Coronavirus Buyer’s Guide & April 2020

Supply Chain Risk Stimulus Impact Availability of Best Practices Assessment Analysis Substitutes for Contracts

Historical Performance buyers are cutting budgets. In addition, product shortages are causing buyers Marketing and advertising agencies have historically performed poorly during of market services to freeze ad campaigns as they are unable to fulfill orders. recessions. In 2009, US ad spending as a percent of gross domestic product sunk Some clients are asking for contract suspensions, while others cut back all or to its lowest level in decades. Moreover, Ad Age reported the sharpest revenue part of their spending on marketing and advertising initiatives. While digital drop since 1945 (7.5%) during 2009. In addition to losing business, many firms advertising is faring better than traditional media, both categories are down offered discounts in order to retain clients. Revenue then suffered for several more than 30.0% according to IAB. Revenue for advertising agencies is poised years as recessionary price discounts of as much as 30.0% were taken as the new to decline 2.0% in 2020, indicating poor performance. benchmark by some clients. As reported by McKinsey, ad spend did not return to pre-recession levels until 2011. According to an Interactive Advertising Bureau (IAB) report, 74.0% of buy-side decision-makers expect that the coronavirus will Market Headwinds & Tailwinds have greater impact on US ad spend than the Great Recession. Marketing and advertising firms are recalibrating their businesses around these headwinds and tailwinds: • Cuts to key buyers’ marketing and advertising budgets Current Performance • Declining consumer spending While the Great Recession resulted from problems in the financial system, • Changing consumer preferences for mission- and cause-based messaging current threats of a recession revolve around declining consumer spending. • Higher monitoring of advertisements to weed out sensationalized content As marketing and advertising campaigns generate fewer conversions, key • Social distancing policies that make shooting new video ads difficult

procurementiq.com 1-888-878-9429 [email protected] Contents

Supply Chain Risk Assessment...... 3 Upstream Suppliers...... 3 Downstream Buyers...... 4

Stimulus Impact Analysis...... 5 CARES Act Provisions...... 5

Availability of Substitutes...... 6 Creative Procurement Opportunities...... 6

Best Practices for Contracts...... 7 Best Practices...... 7 Key Takeaways...... 8

Appendix...... 9 Related Reports...... 9

procurementiq.com 1-888-878-9429 [email protected] Risk Assessment Upstream Suppliers CONSIDER THIS: Upstream Risk Before Risk After As reported by the Supplier COVID-19 COVID-19 COVID-19 Impact New York Times, about 33,000 workers at US • While media companies may sell ad space to businesses directly, ad news companies have been furloughed, laid space can also be purchased by advertising and marketing firms on off or taken pay cuts. behalf of clients. With ad budgets pinched, a crucial revenue stream for Additionally, many Media Companies Medium High media companies is vanishing, thereby weakening financial stability. small newspapers and • BuzzFeed was on the path to profitability at the start of 2020, but publications that rely is no longer slated to achieve its goal due to the pandemic. on ad purchases have shut down due to slower • Market suppliers may also purchase ad space on social media demand from marketing platforms on behalf of clients. The buying pool for social media agencies and other ads is shrinking as small and midsize businesses close due to business buyers. decreased foot-traffic and economic hardship. Social Media Low Medium • Despite growing traffic on social media platforms during this time, Platforms suppliers’ profit margins are in danger as they struggle to sell ad space. • Social media giants will likely be able to weather the pandemic, but smaller platforms may become acquisition targets or discontinue CONSIDER THIS: operations altogether. Last year, Facebook brought in $70.7 billion • While revenue for ISPs may decline in 2020 as business closures in from small reduce demand from clients, high average profit margins will help businesses, the group hit hardest by the current Internet Service ISPs remain solvent and provide services without disruption. Low Low economic downturn. Providers (ISPs) • Despite surging usage, the internet is expected to remain functional as ISPs take measures, such as limiting high-resolution streaming, to keep internet speeds from tanking.

• Although demand may eventually slow, a spike in demand for coronavirus-related information will help boost operators’ revenue during 2020. Medium Medium • According to Harvard Business School, marketers shaved roughly Firms 10.0% to 20.0% off research budgets during the 2008 recession, indicating that demand for these services may fall as the economy weakens.

procurementiq.com 1-888-878-9429 [email protected] 3 Risk Assessment Downstream Buyers

Downstream Risk Before Risk After Buyer COVID-19 COVID-19 COVID-19 Impact

• The hospitality sector is getting significantly less foot traffic and some companies are even closing due to financial hardship. Overall, CONSIDER THIS: Restaurants & restaurant and hospitality buyers have less funds to spend on As part of its efforts to Hospitality Medium High market services. save $800 million this Establishments year and offset losses • The travel industry cut its ad spending by about 50.0% during the from the coronavirus first two weeks of March 2020 compared to a year before. pandemic, Airbnb has halted marketing • Credit card companies are struggling to profit as consumer spending. spending tightens and relief programs allow cardholders to delay payments without penalty.

