But no matter how they are achieving it, one thing is for certain: As the industry continues to seek out ways to do more with less, there is potential for even bigger cuts in years ahead as marketers and agencies decide how many people to bring back into offices and whether to renew leases for expensive commercial real estate.
Coca-Cola Co. is one big example of what marketer efficiency moves will look like in the year ahead, says John Gleason, principal of A Better View Consulting. The company, its revenue squeezed by loss of food service sales, started with internal cost cutting by offering voluntary severance packages to 4,000 employees in the U.S. and Canada, cutting its regional business units from 17 to nine and getting more serious about cutting its long tail of slow-moving “zombie brands.” Then came its December announcement that it’s throwing all global creative and media accounts into review in what likely will lead to consolidation.
While reviews are popular cost-saving moves, there are limits to how much efficiency consolidation or new agency contracts can actually drive, claims Mark Sneider, CEO of RSW/US, who says he’s helped lead two consolidation-focused reviews in recent months. While the results should produce better work, Sneider believes the cost impact may be neutral or even higher, though effectiveness may improve.
Nancy Hill, principal of The Agency Sherpa consulting firm, also says it’s doubtful how well changing or consolidating agencies actually works for marketers long-term. Outside of relatively small savings in administrative overhead, there aren’t that many economies of scale in a bigger agency assignment over a smaller one, say both Hill and Gleason. The savings for clients from consolidation generally come from an agency being willing to accept a lower profit margin in return for a larger absolute profit from a bigger assignment, Gleason says. That’s often followed by the agency looking for ways to cut costs, usually by assigning lower-cost talent to the account in the months and years ahead.
RSW/US also finds signs agency consolidation may be peaking. The portion of marketers who say they use two or fewer agencies reached an all-time high of 74% last year in its survey. But while 29% of marketers say they plan to consolidate shops further, that’s down from 34% last year.
Possibly a bigger trend is at odds with consolidation, though it could improve cost efficiency for marketers and agencies alike—using continuous project work vs. agency reviews.
“There are a lot more marketers using project work as a means of sampling agencies,” Sneider says, generally for projects that go into market. It’s more of an ongoing process and does away with requests for proposals and spec work that may never reach the market.
In many cases, marketers are looking to save money by looking inside the company first.
RSW/US’ study finds marketers have reduced their plans to invest in their internal non-marketing expenditures—such as staff, R&D and travel—to the lowest level ever recorded in surveys dating to 2013. Only 49% of the 105 marketers surveyed plan to increase spending on such non-marketing activities in 2021, vs. 57% at the previous low point in 2013. Agencies surveyed showed a similar downward trend in non-marketing expenditure plans.
That might seem like a plus for agencies, given that fewer inside hires may require marketers to do more business with outside agencies, says Sneider. Yet the same survey also shows 33% of marketers plan to bring more work in-house this year vs. only 13% who plan to decrease in-house work. Also, 63% of marketers say they expect to increase the work done by in-house agencies.
Seemingly, the intentions to do more work in-house but cutting expectations for inside spending and staffing might seem contradictory. But that actually fits a pattern, Gleason says, that he’s seen with in-housing. Inside shops start strong the first couple of years, fueled by new hires and preferred access to internal research to shape insights, he says. After that, Gleason believes in-house creative efforts tend to decline because the team’s fresh insights fade and staffing becomes another overhead line item for finance departments to control.
While creative in-housing may be peaking, media in-housing as an efficiency measure appears to be gaining traction as Gleason sees it. That’s particularly true as growing shares of marketing budgets move to digital, a shift that has accelerated during the pandemic. Digital buying often gets handled in-house or via direct relationships with such outside demand-side platforms as The Trade Desk. The fast-growing connected TV market also often bypasses traditional media agencies in favor of those DSPs.
Even in TV, where the pandemic largely wiped out the traditional upfront last year, terms have changed toward marketers waiting longer to make commitments and winning more flexibility in getting out of those commitments on upfront buys, says Manuel Reyes, CEO of media auditing and consulting firm Cortex Media.
