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German Judge Tells Carat to Open Books

Client Danone Accuses Agency of Not Passing Along Discounts From Bulk Media Buys

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LONDON (AdAge.com) -- A German court battle has put the relationship between marketer and media agency on trial as French dairy giant Danone Groupe accuses Aegis Media of failing to pass on the full benefit of discounts gained from bulk media purchases more than five years ago.

In an attempt to resolve the dispute, the Higher Regional Court in Munich has ruled verbally that Aegis Media's Carat operation in Germany must open up its books. Aegis, unwilling to reveal sensitive market information, is awaiting the written ruling, due at the end of January, before contesting the judgment.

"Aegis notes the recent ruling in its ongoing dispute with Danone in Germany," Aegis said in a statement. "We will study in detail the court's decision when it is issued in writing. In particular, we will look to establish why the court has not considered as sufficient the market standard information that Aegis has already given within the proceedings. Aegis intends to contest this case through all appropriate judicial authorities."

Danone declined to comment.

A $22 million dispute?
The amount in dispute in the case has been widely quoted as $22 million, but an Aegis spokeperson claimed that the real figure is "nothing like" that amount and is "not meaningful in group terms." Observers suspect that in the end, Aegis may prefer to hand over the money rather than open its books to public scrutiny.

Essentially, the two sides are unable to agree on the extent of the transparency that was written into their media-buying contract between 2003 and 2005, and have been fighting about it for several years. Since then, Danone has conducted more than one review of its media business in Europe, including a procurement-driven global review late last year in which WPP's Mediacom won the German business. Ad Age ranks Danone as the 21st biggest global marketer with annual ad spending of more than $900 million worldwide.

German marketers, through their trade body, OWM, take the position that media agencies are suppliers, and should pass rebates back to their clients.

German media agencies, on the other hand, see themselves more as brokers. Gunnar Brune, managing director of Lowe Deutschland, said, "Both these models are true, but I think the agencies are a bit closer to the truth. They take a risk when they buy media -- especially when they are on a contract where they earn money only through the rebates they can get."

Scandals over the way agencies deal with rebates are not new in Germany. The former president of Aegis Germany, Aleksander Ruzicka, is currently serving the fourth year of an 11-year jail sentence for selling back to his agency (via a private company he set up) free commercial airtime that had been given to the agency as part of media-buying contracts with TV channels.

The 'template' system
The trouble, according to one media agency regional executive, is the "template" pitching system, where agencies specify in a template the exact prices they will pay for media slots. Agencies, increasingly desperate for business and for the bulk purchasing power that allows them to secure better discounts from media owners, are competing to offer the lowest prices to potential clients.

Marketers are as much to blame as agencies. "The template is king," the executive said, "marketers are not focusing on KPIs [key performance indicators] or thinking about top-line growth; they are looking for the biggest discounts, because discounts will save their skins -- it's what the CEO wants to hear about."

As well as demanding cheap airtime, marketers everywhere are also looking for the creativity, strategic muscle and sharp analysis that make media agencies a vital partner in communications campaigns.

But some agencies, it appears, are increasingly taking risks by putting very low figures on the template to win the business, and then worrying about delivery later.

"None of this is long term," the regional executive said. "It does your reputation no good. You have to establish priorities. New business is not the only goal. You have to think about existing clients. If you pitch everything too low, there's just not enough discount to be had."

Because many pitches took place in a bad economy last year, the Danone-Aegis dispute in Germany may be a forerunner of new problems to emerge later.

Aegis is unlikely to be alone in its reluctance to open up its books to scrutiny. Most agencies would probably not relish the prospect of seeing the complex web of their dealings with media owners and clients, however legitimate, put under a public spotlight.

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