FRANKEL AT 35: THE FOUNDER AND THE NEXT GENERATION MAP: FRANKEL'S GROWTH

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This interview, conducted by John McDonough, took place in the Frankel & Co. headquarters office in Chicago June 13. Participating were Bud Frankel, founder of the company; Jim Mack, president (who joined in 1979); and David Tridle, chief operating officer (with the company since 1985).

Advertising Age: This is a rare opportunity to have both the founder, who invented the company, and the people who will maintain it at the same table. Mr. Frankel, had you studied the histories of enough agencies to know that to move a company from a cult of personality to a permanent institution, you had to find people who were better at certain things than you were?

Mr. Frankel: I knew it experientially. The reality was a lot of companies were doing quite well. But without exception, every one of them hit a wall beyond which they could not manage more growth. I was determined not to let that happen. I didn't want the future of Frankel & Co. to be dependent on my abilities or my health.

We had a good thing going, but it could only go as far as I could take it personally. And that wasn't far enough for me. We weren't capturing the opportunities. We had to have the kind of skills Jim and Dave brought to the company.

Ad Age: Describe the present ownership of the company.

Mr. Frankel: I'm the principal shareholder, at roughly two-thirds. The balance is spread among about 15 other key people.

Ad Age: You haven't concealed your inclination to go public. Will that happen, and if so, how will it change the way you do business?

Mr. Frankel: We're considering our options, one of which is going public. This is absolutely consistent with our mission, which is to be our clients' most valued marketing partner. We have to grow, and we've reached the point where the financing of that growth can become monumental. It's a huge number now because of all the initiatives in the area of technology that face us. This is what will change our business, not going public.

Ad Age: It's a cliche in the agency business that assets leave the building every day at 5. So what's to finance?

Mr. Tridle: It may be a cliche, but it's true. Moreover, there's been a fundamental change in the agency business.

When I came here in 1985, this was a low-capital business. Today it is, at the least, a medium capital-intensive business. As far as some of the things we're doing, it may even be a high capital-intensive business-because of technology. This has and will forever change this industry.

Because of that, we no longer are a purely service business, and whatever is left, after salaries and rent, is the take-home profit. Each year you may have to invest more back into the capital infrastructure than you make in profits. If you don't, you lose the speed of service, and your cost structure will become inefficient.

This game is becoming separated into two camps: Niche players, who do one thing, and significant organizations, who have the capital infrastructure necessary to service international clients and not let them go somewhere else.

Ad Age: You say you need to finance that growth. But Y&R has grown to be a $1.3 billion agency. Leo Burnett isn't far behind. Both are still private. Frankel's revenues are only $66 million. What's the hurry for an IPO?

Mr. Mack: We actually compete with the agencies you mentioned.

Ad Age: Why? Because they have promotional capabilities?

Mr. Mack: No. Because they have been viewed [by clients] as marketing agencies. But the paradigm is changing. Companies are looking for agencies that can solve their marketing challenges on the broadest scale. That's why we've had the growth we've had over the last 10 to 15 years. Because we view ourselves very broadly as a marketing solution provider.

To do that, we have to be involved in a multitude of different disciplines: directed database marketing, sports marketing, multi-national marketing. When McDonald's or Visa does a major initiative, it not only has domestic but international impact. For us to be able to do our job, we have to provide in all those disciplines.

For us-maybe not for others-going public will enable us to do that because it will give us the capitalization we need.

Ad Age: You say you're in competition with Y&R and Burnett. Is it possible we have some confusion between marketing and merchandising services?

Mr. Mack: Merchandising is one of the tactical disciplines we provide. But what we provide is really a marketing plan, then we work our way down through strategies and ultimately tactics.

We view advertising, sales promotion, electronic media as simply tactics. Our main product is our thinking. Everything else is tactical.

Clients are looking for people who know the business and marketplace. It used to be the ad agencies that did this. But their focus is primarily ad media to reach the consumer. Our discipline is to look at the whole marketing circle.

Ad Age: But you don't provide advertising.

Mr.Tridle: We have done limited advertising.

Mr. Frankel: We have no bias toward any particular marketing tactic, including advertising. Let me show you our marketing triangle. Here is the marketer [top]. He communicates with the consumer [lower left] with a thing called advertising. That's the business of the agency. But in order for us to develop a comprehensive plan, we have to understand a hell of a lot more than just the consumer. You have to understand the channels of distribution and how they reach the consumer. Corporate sales calls on the distributors, who have salesmen out calling on retailers, who have store personnel.

Also, you want to communicate with the consumer in a lot of different ways, say through database and direct marketing. Unless you understand this whole process, you can't possibly build a marketing plan. We have to know so much more about our clients' businesses than the ad agencies that it's a natural evolution for us to become a more important marketing partner.

Ad Age: In June you announced the spinoff of digital marketing into a separate division called Siren Technologies. Why?

Mr. Frankel: It's a totally different business, more of a media business than a strategic or tactical one. It's the business of delivering messages to the point of sale through electronics. Our traditional way of doing business is to develop very close, long-term relationships with our clients. This is more the sale of a service. It needs more sales people making calls. Whereas we have clients, Siren will have customers.

