Are Agencies Prepared For The Rise of Interest Rates?
Updated: Nov 4, 2018
The last two years have been difficult ones for agencies and firms in the marketing and communications space. Now more than ever the senior team in agencies have to be versatile readers of the economic landscape
The Central Bank of Nigeria has kept its benchmark interest rate relatively stable at 14 percent over the past couple of months. The last time policymakers changed rates was in July 2016, when they lifted the monetary rate by 200 bps.
“the search for how to hold on to profitability in the face of dwindling turnover remains the most systemic challenge that most agencies currently grapple with.”
The MPC then noted inflationary pressures rebuilding, as the annual inflation rate increased for the first time since January last year to 11.23 percent in August from 11.14 percent in July, mainly due to higher cost of food. Economic watchers have now begun to project that there might be a further rise in inflation and interest rates on bank loans in the next 12 months. This is despite the recent slight improvement in consumer confidence being driven by an anticipation in the increase of liquidity and spending in the run off to the forth coming general elections in the early parts of 2019.
Marketing services agencies and more particularly experiential and activation agencies are predominantly heavy users of short term commercial debt instruments, such as PO finance, Invoice discounting as well as asset leasing financial products. It is expected that an increase in the cost of debt will be translated into an increases in the cost of these instruments. All of this will undoubtedly have implications on the profitability of agency projects which is expected to compound the challenges agency heads have been tackling ever since the economic recession. Agency project profitability in Nigeria has traditionally hovered between 15% and 35%, but this significantly reduces when over heads and financing charges are deducted, with the stark reality being that several agencies actual operate in negative profitability, while the more prudent are able to establish single digit profit before tax.
This economic reality and the search for how to hold on to profitability in the face of dwindling turnover remains the most systemic challenge that most agencies currently grapple with. What has emerged is that agencies within the experiential and creative space have clustered into two extreme cohorts. In the one hand are smaller agencies which unable to attract the requisite level of bank funds to finance the capital intensive needs of bigger accounts now find themselves not only severely weakened but in survival mode, while the second cohort made up of the larger and better capitalised agencies find that they are better positioned to win more business. Inevitably the industry is witnessing a significant shake out which might have far reaching consequences for the industry structure in the future. One agency head interviewed was clear to suggest that while his agency might have received significantly less number of briefs in 2018 compared to previous years, the individual billing sizes have been significantly larger. It would suggest that the bigger clients are also consolidating their business into fewer agencies who are able to demonstrate the required capacity.
What then might be the way out for the small- to medium sized agency. Experts suggest five key steps that agencies have to take:
Improve Your Financial Management Reporting
In a time of slowing economic activity and likely increase in interest rates, agency management need to speed up their decision making processes and ensure the availability of accurate and timely management information. Fundamental to this is ensuring that management really understand whether and where the profits of the business are coming from. Unfortunately many agencies do not have the systems and processes in place to enable them to monitor the key KPI‟s of their business accurately, and this becomes a further albatross to their ability to improve their performance. So it is a good idea to find a competent financial management partner or resource.
Drastically Reduce Your Operating Expense And Retreat To Cash
Most agency heads already know this intuitively. Indeed the past two years has been all about reducing staff count, getting rid of unnecessary expenses and scaling back the size of operations. The industry has already begun to witness a departure of several talents from the leading agencies either to the client side or to entirely new career paths. These new career path has now also begun to include more freelancer-consulting type working arrangements. Rationalisation becomes a challenge because it comes with the loss of valuable organisational capacity, competencies and experience. It is also important to start re-assess what you are willing to do on credit and find clients who will be willing to pay cash ahead.
Explore New Directions or New Ways of Doing Things
One of the most important benefits of an economic down turn is the creativity that it unleashes due in a large part to the need to survive. Agencies by nature are made up of very creative people and while a large pool of the staff might be younger and less experienced in management and economic terms, they offer interesting perspective to age old problems.
This perhaps is the time to find new and ingenious ways of running the agency. But it is also offers the opportunity of looking at entirely new opportunities within the space (Blue Oceans), particularly one which has not yet been exploited by others and taking the benefit of the first mover advantage to make some money.
Developing A Clearer Proposition Is Key
In times of turbulence and noise, it becomes important for the market to be clear about what exactly you do. The 'integrated or through the line agency' moniker becomes a tougher sell. Rather than an expansion of service space the smaller agency should be focussing its attention into narrower niches of services and working hard to dominate that space whether by being the best or the most creative and innovative, but ultimately being able to show a clear value proposition that will make it attractive to the buying department as much as also the marketing department. One way to do this is to find new spaces that help to establish higher reach rather than just frequency. What this means particularly for experiential agencies and activation firms is that finding new customers for the client becomes more important that communicating with the same old customers more frequently. The challenge is that to be able to do this might require investing the time, effort and some resources in developing proofs of concepts which then can be taken to the client.
Don't Be Afraid To Partner With Others
One of the biggest problems with SME's generally in Nigeria is the cultural penchant to want to be the sole owner of business vehicles. There may be several reasons to justify this approach, but the reality is that it does not always make economic sense and more so in times of economic difficulties. Partnering with others does not have to mean selling your business to others or taking on new shareholders, it could mean establishing loose alliances and partnerships that allow two or more agencies to share cost and valuable resources that might not necessarily give one competitive advantage over another. Start small and then grow the relationship over time
Nigeria is going through a difficult time at the moment and this might seem like the time to quit altogether. Good agencies will have less to fear in a recession or projected tougher economic operating environment than poorly run ones. It will require an ever diligent management, innovative thinking, a clearer positioning and the humility to join up with others to survive the storm and thrive.