Advertising Agencies under the Gun from Major Contract Reviews

By Leila Abboud; Jennifer Saba; Reuters | St Louis Post-Dispatch (MO), June 26, 2015 | Go to article overview

Advertising Agencies under the Gun from Major Contract Reviews


Leila Abboud; Jennifer Saba; Reuters, St Louis Post-Dispatch (MO)


An unprecedented number of blue-chip companies have put their advertising contracts up for review this year, underlining the growing pressure on ad agencies as online marketing threatens their traditional role and profit margins.

At the industry's biggest annual conference in Cannes this week the main topic of conversation among the 13,000 delegates is the 18 companies from consumer products giants Proctor & Gamble and Unilever to automakers like BMW and Volkswagen that have decided to rethink which agencies they want for marketing advice.

About $27 billion in media planning and buying contracts across television, radio, print, text and online are up for grabs, according to Ad Age, more than in the past three years combined.

The reviews are an unnerving prospect for top agencies WPP, Omnicom, and Publicis.

Morgan Stanley estimates that if advertisers' pressure on agency fees drives prices down by 15 percent or more, companies like leader WPP or No 2 Omnicom could see earnings per share drop by about 10 percent.

Analysts say Interpublic and Publicis have the most to lose given their exposure to key clients like L'Oreal and Coca-Cola, which have also initiated a review. Challengers to the top three like Havas have the most to gain, but few expect new players outside the top six agencies to capture elite contracts from the world's top brands.

A board director at one major advertising firm who did not want to be named said the crop of contract reviews represent a "watershed moment" for Madison Avenue a reference to the world's biggest ad agencies based upon the New York street where they grew from the 1920s.

The reviews represent a "harbinger" of how the ad firms are going to have to change their business models to survive, he said, particularly since the reviews include the media buying and planning area, which has traditionally been a profitable one for the agencies.

ONLINE VIDEO BOOM

One Cannes invitation touted a party for the book "Madison Avenue Manslaughter," written by a veteran industry exec and promising a peek into the rough reality facing ad firms.

That reality stems from the fact that brands have had to dramatically rethink the way they seek to woo consumers and the size of the budget they use to do it. Since the financial crisis, procurement executives have gained more sway to ask for proof that marketing spending is working.

As an example, food giant Mondelez International, which has put its media account now with Publicis' Starcom and Dentsu Aegis up for review, has been whittling down the number of agencies it works with from 12 to two so as to save money and re-invest it in the business.

Not only do companies want to pay less to their ad agencies, they also want to make sure that their agencies really know how to help them succeed in a world where consumers spend less time watching television and more using a dizzying array of websites and apps via their mobiles.

Messaging apps like Snapchat and media outlets like Vice and Buzzfeed have fueled a boom in online video with the creation of hybrid editorial and marketing content known as native ads: Some executives at big brands think big ad agencies are simply not skilled enough at banging out these kinds of snippets. …

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