Credit Card • In September 2008, the number of TV ad units run by credit card Medium High Companies services slid by about 24.0%, according to Nielson. Similar declines may occur in 2020. • Visa and Mastercard have cut revenue outlook amid the pandemic, with Mastercard knocking 2.0% to 3.0% off a previous forecast.

• Reduced consumer spending is expected to weaken retailers’ financial stability, causing them to cut marketing budgets or, in extreme cases, cease to operate entirely. Retailers Low Medium • According to Quartile Digital, Amazon merchants spent about 6.0% less on advertising during the second half of February than they did CONSIDER THIS: a year before. While Ford is yanking its national ads promoting • Although automakers have taken a serious hit, cancelations of vehicles, it will replace major events have freed up budget dollars, causing automakers to the ads with a new reallocate spending and invest more heavily in TV-based and online campaign covering Car & Automobile Medium Medium ads. its response to the Manufacturers pandemic and the • Automakers spent an estimated $184 million on 54,000 airings favorable terms offered from March 1 to March 18, according to iSpotTV. to Ford Credit customers during this time.

procurementiq.com 1-888-878-9429 [email protected] 4 Stimulus Impact Analysis Coronavirus Aid, Relief & Economic Security Act

How does the Federal Coronavirus Aid, Relief, and Economic Security (CARES) Act impact the marketing and advertising market?

Allows small businesses (i.e. the bulk of advertising agencies and marketing firms) to apply for the Paycheck Protection Program (PPP), under which some businesses may be eligible to receive a loan of up to $10 million on favorable terms.

Provides $25 billion in federal funding allocations to help public transportation systems remain operational. In keeping transit operations up and running, buyers will be able to continue purchasing transit ads, which cost less than most other advertising mediums such as television, radio, billboards and newspapers.

Modifies the loss limitation applicable to pass-through businesses and sole proprietors so they can utilize excess business losses and access cash flow.

Accelerates the ability for companies to recover Alternative Minimum Tax credits, permitting companies to claim a refund now.

Temporarily increases the amount of interest expense businesses are allowed to deduct on their tax returns by increasing the 30.0% limitation to 50.0% taxable income (with adjustments) for 2019 and 2020.

Provides that net operating losses (NOL) arising in a tax year beginning in 2018, 2019, or 2020 can be carried back five years and temporarily removes the taxable income limitation to allow an NOL to fully offset income.

procurementiq.com 1-888-878-9429 [email protected] 5 Availability of Substitutes Creative Procurement Opportunities What substitutes and creative procurement opportunities should buyers consider in the wake of market disruption?

Buyers may consider low-budget options or DIY-style marketing collateral that can be crafted in-house. With consumers on lockdown, lavish living has largely been replaced by a less-glamorous homebody lifestyle. DIY-style campaigns appeal to consumers’ current situations more than high-end produced content and may also save buyers money. DID YOU KNOW? According to a Kantar survey, 77.0% of consumers want ’ messaging to communicate how they are helpful in everyday life, 75.0% want messaging to cover brands’ response to the current health crisis and 70.0% want brands to offer reassurance.

Buyers may consider sharing the cost burden through co-marketing. Co-marketing is an approach companies often take to secure expensive advertising slots, like commercial ad slots during the Super Bowl. As advertising and marketing budgets tighten, companies may consider teaming up with another to share costs.

Buyers may need to shift spending on out-of-home (OOH) advertising and marketing collateral to online channels, seeking out advertising spots on streaming sites, utilizing social media marketing and investing in paid search instead.

Buyers may consider influencer marketing to reach social media users. With consumers’ trust for people exceeding their trust for ads, the down-to-earth nature of these influencer marketing campaigns may position them as a viable substitute for traditional advertising during this time of uncertainty.

DID YOU KNOW? RewardStyle, a business that connects influencers with retailers, saw a 30.0% increase in paid campaigns in March.

While cutting marketing and ad spend may be a necessary move for many businesses, buyers may consider doing the opposite to stand out from competition.

