Can Canada support mega-agencies?

Merger mania has struck again and more agencies are expected to soon fall prey.
Within the industry, speculation is that by the end of this year, there will only be four global agency networks. The recent $3-billion US merger of Publicis Group and Bcom3 Group along with their long-term strategic alliance with Dentsu of Japan gives Publicis 11 different agency brands in Canada. The other three larger networks - Omnicom, Interpublic and WPP - each have around 20.
On a global scale, the industry is now waiting for smaller networks Cordiant, owned by the Saatchi brothers, Grey Global Group and Havas Advertising, owner of Euro RSCG and Arnold Worldwide, to either join forces or sign on with one of the big four.

Merger mania has struck again and more agencies are expected to soon fall prey.

Within the industry, speculation is that by the end of this year, there will only be four global agency networks. The recent $3-billion US merger of Publicis Group and Bcom3 Group along with their long-term strategic alliance with Dentsu of Japan gives Publicis 11 different agency brands in Canada. The other three larger networks – Omnicom, Interpublic and WPP – each have around 20.

On a global scale, the industry is now waiting for smaller networks Cordiant, owned by the Saatchi brothers, Grey Global Group and Havas Advertising, owner of Euro RSCG and Arnold Worldwide, to either join forces or sign on with one of the big four.

As it stands, Publicis Group agency brands in Canada now include Leo Burnett, Starcom, Bensimon-Byrne D’Arcy, MediaVest, Medicus Group, Martel et Compagnie Publicite, Clarion Direct, Saatchi & Saatchi, Publicis, Optimedia and Dentsu agency DCC Communications.

With clients looking for accountability, accessibility and flexibility, is Canada big enough to support so many large agencies, or does it make better business sense for some consolidations within these groups?

Serge Rancourt, president and COO of Publicis Canada, doesn’t expect any mergers in Canada within any of the networks.

‘There are fewer holding companies with multi-agency brands holding a huge share of client business. With fewer groups we have to keep our agencies independent otherwise there are conflicts, and clients won’t go for that.

‘What will happen is on the media buying side you could have some merging because it’s easier to manage conflict. I think clients will see the benefit of media clout overcoming the potential conflicts.’

Rancourt does admit, however, that multinational agencies in Canada generally lose money on the international business they handle through global agreements because they have to pay fees back to their parent companies. He says that’s why agencies need a big chunk of local business to survive. For instance, Publicis Group encourages its agencies to have at least 50% local business. In Canada, he says, 80% of the business is local because that is where the profit is.

He believes clients should be angry if they’re being charged an ‘overhead’ for services they don’t use and that ‘integrated’ agencies should, as Publicis does, charge for services on an à la carte basis.

Rancourt says there is enough business to go around in Canada and that although there are a number of agencies owned by a single holding company, they will all remain fiercely competitive.

Ron Lund, president and CEO of the Association of Canadian Advertisers (ACA), adds that with the number of ad agencies in Canada, competition ultimately benefits the advertiser.

But the ACA wants to make sure agencies don’t deliver high returns to head offices in New York, London or Paris on the backs of their Canadian clients.

‘We counsel our members to review their costs now, especially the overhead line, in great detail. It’s also our job to counsel our members on how to properly remunerate their agencies.

‘Overhead and the delivering of 18% to head office has got to spur on new [remuneration] models if in fact that number of agencies is going to exist. If we do get down to payment-by-results models we understand what the expectations of both parties are – and the income is skewed towards that.’

While Canada may not be over-agencied, Lund says advertisers are spending less on their marketing communications.

According to London, Eng.-based Taylor Nelson Sofres, actual U.S. media spending in 2001 was US$98.2 billion, a decline of 9.7% from 2000. New York-based Carat Expert projected Canadian media spending for 2001 at CDN$7.6 billion, a 3.3% increase over 2000, which is nowhere near the ’10% rule.’ In the past, ad budgets in Canada could be estimated by just taking 10% of the U.S. spend.

‘In order to convince people to spend more, I think we’ve got to start with ensuring accountability for current spending – not only with the creative agency but also the media spend.

‘With fewer marketing funds available, I think it gives Canada a chance to break new ground in remuneration models.’

Still, not everyone believes the large agencies are here to stay. Graham Watt, CD at agency SGCI in Sackville, N.B., has seen a lot of agency trends over the years – from bigger to smaller and back again. He doesn’t believe it’s possible for every agency in the big network groups to survive because he thinks clients are going to start going back to specialists, not department stores or, in other words, the big agencies with everything under one roof.

Watt, a veteran of multinational and local agencies in the U.S. and Canada, including his own firm, Watt Burt Advertising in Montreal, has never felt that advertising was an especially difficult or intricate business, although the worldwide networks have made it that way.

He complains that agencies have found a good way to increase revenue by adding people or services. ‘It’s a very simple business,’ he says. ‘You need a client, media personnel, a couple of creative people and an administrator and you could do the best advertising on earth. That’s just four or five people. That’s why Paul Lavoie called his agency Taxi, because you need as many people as you can get into a taxi. It’s not a bad way to look at it.’

Bruce Philp, partner at Garneau Würstlin Philp Brand Engineering in Toronto, says his firm’s position in the marketplace is also anti-traditional agency to some extent, and that he is often approached by clients frustrated by the big agencies.

‘What we hear [from clients] is that [agencies] don’t care enough about their business to understand it or the results of their work.’

Philp suggests that the ongoing argument about fees is really an argument about dissatisfaction with a product. ‘If the client community is saying we’re paying the agencies too much, the agencies must hear it saying ‘Your work is not worth it,” he says. ‘Our response should not be to lower our prices, it should be to make our work worth more.’

On the client side, Ian McIntosh, general manager advertising and marketing services for Goodyear Canada, says that, while he has worked with and for both local and multinational agencies, he is most comfortable with a smaller, local agency. The advantage, he says, is that he gets senior people on the account, as well as longevity and continuity from those people.

‘Having worked on the client side with bigger agencies, I found that I was paying a lot of money for libraries in London and business meetings in New York that quite frankly I’ll never tap into. At the end of the day, it may not be on the bills, but when that 8% fee increase comes in, above and beyond inflation, because [the big agency] has lost a big account – that’s scary,’ says McIntosh.

‘As you pay more and more for services that are redundant or being used by somebody else, overpaying gets costly. That’s another reason I’d prefer to stay small.’

Alan Middleton, associate professor of marketing, Schulich School of Business at York University, points out it’s not the presence of these services that adds cost but rather the inefficiencies in the handling of the overall business.

‘To be fair to agencies, the knee-jerk response from clients that [integrated services] lead to overhead and cost doesn’t bear much examination. To demonstrate that, agencies need to be prepared to open their books to clients. It’s not a radical thought. Some agencies have been doing that consistently.’

However, Middleton agrees that the cost comes from allocation of time and hours with endless meetings and ‘going backwards and forwards because the brief wasn’t translated [properly]. It’s those kinds of things that create the greatest inefficiencies and ineffectiveness in the agency business.’

That old bugaboo – an 18% return to parent companies – is not going to go away, he says, but the best way for agencies to deal with this pressure is to refocus on the business of advertising.

Agencies that will thrive, says Middleton, are the ones that stop thinking about shareholder value and put their attention on their customers.

‘The research in business shows that those organizations that focus more effectively on adding value to the customer are the ones that end up making more money for their shareholders.

‘Those organizations that focus primarily on making money for their shareholders succeed less in doing so because they look at it as cutting costs or taking value away from the customer.’