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Wednesday, September 3, 2008

GM Presses Ad Agencies on Costs

As Suffering Detroit Looks for Savings, Local Media Are Feeling the Pinch, Too

In its latest attempt to save money, General Motors has asked its advertising agencies to slash their fees by as much as 20% this year and next, according to several people familiar with the matter.

The owner of Cadillac and Chevrolet works with dozens of agencies around the country, including Publicis Groupe's Leo Burnett and Interpublic Group's McCann Erickson and Campbell-Ewald.

Several ad executives familiar with GM say the cuts could translate into more than $20 million in total savings for General Motors, but likely will mean layoffs for the agencies involved.

GM also has pulled out of September's Emmy broadcast on Walt Disney's ABC; it has advertised on the star-studded program for about a decade.

GM's push shows how Detroit's pain -- caused by a sharp drop in U.S. car sales due to soaring gas prices -- is creating ripples in other sectors. The fallout is expected to be particularly harsh for companies reliant on car makers' massive marketing dollars.

It's not just ad agencies being whacked by the belt-tightening.

Auto makers account for more than 12% of all ad spending in the country -- more than any other single industry. Media companies such as CBS, Viacom and News Corp. have all taken significant hits.

"The collapse in U.S. automobile consumer demand will materially damage the advertising growth rates of traditional media owners," said Michael Nathanson, a senior analyst at Bernstein Research, in a report to investors this week.

Bernstein predicts U.S. auto advertising will fall to $15 billion in 2008 from $18 billion last year -- a noticeable drop from $24 billion in 2004.

Ford Motor's U.S. ad spending for the first five months plunged 37%, while ad outlays by Chrysler in the period sank 31%, according to the latest data from ad-tracker TNS Media Intelligence. TNS figures don't include search advertising.

GM declined to give details on its request that agencies lower their rates, but a spokeswoman says the car maker has "asked our agency partners to work with us to eliminate low-value work and find creative solutions to go to market more efficiently."

Chrysler wouldn't comment on the TNS numbers, but a spokeswoman says the company is shifting marketing dollars to the Internet and to mobile, two areas not included in the TNS data.

A spokeswoman for Ford says the company doesn't comment on TNS data, but notes that Ford said in July that it cut $200 million from its marketing budget in the second quarter.

The media sectors most vulnerable to the pullback in automotive advertising include local television stations, local newspapers and local radio. Local TV stations get about 28% of their ad dollars from the automotive sector, and it accounts for 18% of ad spending in local papers, Mr. Nathanson says.

They are working overtime to find new sources of ad revenue. Tribune's WPMT FOX43, which broadcasts in central Pennsylvania, says it saw the cuts coming and offered its sales force more financial incentives to tap other ad-spending categories. Telecom company ads and a bit of political ad spending have helped. Still, automotive has represented 35% of the station's business in the past. "Automotive is huge," says John Riggle, the general manager. "Are we struggling without it? Yes."

Others stations are scrambling for other sources of revenue, too. "This is the worst I have seen it in my career," says Wayne Simons, vice president and general manager of Fort Myers Broadcasting's WINK-TV in Fort Myers, Fla. Mr. Simons, who has been in the business for 41 years, says the only group spending more on ads these days is lawyers. "They are advertising like crazy, saying that they can help you with foreclosures," he adds.

Auto accounts were once the most profitable pieces of advertising business, but auto giants, like other marketers, have squeezed their agencies enormously over the past few years. FCB, now part of Interpublic's DraftFCB, in 2000 had profit margins in the 20% range for its work on Chrysler. Now, profit margins on auto accounts are typically between 8% and 12%, according to ad executives.

Though ad executives say car accounts remain a vital and profitable piece of business -- in part because the agencies, after years of such work, have created effective economies of scale -- Detroit's retrenchment is another blow for Madison Avenue.

By: Suzanne Vranica
Wall Street Journal; August 7, 2008