DID YOU KNOW? In the 1920s, Post cereal significantly cut ad spend during the Great Depression and lost their top position to Kellogg’s as a result. Kellogg’s doubled ad spend and introduced a new cereal variety. In addition to boosting profit, Kellogg’s investments positioned them as the leading cereal brand, a position they held for the next few decades.

procurementiq.com 1-888-878-9429 [email protected] 6 Best Practices Contracts & Payment Terms

What strategies can buyers adopt to mitigate risk in contracts and payment terms?

Closely examine contract language When force majeure appears imminent, closely analyze the contract’s specific language and applicable law in the respective jurisdiction to determine whether the coronavirus is a qualifying event. Buyers must find out whether pandemics, epidemics or illnesses are specifically referenced in the force majeure provision. Under this provision, additional options aside from campaign termination may be available. For example, buyers may have the right to modify or reduce project scopes through a “change request” or “charge order.”

When entering into new contracts, focus on termination and force majeure clauses Brands should update form agreements, outlining termination rights with reasonable notice periods and revising the definition of force majeure to include events such as pandemics, epidemics and government actions. Forms may also be revised to require refunds on agency fees, should contracts be terminated due to force majeure or as a result of other circumstances.

Closely track campaign benchmarks and actively seek makegoods when possible Buyers that have purchased services based on guaranteed deliverables (e.g. number of impressions) should closely record performance data and seek makegoods for any underperforming marketing or advertising collateral.

Consider alternatives to canceling ad or marketing campaigns If the contract does not allow media to be canceled, buyers may need to negotiate aggressively to reach an agreement wherein ad space may be resold. Buyers may also consider asking suppliers whether the ad space can be donated to a charity, which could yield tax benefits.

Determine whether contract language allows for campaign delays For multiyear campaigns, campaigns promoting products that are in short supply or campaigns that are not appropriate to launch in this climate, buyers may consider rescheduling. Buyers should examine the terms of media buy or insertion to determine what rights they have and whether they will be able to negotiate makegoods for delayed campaigns.

procurementiq.com 1-888-878-9429 [email protected] 7 Best Practices Key Takeaways

ProcurementIQ identifiesdemand risk as the most significant source of risk in the marketing and advertising market due to key buyers’ budget revisions.

Reduced consumer spending gives key buyers less incentive to seek out marketing and advertising services because campaigns are less likely to yield conversions.

Buyers entering new agreements with suppliers should ensure that contracts include force majeure clauses that cover health crises and allow for termination with advance notice.

Mission- and cause-based messaging is more favorable at this time than pushy promotional ads that could be perceived as insensitive.

procurementiq.com 1-888-878-9429 [email protected] 8 Appendix Related Reports

Billboard Advertising Marketing Consulting Services Billboard advertising refers to the use of large outdoor boards to These services provide buyers with a business professional who convey promotional messages. The types of boards falling under advises them on the pursuit of a for their this designation include bulletin billboards, digital billboards, poster business. This type of consulting covers a variety of marketing-related billboards, wall displays and spectaculars. activities, such as the development of marketing objectives, customer segmentation, new product development, and data analytics. Digital Advertising Agency Services Digital advertising refers to promotional messages delivered to consumers through online media outlets. Services provided by Online advertising includes mobile, digital video, e-mail and display digital advertising agencies include search engine optimization advertising, such as web banners and text ads. This report does (SEO), , digital display advertising and social not cover digital advertising agency services, search engine media management. marketing services or social media management services.

Door-to-Door Advertising Search Engine Marketing Services Suppliers distribute advertising materials directly to targeted SEM services help buyers increase their visibility in a search neighborhoods of the buyer’s choosing. Advertising materials engine. A higher rank in a search engine’s results makes it easier include, but are not limited to, door hangers, flyers, product samples, for websites to attract visitors, thus positively impacting their newsletters and magazines. business. SEM focuses on search engine optimization (SEO) services and can also include paid search advertising services. Integrated Advertising Services Advertising agencies included in this report are one-stop shops for Social Media Management Services companies looking to develop and implement advertising campaigns Social media management services curate and create content, through a variety of platforms. Services provided by these suppliers engage with followers, monitor metrics and help convert followers range from basic conceptualization and design to media placement. into paying customers on behalf of clients.

Magazine Advertising Television Advertising Suppliers of magazine advertising offer space in their print magazines Television advertising is programming, during which commercials and periodicals in which buyers can display marketing messages. produced and paid for by organizations are aired. These services Buyers can purchase this advertising space directly from the magazine are used to promote a variety of goods, services and ideas. publication or through an advertising agency.

procurementiq.com 1-888-878-9429 [email protected] 9