GUEST COLUMNIST;WARNING TO AGENCIES: SCALE BACK NOW OR RISK EXTINCTION

Published on .

Most Popular
A dvertising agencies helped create all the significant global brands in the world, and in doing so "co-created" billions of dollars in wealth for brand (marketers) and agency shareholders. During the fast-growth years after World War II, and before private labels, great advertising people also helped create memorable local ads that probably will be used as examples for decades.

Manufacturers and agencies then went global, and success led to "proliferation." Brands and associated (marketing) activities exploded and individual country and agency infrastructures expanded to support the increased activity.

The advent of private labels brought the premium brand era of easy value creation to an end. Price gaps of up to 30% between price brands and premium brands slammed the door on premium brand growth in most categories and exposed grossly inflated cost structures within manufacturers and their agencies.

At the core, manufacturers are at fault for permitting inexperienced brand managers to launch and support infinite line extensions.

Since agencies historically charge a percentage on work billed, it has been easy for agencies to "staff up."

Agencies should take the initiative to change or they will become extinct. Already, high- profile brands have begun to cut prices and, in most instances, advertising and research and development to cover the price cuts. It is a dangerous formula because it risks converting brands into commodities.

Procter & Gamble Co. and other innovators have begun experimenting with models that maintain product innovation and quality communication but keep costs low. Certainly a large source of waste reduction is client focused, but it is time for agencies to make themselves and their clients more competitive.

Global agencies replicated themselves and their activities in every country where there is decent economic activity. These large infrastructures usually supported a handful of global clients and numerous local clients.

While (marketers in) Europe rationalized factories years ago, agencies have built "duplicate communication factories" in each country. While global brands are growing in Latin America, the agency (and manufacturer) manage global brand activities over and over with duplicate buildings, departments and administration systems. Manufacturers pay commissions on duplicate activity and pass along a proliferation tax in the form of price premiums to consumers. Consumers analyze the private label gap and, more often than not, are leaving the premium brand behind.

One sign of the changing agency is the "boutique" creative shop where smaller environments allow creatives to be more creative. Another sign of the changing agency is the rise of media brokers in Europe and, more recently, Latin America, where more focused systems and less activity have allowed media brokers to achieve lower prices for some clients. The final sign of the changing agency is global clients like Colgate-Palmolive Co. and IBM Corp. moving from multiple agencies to single, worldwide agencies in exchange for lower commissions. This reflects the availability of less money to keep multiple agencies profitable.

Tomorrow's global agencies will focus on creating and placing communications exclusively for global clients (local clients will go to local agencies). Centers of excellence in Miami, London and Hong Kong will supply a satellite network of "skeleton" offices (not buildings), which will maintain the local pulse in every country. Media planning and purchasing will be electronically centralized in Ireland or India. All work will be fee-based with performance incentives, and the commission will go the way of the dinosaur. Focused agencies should receive less revenue but more profit.

If not, will we see private-label agencies?

Jeffrey Merrihue is Kellogg Co.'s director of marketing and sales for Latin America.

In this article: