It has been a busy year for the Canadian ad industry, but even as lucrative business changes hands, a troubling global trend suggests advertisers and their agencies are having a harder time agreeing on the value of marketing services.
In 2013, agencies here saw some juicy accounts come up for grabs, including two of the country's biggest banks, Air Canada, and the media-buying and planning work for L'Oreal. Right now, both Rogers Communications Inc. and Loblaw Cos. Ltd. are in the middle of hearing pitches from agencies after putting their advertising services up for review.
But while business is bustling heading into the new year, the marketers themselves, as well as their agencies, are under greater pressure to control costs.
Earlier this month, the chief marketing officer of the world's second-largest advertiser, Unilever, said that the company is looking for $500-million (U.S.) in savings next year. Part of those savings will come by reducing the company's marketing staff by 12 per cent; moving its advertising dollars out of traditional media and into digital channels; and trying to curb the fees it pays ad agencies.
Indeed, marketing dollars everywhere are being squeezed: This week, media agency GroupM revised its forecast for advertising spending growth in 2014 to 4.6 per cent globally, down from an earlier forecast of 5.1 per cent. In Canada and the U.S., spending is only forecast to grow 1.9 per cent and 2.9 per cent, respectively. Agencies are getting a smaller slice of the pie as those marketers ask them to do more with less.
"They're just not seeing growth, in a lot of industries. They have to cut costs – so you can't fault them," said David Leonard, president and chief operating officer of DDB Canada. "The objection I have is where there's no understanding for the contributions marketing makes to the brand. These people, unfortunately, know the cost of everything and the value of nothing. We as an industry should be fighting to change the compensation model."
DDB is looking at experimenting with a system where its agency would be paid not by billable hours, but by how much the client benefits from its advertising – the challenge is agreeing with a client on what the measurement of that effectiveness will be. As pressures have increased, DDB has walked away from pitches where companies were concerned only with finding agency services at the lowest price, or where an unreasonable amount of speculative work was required as part of the process.
They are not alone. According to the CEO of the American Association of Advertising Agencies, Nancy Hill, the industry took a haircut on its profits during the recession just to hold on to clients; and climbing back up to a reasonable level of profitability has been difficult.
Some clients are extending their payment periods to help their own cash flow, effectively asking marketing agencies for interest-free loans. According to a study from the Association of National Advertisers in the U.S., released this month, 43 per cent of marketers have extended terms this year on at least one marketing service, and 42 per cent said they were likely to do so in 2014. The study also found that it was not the chief marketing officer making that decision – changes came most often from the chief financial officer or procurement and purchasing departments.
But, Ms. Hill said, some agencies are starting to push back.
"Marketers certainly are under more pressure than they ever have been in terms of delivering results. ... In many instances, agencies sacrificed being hired for the right reasons, instead of being hired for the lowest price," she said. "... [Some] agencies have finally decided they're not going to take it any more."
That's easier for some agencies than others. The Wieden + Kennedys of the world can afford to say no to business. But even agencies that have seen challenging times are thinking twice about certain client relationships.
Agency TBWA Toronto, which has been working hard to win new business and grow its shop, walked away from a large pitch earlier this year.
"We're being more judicious," said the agency's managing director, George Nguyen. "... It really hurts our businesses when you slash prices ... You're squeezing to hit that margin, to keep people employed. And you end up putting out bad-quality work, or you take a financial loss. Neither of which is good. There needs to be an evolution in the way agencies operate."
According to industry sources, the Air Canada pitch caused some complaints at agencies for the amount of creative work the airline asked for, and for the pressure it put on pitching agencies to reduce costs. The company would not comment on its pitch process.
"You can't reinvent a brand that's national in scope and not even be able to afford to put a junior on it," said one creative director, who asked not to be named, speaking about the type of requests his agency has walked away from – and he has seen other agencies in Canada start to say no more often as well.
During the recession, some clients had to cut their marketing budgets by 30 to 40 per cent, said Darren Woolley, managing director of Trinity P3, a pitch consultancy that helps companies all over the world find advertising agencies. Combine that with the growing role procurement departments play in agency searches, and it has turned up the heat. Those procurement executives, who are experts in negotiating prices with suppliers of all kinds, started asking agencies to cut costs, often out of desperation, and have resisted attempts to bring fees back up to a more reasonable level.
"It's happening everywhere," Mr. Woolley said. "... Under that process, they're less likely to get good agencies. They're more likely to get the ones that are just desperate for revenue."
DDB's Mr. Leonard said he knows of smaller agencies more in need of clients who will accept an unprofitable client, in hopes of doing good work and being able to renegotiate the relationship down the line. But realistically, cost cutting leads to a lower quality of work.
"I can make it [my blended hourly rate] $99 an hour if you want chimps working on your account," he said.
That desperation is hurting the industry over all, argues Brett Colbert, chief procurement officer at agency holding company MDC Partners, whose job was created as a way to provide a negotiator on the agency side who speaks the language of procurement departments.
"We've got to defend who we are in this marketplace," he told an audience at an event to address issues around procurement, hosted in Toronto this week by the Institute of Communications Agencies. Canadian firms in particular need to push back, he said, because the biggest clients have head offices elsewhere, and may see Canada as an easy place to cut costs: it's a largely English market, and is often seen as similar enough to the U.S. that adapted American advertising is good enough.
However, there are some indications that the negotiations could improve: Alyssa Altman, of advertising firm SapientNitro, has noticed more clients hiring people in their procurement departments who have agency experience; and most agency executives say the best clients recognize the value of marketing to their bottom line and are trying to speak the same language. For others, the work tells the tale.
"You go to a used-car lot, you can probably talk down the price. But Porsche doesn't discount," said David Droga, multi-award winning founder of New York-based agency Droga5, which charges a premium on many of its services and often does not pitch for business. "...If you don't have a unique offering and don't have the proof that your work is a game changer for a client, then procurement has more say than the CMO."