While a volatile economy casts a dark cloud over the prospects of the advertising sector post-Brexit vote, for some of the smaller and independent agencies a sliding sterling contains a silver lining.
The immediate benefit of a weak pound is making certain marketing services cheaper and therefore more competitive to overseas advertisers. With the pound plunging to a 31-year low against the dollar as it hovers at a three-year low against the euro, agency bosses are torn between whether to push for new business now they’re effectively cheaper in these markets or sit tight if demand there is weak due to economic uncertainty.
Agencies like independent branding shop Bulletproof and WPP’s Fitch have already spied opportunities. And while both are optimistic for growth, what they offer is demand-sensitive rather than price-sensitive, so the scope for manoeuvre is strictly limited. Indeed, there’s a sense from other agency executives that the real worry is slow growth in Europe and the thought of higher import costs such as talent.
“As soon as the pound tanked off the back of the vote it immediately made us more competitive overnight in Europe,” said Jonny Stewart, managing partner at Bulletproof.
For years the success of the city has kept the sterling very high and that has proved challenging for businesses like Bulletproof to compete internationally because of the higher exchange rates. It’s an issue that’s been exacerbated over the last six months as bigger agency groups have steadily brought their fees down to the medium-sized shops, which consequently put a squeeze on the likes of Bulletproof. Maybe if there’s a permanent effect on the exchange rate, that could tip the scales in the favour of these smaller agencies, mused Stewart.
“We’ve always had our European clients telling us to review our rate card when it comes to looking to join a roster and it was like we were being penalised for being a London agency working off the back of the sterling,” he continued. “We got asked to review our rates that Wednesday [before the referendum] for a roster pitch and we asked if we could defer it until Friday so that we could understand the outcome. Everything that they asked us to do almost got mitigated by the drop in the exchange rate.”
Other agencies have reported similar benefits in the immediate aftermath of the referendum, especially those that are able to lean on offices in less volatile markets. The only certainty many can confidently predict is more uncertainty, mindful that a falling pound is a double-edged sword and that Brexit does not need to be a long-term disaster.
For WPP-owned Fitch, which has been working with Russian companies for years, though less in the last 18 months, a drop in the pound could open the door for new opportunities. “We need to be positive,” said Alasdair Lennox, executive creative director for the agency’s EMEA business. It may be easier for a WPP agency to exploit a weaker pound, yet Lennox stressed that its decision to do so would be stem from whether it could grow market share in Russia instead of using it to make tactical gains.
“We’re assessing whether we go out there [to Russia} with a road show and up our presence there again,” Lennox continued. “This isn’t about making a quick buck. My narrative for Russia would be that we’ve worked there for nine years and we’ll work with them [businesses there] when their economy is strong and we’ll be there when the economy is quiet. I say this because we’re not here to plunder and pillage [markets]. That’s not what we’re about.”
However, for those domestic shops that hardly ever pitch for overseas business it’s unlikely they will gain any competitive advantage from falling exchange rates. Performance business SearchStar is one such agency and sterling’s slump will have the adverse effect through lower incomes and higher prices squeezing profits. Because it runs international campaigns on behalf of UK-based advertisers, the drop will make overseas media more expensive to buy.
“Theoretically, the increased margins our clients make on their sale prices will compensate. Critically, I’ve yet to receive a client call asking us to run an export campaign,” revealed Dan Fallon, managing director at SearchStar.
“The calls I have received from clients so far have all been negative. Already we’ve been told a campaign has been put on ice by a large firm of City lawyers and a UK exporter client has told me they are moving their headquarters to Dublin. Unfortunately, I completely fail to see the bright side in Brexit. The vast majority of our clients are likely to find life tougher and consequently so are we. We’ll do all we can to mitigate it but business is likely to be difficult.”
Similarly, Ollie Bishop, founder and chief executive at Roast, is disheartened by the impact of a weaker pound. Roast has grown to 40 people in 18 months and is concerned that talent won't continue to flock to the UK at the same levels as before. Bishop explained “It is easy to run pan European campaigns from one office as long as you have the talent. We rely on smart foreign talent as much as local talent.”
One potential bright spot amid the economic doom and gloom for Bishop is the impact on commercial prices. While admittedly bleak, the agency boss questioned whether a fall in office rents off the back of investors trying to pull their cash from commercial properties in the wake of the vote could be good for profit margins moving forward. “But even something like commercial prices would only happen if a load of businesses go bust and move out of London and then there’s less business to win,” he continued. “Is a positive that is based on quite a few negatives happening really a good thing?”
Tax breaks for businesses should help free up the funds to insulate themselves from the pound’s fall. If agencies have additional funds to reinvest in their businesses it could also help them absorb the rise in import costs. Received wisdom dictates a weaker pound will fuel exports, but most currency fluctuations initially work by slashing demand for imports, not lifting exports.
With that in mind, agencies shouldn’t stake future plans on the value of the pound, advised James Kesner, director at Results International. “Brexit in the long-term could be painful for agencies but I think in the short-term it could actually work out quite well…relationships [with clients] are still really important – even more so now if you’re doing business in the US or Europe.”
Agencies are naturally concerned about those relationships as advertisers mull over whether change is needed to shield their brands from all the market disruption. Many it would seem are braced for the worst; the share of British businesses that are pessimistic about the economic outlook over the next 12 months doubled from 25 per cent to 49 per cent after the vote to leave the European Union, according to a study by YouGov. And those concerns have already caused some brands to pull or pause their budgets, while agencies have tried to advise them as best they can.
As Emma Robertson, chief executive at Transform, explained: “The only certainty is uncertainty at the moment, so we’re advising our clients to be as agile and adaptable as possible. That includes shorter, more flexible contracts with all suppliers. In this market context, agencies that focus on outcomes-based projects rather than people-based retainers will flourish whether they’re independent or not.”
Ben Little, co-founder of innovation business Fearlessly Frank, said it’s advising clients to do two things: “The first is find new innovative ways of breaking through, the second is prime the pump with new product and services. Even before Brexit – but especially now – ‘normal’ is dead. We live in a world of complete, perpetual change and all companies need to keep innovation on the agenda.
“All brands want immediate results: however, those only looking for immediate results will not be with us in the longer term. Demanding immediate results while cutting back spend is the most effective way possible to open the door to nimble competitors.”
The pound is set to tumble even further, according to some analysts, who believe it could gain parity with the dollar. For agencies, that will undoubtedly mean a more competitive export sector as long as the demand holds up.