Mr. Tridle: Richard Mandeberg, VP of Frankel & Co., developed this end of the business for us. Tony Dillon, general manager of Siren Technologies, will head it. We expect Siren to sell to non-Frankel clients. It will need to pursue its own destiny. We think the association with Frankel will be important. But they will have to go after a whole other class of customers.

Ad Age: What is your IPO schedule?

Mr. Frankel: We're on track for the first half of '98.

Ad Age: When was the IPO decision made?

Mr. Frankel: About 1995. We have a little exercise every once in a while in which we look at our client list and think about what their future needs are going to be. We plan accordingly. If their needs are likely to be this, we ask what our role should be and where do we have to be at that time.

Ad Age: How big a stake do you expect to offer in the IPO?

Mr. Frankel: We don't know the precise structure at this point. But whatever happens, management will hold controlling interest in the company.

Advertising Age: Some say agencies go public so the bosses can get rich. Will this enrich you men?

Mr. Mack: Nothing in this is a cash-out scenario. This is an investment to take advantage of the opportunities that exist.

Ad Age: When Ogilvy & Mather was taken over by WPP in the '80s, David Ogilvy didn't conceal his contempt. When it was over, someone asked him why he took O&M public. He shrugged and said, "Nobody's perfect." Will Frankel become a takeover target?

Mr. Tridle: O&M didn't have management control. They became a target because management held onto a very small percentage of the outstanding shares. They were happy being a public company. They were not happy when they couldn't control their destiny, and WPP made it impossible for the board to turn down the offer without shareholder suits.

Mr. Mack: I think it's fair to say, without going into details, that our plan is to keep control.

Ad Age: Frankel is now the fourth-largest promo agency by revenues, which stand at around $66 million. Do you want to be the largest?

Mr. Tridle: The goal is to use capital to take advantage of the opportunities we have. A byproduct of that, we expect, will be growth.

Mr. Mack: We're trying to take ourselves out of the usual categories of ad agencies, promo agencies and the like.

I think there is a convergence going on in which ad agencies are getting into these other tactics. We're thinking about how you look at marketing in the whole sense.

We're the agency of the future. I think there are a lot of folks trying to do this. If this were not true, the multi-national companies would not be acquiring the services they are. We are trying to deliver holistic programs, and that's eventually what they would like.

Ad Age: Twenty-five years ago, promo agencies were predicting that media costs were rising and that clients were going to be shifting money from ad agencies to promo. Brave words, but most observers figured it was all self-stroking rhetoric to boost a trinkets-and-trash industry PR image. Now, 25 years later, the largest promo agency is only the size of a mid-size ad shop.

Mr. Frankel: I don't agree. If you use the multiplier, we're going to be a billion-dollar agency. The network TV audience is about a third what it used to be, and the prices continue to climb. Clients are spending more money and getting less bang for their buck. But they're still producing all these goods. They have to look at other ways to get at this consumer and enhance the distribution system beyond advertising. I'm not saying they don't need advertising. I'm saying it's just much, much less efficient.

Mr. Tridle: Advertising has gone from being the solution to one of the elements. There are many other elements necessary to have a successful marketing program. And that is the focus of what we do. That's why we do advertising. But it's also why most of the ad agencies aren't pure ad agencies. They're doing other things because advertising is an element, not a solution anymore.

Ad Age: Promo agencies used to make money on the markups of goods and production. How does Frankel make money on its thinking?

Mr. Tridle: We're not a business that is about adding markups to make money. Ninety-some percent of our revenue comes from fee-for-service. That has also been the trend in the ad agency business, which is one of the reasons they've been looking to get into other businesses.

Ad Age: What will this new flow of IPO capital pay for?

Mr. Frankel: At lot will go into research and developing new technologies. At lot will go into the new Siren division, because that is a very capital-intensive investment. Other portions will be used for strategic acquisitions, international expansion and building our infrastructure.

Mr. Tridle: But as we go international, we may need a capability. We may buy it or align with it. There are different ways and no formula. It depends on the resources we need.

Ad Age: You keep saying "be our clients' most valuable marketing partner." But that makes no claim any other agency doesn't make.

Mr. Frankel: There's a very big difference. A lot of those people are trying to do what's best for their clients, but within a very narrow range. We want to provide brand- and sales-building services for all the marketing elements of our clients' businesses.

Ad Age: One advantage you have over agencies is that the results are in fast. A TV campaign about McDonald's may take years to show results, and even then no one can be sure it's the ads. But when you dump 10 million Beanie Babies into the stores, you know in 48 hours what you've got.

Mr. Mack: No question, a sales promotion program is very measurable. But we don't want to lose sight of the other measurement factors surrounding the brand.

Mr. Frankel: If we do anything that hinders the image expectations of the client, we're in deep trouble. The notion that the advertising is the image maker and everything else is "collateral" is wrong. Everything impacts the image of that brand. Every contact and experience with that brand is essential to the maintenance of the image.

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