TOP 300 AGENCIES: Hard times

The shadow of conflict in the Middle East, the falling stock market and continued uncertainty about the end of the recession combined to make 2002 a difficult year for the ad industry. John Tylee reports.

Maybe no other event more dramatically symbolised what a ruthless and unforgiving character the global communications industry became last year than the demise of D'Arcy.

No matter that the US-based network had been a significant player in world advertising for almost a century or produced some of its most famous campaigns. Weakened by the loss of Mars and with major investment needed to reverse its failure to thrive, the runt of the Bcom3 litter was put out of its misery by its new Publicis Groupe parent.

If 2002 confirmed nothing else, it was that a proud heritage counted for little in a sector that saw its hopes of recovery shattered by the post-Enron collapse of equity markets, the prospects of a Middle East war and a double-dip recession.

Sentiment had no place during a period when even forecasts of modest growth proved to be over-optimistic and sluggish recovery was the pundits' sunniest prophecy.

For the industry's supergroups, 2002 may go down as the period when their raison d'etre was questioned as never before. It may also be seen as the time when the prospect of little economic growth for the foreseeable future finally forced agency holding companies to produce efficiencies to clients long sceptical of agency mega-mergers or their ability to deliver integrated marketing communications.

The D'Arcy dismemberment summed up the supergroups' predicament. Retaining an ailing network made no sense to Publicis, which was careful to head off potential conflict issues involving Procter & Gamble, L'Oreal, Renault and General Motors. However, it seems to have been less sensitive to the feelings of some of D'Arcy's major US domestic clients who, according to reports, were ready to shove off rather than be shoved around.

The new millennium has found the communications holding companies stuck between a rock and a hard place. On the one hand, they're under shareholder pressure to produce better margins through cost efficiencies; on the other, they risk alienating clients who don't believe that "one-stop shopping" has lived up to its promises and are unwilling to be treated as pawns in what they see as self-serving exercises by their marketing suppliers.

During 2002, this dilemma was exacerbated not only by the supergroups' lack of resources to deliver to shareholders via acquisition, but also by a global economy that remained in the doldrums.

Numis Securities, which at the beginning of the year was forecasting a growth in the UK media sector of just 2 per cent, had slashed even that cautious estimate by half at the end of it.

Even encouraging signs of returning life in the US ad industry caused little cheer. While this might benefit volume-led services suppliers, notably media companies, fee-based services such as advertising were not recovering because, put simply, excess of supply over demand makes it a buyer's market. WPP, Cordiant and Chime were among the holding companies feeling the impact, the latter pair's problems being compounded by significant account losses, Numis concluded.

As a report by Results Business Consulting explained: "Continued rapid growth gets more and more difficult for the mega-groups. Clients will pressure their margins and the staple source of volume revenues, traditional media, is in relative decline. All these reinforce a lower-growth future."

The UK mirrored what was happening elsewhere. An end-of-year CBI and Grant Thornton survey of business and professional companies, including ad agencies, found that an improvement in the value and volume of work during the last quarter was still significantly below normal and that confidence had failed to improve.

Predictions of a drop in house prices, the possibility of war with Iraq, a flat stock market and the return of industrial unrest combined to fuel worries, the survey found. "This prolonged uncertainty in the economy is here to stay unless some of the issues are seen to be resolved," it declared.

On the ad scene, the recession showed itself in a lack of start-ups.

Paul Simons, ousted as O&M's group chairman, set up Passion & Partners but the only other launch of note, Rapley Smith & Jones, failed even to celebrate its first birthday. Martin Smith, one of its founders, said: "I don't think there's been a time when there has been so little cause for optimism in the business."

One natural consequence of such gloomy times is that agencies will compare their Campaign scores with their rivals and draw wrong conclusions. In fact, agencies have been scored on their individual performance, not against their peers'.