“Everyone is really being more careful in ensuring things are more cancelable,” Reyes says. “People are trying to commit as little as possible on media that are hard to cancel.”
But marketers are continuing to get pitched hard on principal deals where agencies have taken possession of inventory for resale. More so in Europe than the U.S., agencies have found themselves holding a lot of inventory, says Stephen Broderick, CEO of consulting firm MediaPath. The deals may look appealing to marketers, he says, but almost certainly agencies are making healthy margins. Pressure on agencies to make profit on principal deals is only intensified, Broderick says, as some face the grim prospect of trying to earn profit, or just break even, on aggressively priced deals made in 2019 to win new accounts. Reyes agrees that agencies are stepping up efforts to sell inventory directly to clients, but says he can’t really blame them at a time when revenue is down.
Cuts or share shifting?
Revenue trends for the biggest agency holding companies certainly make it look like marketers are cutting costs vigorously. The four leading agency holding companies reported third-quarter organic sales down anywhere from 4% to 12%. WPP in December announced revenue for October and November continued to decline 6.7% and expected a similar decline for the full quarter.
It all looks pretty grim, until you consider that some parts of the marketing-services world are growing healthily. Privately held You and Mr. Jones, which runs a large influencer marketing network and supports marketer in-housing efforts with tech platforms and staffing, expects a revenue increase of around 27% for 2020, says CEO David Jones. His company has more than 3,000 employees, up around 50% in two years. A recent $260 million funding round put the company’s valuation at $6 billion (close to half of WPP’s $13.1 billion), and it consolidated content operations previously handled by 500 digital agencies for a global client Jones declined to name.
Unilever’s U-Studio (which is not that new client), uses Jones’ Oliver unit to staff and provide the tech platform for content development across 23 countries. U-Studio has been billed by Unilever as in-housing and an efficiency move. But the staff is largely from Oliver. And Jones says the goal of what Oliver does isn’t about cost cutting directly.
The idea is to provide in-house operations with agility and a career path for their creatives to keep them from getting stale by working for only one client or brand. “We don’t charge any less” for talent than conventional agencies, says Jones, a former Havas CEO. “It’s just that we can get to a solution much faster and create scale in a way traditional models can’t. So we can typically take 30% off the costs a major client has on content.”
If anything, the pandemic is just accelerating growth for companies like his and other digitally focused players operating with new models, Jones claims. That’s a group in which he also includes Martin Sorrell’s S4 Capital.
“All of the major holding companies are down and saying it’s caused by the pandemic,” Jones says. “It’s actually not true. What it’s caused by is that they have businesses that are traditional analog, and if you have a business that’s genuinely digital and genuinely tech, they’re booming.” Investors have realized this, he says, which is why market capitalization for The Trade Desk is nearly that of WPP, Publicis Groupe and Omnicom combined.
The shift of marketing budgets to more efficient players was inevitable—and long predicted—Jones says. The pandemic is just making it happen faster. “You’re seeing a huge change in in-housing content, in-housing media, and it’s given people the impetus to make changes it probably would have taken a year or two to do otherwise.”
He doesn’t ascribe his recent success to being smarter than holding company executives, since he was once one himself. He just ascribes it to being able to build a business from the ground up.
“Why is Sorrell doing so well now when he wasn’t at WPP?” Jones says. “Why am I doing so well now when I was doing less well when I was running Havas? What do we know now that we didn’t know then? Nothing. It’s just that those legacy structures are impossible to change.”
A holding company executive, who spoke not for attribution, said it’s easier growing businesses like Jones’ with nine-figure revenue than holding companies with 11-figure revenue. But he said companies like You and Mr. Jones ultimately are structured like holding companies, which themselves have some agencies growing through the pandemic and sometimes embedding creatives with clients in setups not unlike Oliver’s.
