ASIA: THE DENTSU STORY - Japan’s oldest and largest advertising group will have to refocus its strategy if it is to cope with an influx of foreign rivals at home, Alexandra Harney says

On a quiet street corner in Kyoto, a large neon sign glows eerily above the sleepy tea houses and traditional inns. The bold lines of Dentsu’s logo may strike passing tourists as an intrusion into an historic scene, but not so the Japanese - Dentsu is a household name.

On a quiet street corner in Kyoto, a large neon sign glows eerily

above the sleepy tea houses and traditional inns. The bold lines of

Dentsu’s logo may strike passing tourists as an intrusion into an

historic scene, but not so the Japanese - Dentsu is a household

name.



Despite several leading US and European conglomerates having been in

Japan for decades, Dentsu has controlled more than 20 per cent of

billings for at least 20 years. It has the biggest multinational

companies in Japan among its clients, controls 50 per cent of prime-time

TV slots and boasts an impressive overseas network.



Last year, Dentsu had profits of Y189.5 billion (pounds 987 million),

far surpassing Hakuhodo, its closest rival, which has an 11.9 per cent

market share.



But analysts and industry executives think that the times may be

catching up with Dentsu. In the course of a few weeks last autumn, WPP,

Omnicom, and BBDO marched into Japan and snapped up pieces of the top

agencies, in what was certainly the largest influx of foreign marketing

groups in decades.



WPP’s purchase of a 20 per cent stake in Asatsu, the number three

Japanese agency, was swiftly followed by an investment by TBWA, the

London-based agency that is part of the Omnicom group, to buy a majority

stake in Nippo, an unlisted Japanese agency affiliated with Nissan

Motor. And early last year, US-based BBDO purchased 20 per cent of I&S,

one of the top ten Japanese agencies.



Two other local agencies, Ogilvy & Mather Japan and J. Walter Thompson

Japan, are already part of the WPP group. Asatsu, an upstart agency that

climbed to the top of the industry, had also recently taken over

Dai-Ichi Kikaku, the country’s seventh-largest agency.



At the same time, conditions in the Japanese economy were worsening.



The country’s worst recession since World War II has forced companies to

slash advertising and promotional spending, with advertising revenues

down 3.8 per cent in 1998 - the first annual decline in five years,

according to a survey by Dentsu. Total revenues only reached Y5,750bn

(pounds 29.8 billion), reflecting the sharply reduced advertising

budgets of Japanese car manufacturers, by far the advertising industry’s

largest clients.



It would not have been surprising if Dentsu had backed off to reconsider

its strategy amid these increasingly tough conditions. Instead, it

plunged into an expansion programme, including an organisational

restructuring, an audit of its operations in preparation for flotation

in August 2001 and construction of a new headquarters building in Tokyo.

The company is also currently strengthening its ’Chinese walls’, to

allow it to serve competing companies.



In December, Dentsu even signed an alliance with Leo Burnett, the highly

ranked US-based agency, and bought 10 per cent of a wholly owned

investor relations subsidiary of Nomura Securities, the leading Japanese

brokerage group. Earlier this month, it opened a new office in China, a

50:50 joint venture known as Shanghai Oriental Rihai Advertising.



Industry observers say that more overseas expansion, particularly as

Dentsu looks to reinforce its European operations, is likely. The agency

says it plans to double its share of overseas revenues of total billings

by 2010.



Dentsu’s president, Yutaka Narita, is focusing on globalisation and

digitalisation as the guiding concepts for the company in the coming

years. In an address earlier this year he said: ’We expect the

international mega-agencies to move toward strengthening their position

in the Japanese advertising industry. If we are to compete successfully,

we must continue to upgrade our client services while improving our

overseas performance and reinforcing our overall systems.’



Teruyoshi Katsurada, the executive vice-president, believes that Dentsu

owes much of its influence in Japan to its close ties with media

organisations, including Jiji and Kyodo, two of the largest wire

services. Dentsu also buys media space and plans campaigns in the same

division, unlike its US and European rivals, which typically conduct

these activities in separate agencies.



Industry observers argue that increasing demands for structural change,

particularly as Japanese companies pay closer attention to raising the

efficiency of investments, could challenge Dentsu’s position in the

future.



Kota Nakako, an analyst at Warburg Dillon Read in Tokyo, says that while

the new arrivals will hardly dent its market share in the short term,

Dentsu has been criticised for focusing too much on revenues at the

expense of efficiency. ’It has several thousand client companies. This

raises labour expenses a lot. There is some value in shrinking the

number of clients and focusing more on efficiency.’



The question of overseas expansion is what brought Dentsu, which already

has a global partnership with Young & Rubicam, into a tie-up with

Burnett.



Analysts say that although the Y&R relationship is strong in Asia,

Dentsu needs to cover the lucrative US and European markets better to

compete with WPP, Interpublic and Omnicom.



With little hope for a quick recovery at home, analysts say Dentsu would

be wise to gear up for stiffer competition from foreign companies in

Japan and use its new links with Burnett to bring new clients back to

its home market, where it is still the undisputed champion.



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