Business services industry trends: Fall 2024

The Federal Reserve’s September rate cut of 50 basis points, to 4.75%−5%, will provide a lift for the marketing and advertising industries. Not only will their clients’ and prospects’ cash flows increase, but these lower interest rates will reduce borrowing costs for advertising and marketing firms themselves, thus releasing pent-up demand and potentially improving profitability. While the first rate cut is significant, additional rate cuts on the horizon may further boost the industry.

What it means for clients and prospects

Advertising agencies’ revenue depends heavily on client marketing budgets, which typically equal about 10% to 15% of sales. Reduced borrowing costs will increase cash flow for companies. These prospective clients can redirect their additional liquidity toward marketing and advertising efforts, which typically see pullback when cash flows tighten.

While there is no guarantee that clients will spend their additional cash flows on these efforts, it’s a safe bet. Rate cuts could have a positive impact on U.S. real gross domestic product—and according to Bloomberg, the organic sales growth of marketing and advertising companies has aligned with real GDP over the past five years.

What it means for marketing and advertising firms

With lower interest rates, borrowing costs will drop, boosting profitability and freeing up cash flow for marketing and advertising firms. The pivotal decision for firms is how to invest these funds, a choice that will vary according to each firm’s specific circumstances. Two primary areas of interest are likely to be mergers and acquisitions, and strategic investments.

Lower borrowing costs could accelerate acquisition strategies. Since 2021, U.S. deal counts in the marketing and advertising industry have declined in both the private equity and the corporate space. However, we’re anticipating M&A activity to increase in 2025 and beyond.

Major players in the industry are already leveraging M&A to enhance their capabilities in high-growth areas like artificial intelligence, advanced technologies, connected TV and retail media. It’s up to middle market firms to keep pace.

As midsize companies pursue M&A deals, they will either accelerate the development of existing or emerging capabilities or expand their presence in a specific area. In either case, they aim to strengthen core offerings, optimize financial performance, integrate advanced technologies, and expand geographically and sector-wise, focusing on strategic acquisitions and divestitures to drive growth and efficiency.

The second area of interest is strategic investments. One example is connected TV, which continues to be one of the fastest-growing ad spend channels. Another example is retail media, which has, according to Bloomberg, emerged as a large, growing opportunity for brands to leverage top-quality, first-party data for targeted advertising in an environment that takes into account privacy laws.

Firms are also likely to invest in AI, data and advanced technologies, either by developing their own tools or through partnerships that increase operational efficiency. According to Bloomberg, most advertising and marketing firms spend about 85% of their revenue on salaries, real estate and operating expenses, leaving them with an average 15% operating margin. With AI likely to boost productivity up to 40%, according to a 2023 MIT survey, there will be cost savings that could boost those margins. While the major players in the industry have not quantified the impact of AI, most of them have credited AI with having a positive impact on their revenue growth and margins.

The takeaway

The Federal Reserve’s interest rate cuts are poised to significantly affect the marketing and advertising industry. Reduced borrowing costs will empower middle market firms to engage in mergers and acquisitions and invest in cutting-edge technologies such as AI. This influx of strategic investments will not only drive innovation and enhance individual firm capabilities but also elevate the industry’s overall competitiveness and operational efficiency.

As a result, the industry will experience heightened competition and the rapid adoption of advanced technologies, fostering an environment ripe for collaboration and growth. However, these benefits come with challenges, including market consolidation and the pressing need for skilled talent acquisition and development. Ultimately, these dynamics will shape a more innovative, efficient and competitive industry landscape.