Let’s get experimental
The pandemic has not affected all sectors equally. The brunt of the downturn is fairly focused in travel, hospitality, movie, restaurant, apparel, cosmetics, sports and many retail operations. Packaged food, grocery, online retail, household products and home-improvement marketers have experienced a boom. So while the media recession was sharp—with spending down more than 30% in April and May—it rebounded quickly and actually rose 2%-11% each month from August through December, according to Standard Media Index.
Companies that find themselves with a pandemic windfall—particularly in packaged goods—“are using this mentality to say, ‘Let’s go experiment,’” says consultant Gleason. “They’re using more of a startup mentality.” Then again, he says, marketers hurt by the pandemic are doing largely the same thing to save money. “After years of big companies trying to be more agile and entrepreneurial, it took COVID for them to actually start doing it,” Gleason says.
Procter & Gamble and others in recent years began replacing conventional concept testing by instead just launching brands on a small scale, creating some “minimally viable product” and learning by selling it online, seeing what people like, then adapting the product, its marketing or both in waves of refinement and expansion. But lately Gleason says he’s seeing companies try a cheaper option still—putting products for sale online without actually making any—then, if people click to buy, telling them it’s out of stock or unavailable in their market. Only after gauging interest do companies even make prototypes to sell.
It’s a tactic Rachel Tipograph says she’s been using, or telling clients to use, since 2009 as a digital agency and retail executive and later founder of MikMak, which provides e-commerce marketing analytics, software and shoppable ad formats for social media. “Social media and retailers are breeding grounds for R&D,” she says. Brands can get an idea of who the prime market is before finishing product development, breaking the interested audience down by demographic or psychographic factors, “and even go as far as setting up an email landing page to remarket to people who express interest,” Tipograph says.
Bigger changes ahead
Even if efficiency is driving more decisions in 2021, the bigger changes may come in 2022 as the pandemic subsides. Marketers have been on the whole fairly humane over the past year, generally treating their agencies like the partners they often call them and reluctant to press their advantage too hard even in a down marketplace where they could, says Hill.
But inevitably as agency contracts come up for renewal or new agencies come on board, marketers will look harder at costs. While compensation structures vary, they ultimately boil down to agency overhead plus a margin. And the overheads could be very much in flux.
Marketers and agencies alike have gotten used to working largely with remote, distributed workforces, which raises questions about why they need so much high-priced commercial real estate. As leases come up for renewal, pressure to downsize in favor of office-sharing distributed workforces is likely to rise, say Gleason and Sneider. On the other hand, those real estate costs are going to weigh particularly heavy on holding companies like WPP and Omnicom that have invested in new corporate campuses, Gleason says.
But WPP CEO Mark Read says the company’s campus program already was designed to consolidate multiple buildings into single ones with less space, timed for when leases expire and saving about 20% of its space in a natural process over a couple years. “Some of these savings will be returned to clients,” Read says. “The rest will be hopefully re-invested into people. We need to attract better people into our industry, and that’s gong to mean in all likelihood paying them more.”
Freelancing, and the financial flexibility it gives agencies and clients, is likely to rise, Hill says. Agencies based in high-cost markets like New York, San Francisco and Los Angeles were always able to justify higher fees because of the higher cost of living. But if they have less office space or more people working from lower-cost locales, that could change, she says.
“There’s a lot of chatter now about if I’m an agency in New York and my employee A is living in Omaha, why am I paying them a New York salary? Well, who are you to say what their cost of living is? Other companies in San Francisco are saying ‘You’re free to live where you want, but you need to be in the office four days a month. And if we’re still paying you the same salary, the travel is on your dime.’ Everyone is trying to figure out what a flex model looks like, and of course that’s going to trickle down into how clients look at compensation.”
No matter how quickly the marketing economy rebounds from the pandemic, it’s opened people’s eyes to what’s really essential, what they can live without and more efficient ways of doing things. Long after COVID-19 becomes a distant memory, the drive to do more with less is here to stay.