The European advertising market has been severely affected by the economic recession of the early 1990s. This led to budgets being cut, job losses and downward pressure on commission rates. However, as the economy has picked up, the market for advertising expenditure has grown in strength and while profit margins still do not compare with those from the heady days of the 1980s, margins have improved and there is also now less agency debt.

Over the past decade, two main trends have emerged. Firstly, the development of large multinational agency networks offering integrated services to their clients for total marketing communications. Secondly, there has been a major shift towards the use of media independents and specialists for media planning and buying services. Indeed, many agencies have hived off their media departments to create media dependents which look after the agencies' own clients' media requirements and also pitch for outside business.

The two main factors that influence the rate of advertising expenditure are consumer expenditure and company margins. When margins come under pressure, advertising spend is usually cut, whereas when consumer spending is high, advertising spend increases. Demographic changes would appear to favour the industry in the coming decade, with a greater number of young people for whom brands provide confidence and peer group approval and a greater number of older affluent empty nesters, with high disposable income.

In terms of regulatory bodies, the main UK regulator is the Advertising Standards Association, which can levy fines of up to £50,000 on agencies that offend the public's taste. In the UK, both statutory law and self-regulation combine to police the industry. However, in Europe many countries practise different laws across a wide range of advertised products and services, this can make pan-European advertising very difficult. In response to this, the EU has developed a new Green Paper aimed at standardising pan-European regulations.

Many clients initially embraced pan-European advertising as a way of economising on agency and production costs. However, many have found that the savings have not been what was anticipated as this has increased the costs of managing the business centrally. In addition, creative work has still needed some adaptation to account for local nuances. In terms of agency structure for handling pan-European accounts, a polarisation has emerged between the large multinational networks with offices in all major European countries and the smaller independent agencies, that handle European creative work but form a strategic alliance with other agencies for advertising distribution.

The emergence of new electronic media, such as the Internet, CD-Rom and interactive television has begun to present advertising agencies with many new challenges. The new media can make it easier to conduct a personal dialogue with consumers, but as yet, few agencies have used their potential to any great effect. With media inflation causing some concern among clients, many may look to new media as part of their communications campaign and agencies need to be fully aware and conversant with new media if they are not to lose out to other service companies.

Over the past five years, worldwide expenditure on advertising has increased by 20 percent, yet in Europe, a mature advertising market suffering from the effects of recession, this increase was only 4 percent. Having said that, the UK performed well up by 23 percent and aided by a strong economy, advertising expenditure in Germany rose by 34 percent. During this time, there has been a gradual decline in print advertising throughout Europe and a corresponding rise in television advertising expenditure, as opportunities and new channels have opened up in this area. Radio has also improved its performance, again due to the opportunities presented by new stations. This has been particularly true in the UK where two national commercial stations Virgin Radio and Classic FM have greatly boosted radio spend.

In the UK, all of the major advertisers were retailers, further evidence of how the power has shifted away from manufacturers towards the giant retailers. More specifically, Sainsbury, Curry's and Safeway took the top three positions in 1995. In a survey looking at consumers' favourite advertising, Safeway, Salt 'n' Lineker (Walkers crisps), Barclaycard and PG Tips were the nation's preferred choice.

One of the biggest problems facing agencies in the 1990s has been agency remuneration. Traditionally, this has been paid on a commission basis, with the agency retaining 15 percent of a client's gross media billings. However, many clients have begun to question this system. Currently, payment is often in the form of fees plus commission, although a royalties system of payment has been suggested.

Furthermore, agencies have gradually begun to play less of a strategic role in clients' business and marketing plans and more of a tactical one. This is a worrying trend, as if clients use external consultants to help plan their marketing strategies, agencies will be reduced to selling their services in a commodity-like way. This will greatly effect their importance, prestige and moreover, their margins. Increasingly, marketing budgets are being spread more evenly across a wide range of marketing services, such as direct marketing, PR and sales promotion. If traditional agencies are not to lose out, they must maintain a strategic presence and many are expected to expand by offering more integrated services.

In the UK, the top three agencies in 1995 were J Walter Thompson, Abbott Mead Vickers and Ogilvy & Mather. Saatchi & Saatchi, who have held pole position since 1988 fell to fifth place following the departure of Maurice Saatchi and several of its most valuable clients. The leading media specialists were Zenith Media, TMD Carat and the media department of BMP DDB Needham, which is about to be rebranded as a media dependent. The top three European agency networks were the French owned Euro RSCG Worldwide, Publicis FCB Communication and the UK owned Ogilvy & Mather Europe.

Over the coming decade, media fragmentation will continue to increase and the consumer becoming ever more elusive. In addition, there will be a growing number of communication channels available to advertisers, including the new electronic media. Many advertisers could feel confused and bewildered and in need of sound strategic advice and planning. This is where advertising agencies must take the lead if they are not to loose out to strategic marketing consultants and media specialists. If this opportunity is lost, the role of agencies could become increasingly marginalised and creative services simply bought as commodities.