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Dentsu's Olympic year torpedoed by coronavirus outbreak

TOKYO (Reuters) - Japan's largest advertising agency, Dentsu Group Inc 4324.T, pulled its earnings guidance for the year ending December on Wednesday as the coronavirus outbreak, which has upended expectations of a bumper Olympic year, hammers client spending.

Dentsu's logo is seen at its head office building in Tokyo Japan, August 9, 2019. Picture taken on August 9, 2019. REUTERS/Kim Kyung-Hoon

Dentsu is a key player in securing and operating the Tokyo 2020 Olympic Games and had been anticipating an earnings boost as Japanese firms shell out ahead of the once in a generation event.

However, the coronavirus forced organisers to push back the Games to 2021, with doubts still lingering over the feasibility of that delayed date, and is hitting advertising spending as economic activity slumps.

After ending last year with the first annual operating loss in its more-than-100-year history, Dentsu’s cost cutting measures helped offset the squeeze on sales with the firm reporting a 166% jump in operating profit in the January-March quarter to 24.7 billion yen ($230 million).

Dentsu, however, warned that the April-June quarter is expected to be the weakest of the year and that the business environment “continues to be severe”.

That comes even as Japan has escaped the restrictive lockdowns seen in some countries and is taking steps to reopen the economy, raising hopes that spending will pick up.

Dentsu's grim outlook was reinforced by peer Hakuhodo DY Holdings 2433.T, which last week reported advertising sales fell 20% in April year-on-year, larger than March's 8% decline.

The virus is also undermining Dentsu’s efforts to extend its reach beyond the domestic market, where its dominance and the fat margins that result have given the firm influence in business, politics and sport.

Sales fell at its overseas business, Dentsu Aegis Network, which is undergoing restructuring and management changes and was a major factor in last year’s loss.

Tokyo 2020 is the culmination of years of behind-the-scenes preparations by Dentsu, which has played a major role in the development of the global market for sports sponsorship and rights.

Reporting by Sam Nussey; Editing by Kim Coghill and Muralikumar Anantharaman