Meanwhile, the recession not only put a brake on most takeover activity but complicated the few deals that were being negotiated - none more than WPP's protracted efforts to buy HHCL & Partners from the embattled Chime to become the flagship operation of its Red Cell network. As the end of the year approached, the purchase had not been completed, many months after news of it broke, because of the reported insistence of WPP's group chief executive, Sir Martin Sorrell, on an all-paper deal.

To make matters worse for a global communications business whose consolidation looked to be almost complete in 2002, there was evidence that consumers were increasingly uniting against the hi-tech and the impersonal, while taking comfort in all that's genuine. According to research by Euro RSCG Worldwide, this will manifest itself in pressure on advertisers to use real people in their marketing communications. The agency group also identified a growing belief by consumers that companies owned and managed by families were more likely to make products they can trust.

And it suggested that more companies might follow the lead of the cleaning products manufacturer SC Johnson, which recently rebranded itself as SC Johnson: A Family Company.

So how do giants such as WPP, Interpublic, Omnicom and Publicis maintain earnings growth as suitable acquisitions dry up? WPP last year intensified its attempts to improve margins on existing business and to enhance its array of direct marketing services. There may also be some limited scope for stealing business from smaller agencies.

Opportunities may even exist to expand into communication technology, but few marketing people have knowledge of the sector and such a strategy would be risky. Less hazardous might be the growing interest among the supergroups of influencing or controlling programme content.

Bob Willott, the editor of Marketing Services Financial Intelligence, said: "Buying into content, and even media owners, would put a marketing services company into a powerful strategic position, not only controlling the highway to the digital box but, in some cases, being able to reach live audiences directly."

However, the major lesson for the supergroups from 2002 is the importance of a remuneration system with which all parties - client, holding company and operating unit - are content. This is key, given the growing trend of clients seeking economies of scale by doing a deal directly with a parent operation. Allied Domecq's contract with Cordiant for the group to handle the global promotion of a number of its flagship brands is just one recent example.

The problem is that the holding company often has no ability to relate the agreed fee accurately to the work produced and the value delivered.

The outcome? Disappointment for everyone.

With so little respite in sight for the ad market, agreeing a fair price for the job is now of crucial importance. Despite consistent growth in UK TV revenues throughout the latter part of 2002, a modest recovery in the overall market during 2003 is the best that can be expected. Any real progress may be delayed until next year as the US economy is pump-primed for the presidential elections and advertisers seize on the Olympic Games as a vehicle for reaching mass audiences.

In the meantime, eyes will be drawn to the newer kids on the block for evidence that the industry hasn't lost its capacity to be both entrepreneurial and innovative. Mother's success at capturing Orange's £43 million account and Clemmow Hornby Inge's addition of brands such as Tango and Heineken to its portfolio suggests such qualities remain alive. Moreover, it is not just modest-spending local clients who are prepared to put business their way.

In a year when the industry was driven to the depths of despair, there's comfort to be drawn from the fact that its ability for self-renewal hasn't been entirely lost.

HOW THE TOP 300 TABLE IS COMPILED

The compilation of the Top 300 tables begins three months before publication. Agencies on Nielsen Media Research's database are contacted and asked to complete a questionnaire about declared income, declared billings, total number of accounts held, accounts won and lost and the media split of their billings. The media measured on all tables in this report include TV, display press, radio, cinema and outdoor. Around 150 agencies replied to the questionnaire this year. Returning a form does not in itself guarantee inclusion.

Agency client assignments are compiled from data supplied by agencies and media owners on a regular basis, alongside information published in the marketing press. Press expenditures include an Advertising Association discount factor, varying by sector and quarter.

Not surprisingly, agencies lobby hard to influence the way the data is presented; the Top 300 tables and reports can affect everything from share price and client perception to staff motivation. But objective representation of the dynamic agency market is crucial, so the tables are rigorously checked and analysed to ensure that the data presented is a fair reflection of the information provided to us.

Nielsen Media Research has used the same measurements as last year for consistency and agencies are listed according to the trading name used in 2002.

Campaign would like to thank Nielsen Media Research for its help in compiling the tables.