market for commercials (a.k.a. the opposite of last-minute) is expected to see higher per-viewer prices and greater overall spending.  “How rapidly things have come back has been a nice positive surprise” for the networks Bank of America analyst, Jessica Reif Cohen said.  Jessica also thinks “it’s pretty clear this is going to be a pretty buoyant upfront”.

Jessica’s theory was supported in part when it was reported that U.S. outlays by auto makers on national TV ads rose 22% YoY to $742.7MM in the first two months of 2010 by Kantar Media, an ad-tracking firm owned by WPP Plc.

Throughout the malaise we heard that the consumer was the key to the recovery.  From the spending numbers by both consumers and advertisers it would appear that that both sides are stepping things up.

The next step is sustainability.

Enjoy the week.

Jim Delaney

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