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NEWS19 October 2009

Pressure from online alternatives ‘could stunt research recovery’

Financials

UK— Market research’s recovery from the recession could be held back by stiff competition from new ways of gathering business intelligence online, a report from Morgan Stanley has warned.

The report looked at four major marketing services groups and picked out WPP as its “least preferred” option because of its heavy reliance on market research following the acquisition of TNS last year. Research now accounts for nearly a third of the group’s revenue, and the TNS purchase also left it with a high level of debt leverage.

WPP, which had previously pinpointed insight as one of its “engines of growth” found that it was in fact the hardest hit of all its sectors in the first half of this year, and other major agencies including GfK and Synovate have also seen big drops in revenue.

“We are concerned that market research pricing may remain under significant pressure even in a recovery scenario due to pressure from online competition that is driving down prices,” Morgan Stanley’s report said.

Edward Hill-Wood, author of the report, told Research that in recent years ‘traditional’ MR agencies have been undercut by start-ups using purely online data collection methodologies and new approaches such as social media analysis. In response many agencies shifted their focus to ‘value-added’ analytical and consultative services, only to find that it is precisely these discretionary services that are now being cut amid the recession.

“The whole sector has performed worse than expected,” said Hill-Wood. “There was a little bit of false hope going into it – research was expected to trade through the recession relatively unscathed, maybe with flat revenue or small declines, and what’s ended up happening is the declines have been very significant.

“Firstly, it was a mistake to think [market research] was defensive in the first place, because people were judging that on one downturn. Back in the late 1980s and early 1990s it wasn’t really a category of any scale, and if you look at the last downturn in 2001-2003, you still had this massive theme of globalisation and deregulation, with lots of big customers entering new markets. Now, anyone who wants to be in China is probably there already. Secondly I think the two big sectors that continued to advertise quite healthily in the last downturn were autos and FMCG, and this time both those sectors have cut spend aggressively. In the previous downturn people still bought cars and houses and the real pain was restricted to tech, finance and media.”

As the economic storm shows no mercy to research businesses, those that moved up the value chain to defend revenues may have inadvertently made themselves vulnerable, Hill-Wood says. “Regardless of your profits, you’re always going to need to know what your market share is, so they’re still getting that work, but the margin they’re charging is much lower,” he said. “They’ve dropped prices for that and raised prices for analysis. But if you’re cutting your budget back significantly, you don’t necessarily need all that expensive value-added data analysis.”

Research may turn out in the long term to be more cyclical than was previously realised, with the return of discretionary spending leading to a strong resurgence of revenues. If so, WPP’s Sir Martin Sorrell might yet be right about insight as an “engine of growth” – in the right circumstances. But Hill-Wood says: “It’s not ever going to be perceived as a defensive industry in the way it used to be.”

4 Comments

9 years ago

Hi, It would be great to have a link to the actual report? I can't find it. Thanks Andy

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9 years ago

Hi, Very informative findings!! I do have a question. What should tradintional MR agency do to save themself in this scenario ? Thanks Sanjay

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9 years ago

I've yet to read the full report but this sounds pretty much what Simon Chadwick's paper "Client Driven change: the impact of changes in client needs on the research industry" predicted 5 years ago for the full service big agency business model.

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9 years ago

I don't think this will be as drastic as what is happening in the newspaper/magazine publishing sector but in both cases the writing has been on the wall for quite a while. Integrating online sentiment/influence analysis and insight with other MR channels and insight/application experience should be MR industry's key strengths.

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