$43.6B U.S. agency revenue
Two ad-production trade groups are blasting Mars Inc.'s new 120-day payment term policy, warning that if the controversial practice is applied to ad agencies, it could severely harm companies that make and edit the candy giant's ads.
In a letter sent to Mars Global Chief Marketing Officer Bruce McColl, the Association of Independent Commercial Producers stated that the policy would "simply decimate the way this industry operates." The group, known as AICP, represents companies that are involved in 85% of all domestic commercials aired nationally, according to its website.
Meanwhile, the Association of Independent Creative Editors, or AICE -- which represents editing, visual effects, audio mixing and video finishing studios -- also sent Mr. McColl a letter saying the policy is "patently unfair" to its members and "directly threatens their financial future."
The letters were sent after Ad Age reported late last month that Mars was seeking to extend the period before suppliers get paid to as long as 120 days. The policy follows moves by other big advertisers to extend payment periods, including Procter & Gamble, which has sought to move from 30 to 75 days, and Mondelez International, which confirmed a year ago that it was seeking 120-day terms.
Mars spokesman Ryan Bowling told Ad Age that the 120-policy is being implemented gradually on a case-by-case basis. "We are looking at all categories but I can't confirm what industry or what suppliers due to confidentiality," he said. He added that "we look at what is mutually beneficial [with suppliers]. That's our No. 1 priority with each supplier." He said Mars plans to directly respond to AICP and AICE, but declined to share what the company will tell the groups.
The extended payment terms moves by Mars and other companies "ultimately boils down to a large multi-billion dollar corporation leaning on independent small businesses for interest-free loans and that's just absurd," AICE Executive Director Rachelle Madden said in an email to Ad Age.
Money typically flows from marketers to ad agencies, which in turn pay production companies. But as AICP pointed out in its letter, labor laws and union contracts "dictate that payment of labor … must be paid within a prescribed period of time, usually within two weeks." So if agencies are not paid in a timely manner, production companies would "have to borrow funds to meet these obligations to fund your productions -- which would ultimately add cost to your projects," AICP said in its letter to Mars.
Join us for the only industry event tailor-made for small and mid-sized shops. Come ready for a powerful mix of inspiration and practical advice��"with takeaways you can put into action as soon as you’re back in the office. Bring a list of challenges and we’ll discuss, debate, and share best practices. Register now.Learn more
Still, it is unclear if Mars has or is planning to institute the policy with ad agencies. As Ad Age reported last month, a person at one agency that works for Mars said the shop was approached about extending terms, but the agency was able to keep its current terms.
The AICP letter expressed concern about so-called "sequential liability" agreements that are included in ad agency contracts with production companies.
The agreements dictate that payment terms negotiated by agencies and production companies are "trumped by whenever the agency receives payment from Mars for that production," according to the letter to Mars. So if funds "specified for production are not specifically segregated from other funds, and the sequential liability policy is applied, production companies will not be able to meet their obligations on your productions, which will cause insurmountable legal and financial hardship" the letter stated.
Matt Miller, president and CEO of AICP, said in an interview that the organization sent similar letters to P&G and Mondelez when they began implementing longer payment terms. But he said both marketers have found ways to get timely payments to production companies.
Mr. Bowling declined to go into specifics on how Mars would handle production costs. He stressed that the new policy comes with a "supplier financing program" that would allow suppliers to opt-in to receive payments more quickly than 120 days.
In essence, this would mean an agency would be paid by a third party (a bank) arranged by Mars and then Mars would pay the bank after 120 days. Agencies using this method would have to pay what Mr. Bowling described as a "small service fee" to the bank that he said would be less than what the agency would pay if it secured its own credit line.