By Michael Bürgi, first published in Digiday, August 1, 2022. Read original article here. 

Batten down the hatches, because it’s going to be a bumpy second half of the year for the marketing and media landscape overall.

No one sector will escape some brush with depressed numbers or client loss — and that includes the broader agency landscape. In fact, some are already feeling the pinch, both within the somewhat secure domains of holding company environments, but also across the swath of independent agencies serving up media, digital, experiential, performance and creative work.

In at least one case, an independent media agency lost clients who could no longer afford to market because of supply-chain issues. The head of strategy and planning, who declined to speak for attribution, confirmed client losses. “We’ve had clients who said, we literally can’t sell anything, we don’t have any more product to sell, we have to shut off advertising,” said the exec. 

Meanwhile, other agencies have experienced client pullbacks on spending, or had clients award RFPs, only to pause any work that was supposed to be started. Said the head of investment for one major holding company: “The economic uncertainty and continued supply-chain issues and now new spikes in COVID have major categories pulling back,” including automotive and telecom advertisers.

The CEO of an independent mini-holding company said about half of all independent agencies just don’t take the time to read the tea leaves of economic uncertainty, and those are the ones who may struggle to survive. “Inevitably clients are going to peel back 10, 20, 30 percent of brand advertising and peel back some social,” said the CEO. “What they’ll peel back last, of course, is the acquisition media because that’s the bread and butter. But especially for the independents, who might be working on a 10% margin, if their clients simultaneously are 45 days late on cash flow, while their employees have gotten raises and budgets roll back 30 percent, It doesn’t take a whole lot to create a lot of uncomfortability very fast.”

Dgiday spoke with a number of independent agency leaders to get a handle on just what kind of damage could hit the media agency world, and how bad it will be. A few common factors stand out: 

Specialization is endangered

Specialty shops that align with a single or narrow avenue of clients may well be in trouble, and should think about either diversifying their client base beyond one or two verticals, or expanding their services into other areas to reduce risk.

"Typically, you see, you know, experiential advertising and some of the more upper funnel brand building take some of those initial hits,” said Jared Belsky, CEO of digital agency Acadia. “It’s not always gradual — usually those cuts go deeper. So sometimes they’re caught flat-footed.”

Seth Hargrave, CEO of independent Media Two Interactive, said he’s been able to avoid a serious downturn despite being a digital specialist shop. “We’re a specialized agency in terms of media buying and technology, but the flip side of that is we want as diverse of a client base as we can possibly get,” said Hargrave. “Because that insulates us to a certain degree, and gives us opportunities when times are tough.”

DTC falling out of favor

Agencies are pulling away from direct-to-consumer advertisers, especially startups, which often sell luxury products (that don’t sell well in a recession) or aren’t strategic in their approach. Several agency execs said they’ve deprioritized DTC as a category, after it was red hot for the last two years.

"There was this big flourishing of small brands, DTC brands and independent performance marketing companies, that was driving a lot of performance marketing, independent agency growth. That side is shaking out,” said Michael Stich, CEO of Court Avenue.

"We aren’t as interested in DTC opportunities anymore,” said an executive at a digital agency who spoke on condition of anonymity. “We’ve had some before. While we love their entrepreneurial spirit, the rigor isn’t there and sometimes the expectations aren’t there. Sure, you can have 1,000 percent sales increases in year one, but guess what that meant? You sold 1,000 units — that doesn’t mean you really have a sustainable business.”

Pressure on the client leads to pressure on the agency

Agencies need to be ready for clients to exert greater scrutiny on planning and execution because CMOs and marketing departments are getting that same extent of scrutiny from their CFOs and procurement people. 

"The CFOs are running the show,” said the strategy/planning head that lost clients. “They’re like, ‘We need to conserve cash.’ And this is one of the easiest places for them to pull from.”

"CMOs and marketers are going to be backed into a corner to show proof of return,” agreed Hargrave. “They always are, but that constriction is going to be significantly higher over the course of the second half of this year” because of the financial pressures of the recession.

It's even happening with RFPs, said Dan Eisenberg, CMO of Blue Chip, an independent brand, media and shopper agency. “We’ve seen some RFPs around where there is a lot more scrutiny from client side financial leadership back on the marketers to make sure that everything is is bullet proof in that business plan,” including market analysis, supply-chain concerns, distribution and sales forecasts, he said. “It’s forcing the marketers who are ready to get in the market to have to circle back and be involved in a lot more internal reviews, additional layers of scrutiny. Sometimes they might even need to go back and rework that business plan, because of what they’re being asked.”

Places to cut back

Agencies, particularly publicly traded firms that have to worry about Wall Street punishing them, have a few things at their disposal to minimize risk if incoming revenue drops: freeze hiring, cut back on travel & expense budgets before you get to layoffs. 

"Focus on your people, protect your people, ensure that if we have a recession and come out of this recession, that you are well positioned with your clients and your teams to be able to support,” said John Harris, CEO of independent agency network group Worldwide Partners. “That’s versus, ‘We’ve cut 10% of our staff — Oh my God, now we’re back into trying to hire people again’,” which is harder than it’s ever been.