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Category Archives: Agency Holding Companies

Economic Growth Projections Raise Concerns for Ad Industry

25 Aug

economyAdvertising agencies are finding that organic growth will be a difficult objective to achieve in the near-term.

One contributing factor comes in the form of marketing spending constraints on the part of advertisers. Why? Organizations are feeling pressure to control costs in the wake of lack luster market conditions that are limiting growth and reducing margins.

The key economic indicator driving advertiser concern is “slow growth” which is impacting many sectors of the economy:

  • GDP growth of 1.2% during the 1st quarter and 2.6% in the 2nd quarter (short of the sustained 3%+ growth rate promised by the White House).
  • U.S. retail sales, excluding auto and gasoline, rose 0.5% in July ’17.
  • Fast-Casual restaurant sales fell more than 3% in the first quarter of 2017.
  • U.S. automotive sales have fallen for seven straight months (Jan. – Jul.).
  • Homebuilder confidence sank, posting HMI’s lowest reading in over 6 mos.

Two CPG giants have announced dramatic moves, which reflect the nature of this challenge. Unilever signaled its intent to reduce the number of agencies on its roster by 50%, while cutting the quantity of ads produced by 30%. Procter & Gamble Co. indicated that it would trim $2 billion in marketing spend over five years as part of an enterprise wide expense reduction initiative.

It is worth noting that there are motivations beyond “cost reduction” driving these decisions by advertisers. Consider fast-food giant McDonald’s, which earlier this year trimmed the number of agencies that it works with from 60 to fewer than a dozen. Their goals included streamlining marketing and improving the consistency of their output… in addition to reducing expenses.

Unfortunately, the impact of slower spending by advertisers is being felt on Wall Street. According to an August, 24 article in the NY Times, WPP which had earlier cut its revenue forecast saw its share price decline by 10.9% in London, with Omnicom Group and Interpublic Group falling 7% and 6.3% respectively in the U.S. and media stocks are generally lower as a sector.

Interestingly, advertisers have made a conscious decision not to fuel marketing spend to counter slowing sales, but to cut spending to protect margins, which is particularly concerning to the ad agency community.

With increased competition from non-traditional players (i.e. management consulting and technology firms) and the continued fall-out from an industry transparency crisis, the lack of confidence on the part of marketers regarding advertising’s ability to drive profitable revenue growth is certainly a worry.

Whether or not this slowdown in organic growth on the part of ad agencies portends a slump, remains to be seen, but at the very least the macro-economic uncertainty will serve to increase industry volatility. Perhaps the industry can find some solace in the words of Yogi Berra the hall of fame catcher and manager of the New York Yankees: “Slump? I ain’t in no slump… I just ain’t hitting.”

 

 

Is the Agency Holding Company Model Viable Going Forward?

19 Oct

questionThe pursuit of excellence is less profitable than the pursuit of bigness, but it can be more satisfying.” 

 ~ David Ogilvy

It is not our intent to suggest that scale does not have its advantages. There are multiple instances, within the professional services sector in general and specifically within the ad agency community, where size translates into meaningful benefits for clients.

That said, since Papert, Koenig, Lois went public in 1962 and other advertising agencies soon followed suit, the ad industry has undergone dramatic change. Ad agency IPO’s begot an uptick in agencies acquiring other agencies, which Marion Harper, CEO of McCann Erickson pioneered with the formation of The Interpublic Group of Companies in the early ‘60’s. This was then followed by the “unbundling” phenomenon of the late ‘70’s and ‘80’s.

Fast forward to 2016, where the top five agency holding companies; WPP, Omnicom, Publicis Groupe, Interpublic Group and Dentsu account for over 70% of the world’s estimated 2016 ad spend of $542 Billion (source: eMarketer, April, 2016). Further, each of these holding companies have broadened their acquisition strategies to further penetrate the larger $1.0 Trillion global media and marketing services category.

As a result, the portfolios for the top five agency holding companies contain between dozens and several hundred firms covering a myriad of marketing disciplines including, but not limited to:

  • Creative agencies
  • Media agencies
  • Digital agencies
  • Social Media agencies
  • Brand activation firms
  • PR firms
  • Relationship management firms
  • Programmatic trading desk operations
  • Research and audience measurement firms
  • Media properties

It is clear that the agency holding companies have successfully pursued and achieved “bigness.” The question is; “Has the holding company model achieved “excellence?” The answer may well depend on which stakeholder group one belongs to. Shareowners will likely have one viewpoint, suppliers and employees another and clients perhaps yet another perspective.

In the early days, the primary role of the holding company was to pursue efficiencies across their agency portfolios, while leveraging cross-agency synergies and driving strategy across their portfolio firms. Four decades later, this has evolved into holding company “agency” solutions consisting of cross-firm, multi-disciplinary client service teams served up to the holding companies top global clients.

Yet, the holding companies are struggling to define and evolve cultures, eliminate inefficiencies and break down silos across the numerous agency brands and marketing services firms that they have acquired. All while wrestling with issues and opportunities tied to the rate and rapidity of technological change and its impact on the business of creating and placing ads and not least of all… technology’s impact on consumer media consumption and purchasing behavior.

Today, the agency community is facing challenges related to attracting and retaining talent, evolving remuneration systems and regaining advertiser trust, all while being mired in a very public dispute with advertisers, publishers and ad tech providers regarding the issue of transparency.

Simultaneously, serious competitors have emerged, threatening the ad agencies stranglehold on advertising, media and marketing services. Consulting organizations such as Accenture, IBM Interactive, Deloitte Digital and PwC Digital now offer comprehensive, end-to-end consumer solutions, which include branding, graphic design, creative and media services to complement their analytical, strategy consulting, enterprise digital solutions and customer experience design skills.

This new breed of competition has monolithic brands, established cultures and highly trained, intelligent, flexible global workforces. Also looming on the competitive horizon are firms such as Adobe, Oracle, SalesForce, Facebook and Google that continue to focus on serving up marketing services and support to advertisers on a direct basis.  

Perhaps most importantly, the ad agency holding companies may not control their own destiny. At least not to the extent that they once did, when serving as valued, trusted advisors to their clients providing high-level strategic support and maintaining solid C-suite level relationships. Further, advertisers today have shown an openness to evaluating alternatives to the traditional client/ agency model, which has favored the aforementioned consultancies, technology and media firms along with in-house solutions.

It is certainly too soon to count the holding companies out, as they remain a formidable force in the industry. The question is can holding company leadership successfully chart a new course for leveraging their scale and talents to boost their relevancy in the years to come. What advice might one of the industry’s most iconic leaders offer to his holding company contemporaries?

“Leaders grasp nettles.” ~ David Ogilvy

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