By Nathalie Tadena And Serena Ng
The world's largest advertiser wants to spend less on marketing,
dealing another big blow to an industry already battered by
corporate cost-cutting.
Procter & Gamble Co. is preparing to make deep cuts in the
number of advertising agencies it works with, hoping to save up to
half-a-billion dollars in fees that it now pays to outside firms to
help pitch its myriad everyday items, from Gillette razors, to Tide
detergent, to Pantene hair care, to Bounty paper towels.
What worries Madison Avenue isn't only the pressure agencies
will feel as P&G tries to wring better prices from them--or
risk losing the business altogether--but that the consumer-products
giant is joining other big companies, including Unilever, L'Oréal
SA, Coca-Cola Co., S.C. Johnson and Visa, that are evaluating some
part of their ad accounts.
In all, companies with nearly $20 billion in media buying power
have some part of their agency business under evaluation. That
makes this an unusually risky stretch for an advertising industry
that has seen accounts steadily whittled down in recent years as
their clients try to offset slow growth with cost cuts.
The pressures have prompted extensive industry consolidation,
culminating in the merger attempt between advertising giants
Publicis Groupe SA and Omnicom Group Inc. that collapsed last year.
Yet agencies are still at the behest of clients in an increasingly
frugal mood.
P&G Chief Financial Officer Jon Moeller said Thursday that
the household-products giant plans to "significantly simplify and
reduce" the number of agencies it works with on ads, media buying,
public relations, package design and in-store marketing.
Unilever, which spent roughly $7 billion on advertising and
marketing last year, is currently reviewing its global media-buying
business. The process is being driven in part by the need to find
"cost savings and efficiencies," a person familiar with the matter
said.
Snacks giant Mondelez International is expected to put its
media-buying business in review in coming weeks, another person
familiar with the matter said. A Mondelez spokeswoman said the
company's media contracts don't expire until the end of the year
and it currently doesn't have a media review going on.
Companies often have multiple reasons for calling reviews. Many
hold contests so they can make sure they are getting the best
services. Other times brands are testing whether their agencies are
up to speed on the latest marketing methods in an industry being
transformed fast by technology.
Still, the current round of re-evaluation threatens to hit the
ad industry in the pocketbook.
"It's a tsunami of reviews right now," said Russel Wohlwerth,
the principal of ad consulting firm External View Consulting Group.
"Companies are looking for savings from everything, and marketing"
is clearly in finance-department sights.
P&G spent $9.2 billion on advertising in the year that ended
last June. Its plan to drop a significant number of agencies comes
after years of deep cost-cutting in other operations to accelerate
growth and escape a reputation for bloat.
The company said last year it would exit 100 brands to focus on
the 65 biggest and most profitable such as Pampers, Crest and Head
& Shoulders. Because it has so many brands, P&G contracts
dozens, if not hundreds of agencies all over the world to help it
manage everything from ad campaigns and events to package design
and product launches, PR and displays inside Wal-Mart and other
retailers.
The culling will take place over the next two years, a P&G
spokesman said, adding that each of the company's brands will
determine its needs and review its agency use. P&G doesn't
disclose how much it spends on agencies, but former employees say
that the company used to spend roughly 15% of its advertising
budget on fees.
"What we are talking about is being as efficient and effective
as we can in spending those dollars where they drive returns," Mr.
Moeller said Thursday.
Clients have been putting pressure on advertising companies as
procurement officers exert more influence over marketing budgets.
Procurement departments review everything from agency fees to
production costs, looking to cut expenses where they can. Many big
companies are also stretching out payment to agencies from 30 days
after a piece of work to 60 days or even more than 120 days. Two
years ago, P&G told its agencies and other suppliers it would
pay them in 75 days instead of 45.
The global advertising industry is dominated by conglomerates
WPP PLC, Omnicom, Publicis and Interpublic Group of Cos.--four
firms that together generated nearly $50 billion in revenue in
2014.
Martin Sorrell, chief executive of WPP, the largest of those,
said Thursday that clients are "examining their costs with
increasing rigor," a trend that is going to continue as companies
contend with sluggish growth. WPP reported revenue growth of 8.3%
for the first quarter, boosted by currencies and acquisitions.
Interpublic Chief Executive Michael Roth said on an earnings
call Friday that agencies are under pressure to show that their
efforts produce a measurable return. Interpublic said its revenue
rose 2.4%.
The glory days of "Mad Men" are long gone, and extended
marriages like Leo Burnett's 57-year relationship with Allstate
Corp. are few and far between. A decade ago, the average tenure of
an agency-client relationship was about seven years, said Drexler
Fajen & Partners, a media consulting firm. Now, it is around
three and a half. Unilever reviews its media-buying agency account
every three years.
A recent study from the Association of National Advertisers, a
trade group, found that only 40% of agencies believe they are
fairly compensated, even though 72% of clients think their payments
are appropriate. "They always feel you can squeeze labor a little
bit more," said Ann Billock, a partner at Ark Advisors, a firm that
advises marketers on agency selection. If cuts are too deep, an
agency can be forced to shed staff, she said.
The fee pressure has eroded margins at the agencies that come up
with the ads as well as those that place them in the media. The big
advertising holding companies have managed to offset those
pressures by expanding into higher margin businesses like automated
ad buying and data analytics. Broadly, though, budgets are
tightening.
"Any given agency needs to be able to do the same work they did
last year for less than they did it last year," Pivotal Research
analyst Brian Wieser said.
The newness of some of those services may also play a role in
driving some of the reviews. Real-time programmatic buying--where
computer software makes instantaneous decisions on where to place
ads around the Internet--is hard for clients to track.
Last year the Association of National Advertisers and Forrester
Research surveyed about 150 senior marketers and found that 46%
expressed concern about the transparency of their media buys.
Write to Nathalie Tadena at nathalie.tadena@wsj.com and Serena
Ng at serena.ng@wsj.com
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