Account Loss: Bates faces tough times after Wendy's

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Bates Worldwide and parent Cordiant Communications Group suffered yet another major blow last week when, after 15 years, Wendy's International moved its $312 million account to Interpublic Group of Cos.' McCann-Erickson WorldGroup. Commented one London-based equities analyst less than 24 hours after the shift became public, "Cordiant executives are still in a state of shock."

This has been a devastating year for Bates Worldwide. It lost the $400 million U.S. assignment of Hyundai Motor Co., its largest global client. In the U.S., several smaller accounts, including CVS Corp. ($35 million) and the Dept. of Defense Joint Recruitment and Advertising Program ($15 million), also split. Since January, Bates USA has lost about $678 million of its $1.437 billion in billings, leaving current billings at $760 million, according to Ad Age estimates.

Bates' largest remaining U.S. client by billings is Pfizer, which spent about $200 million in 2001 on accounts handled by Bates, including Benadryl and Zantac 75. Pfizer may be wary of Bates now since the agency is likely to endure cuts in employees and resources, one former Bates executive said. The pending Pfizer purchase of Pharmacia may pose less of a threat to Bates than Pfizer's intention to sell its Adams confectionery unit, whose roster includes Bates. If a package-goods company with deep agency ties buys Adams, Bates could be vulnerable on its Dentyne and Certs accounts, which spent $42 million in 2001, according to Taylor Nelson Sofres' CMR. Pfizer didn't return calls.

limited prospects

Cordiant CEO Michael Bungey for several years has been open to talking with suitors, but his prospects now are limited. Whereas two years ago, a distressed entity would find numerous suitors among ad-agency holding companies, said Paul Richards, analyst with Numis, London, there are no obvious buyers for Cordiant and it's unlikely shareholders would sell at the current low price. The stock closed at $4.36 Aug. 16, down 86% from its March 2000 peak. Mr. Richards expects Cordiant Sept. 6 to announce pre-tax profits of $7.7 million for the first half of 2002, down from $33.8 million for the prior-year period.

Bates, founded in 1940, as recently as 1986 was the world's third-largest ad agency. Despite its industry renown as creator of such memorable taglines as "The Milk Chocolate that Melts in Your Mouth, Not in Your Hands," the agency in recent years has been perceived as a has-been. In 1997, when Cordiant separated Bates Worldwide from Saatchi & Saatchi and Zenith, creating three separate businesses, Mr. Bungey predicted the move would unleash the power of Bates once it was no longer blocked from gaining consumer-products business because of sibling Saatchi, a Procter & Gamble Co. agency.

where's the beef?

The new-business surge never happened. Efforts to attract major consumer products accounts failed.

Wendy's and Hyundai left Bates even though its recent work helped make the clients among their categories' strongest performers in sales growth. Don Calhoon, Wendy's exec VP-marketing, said the chain does not plan to change its marketing strategies or the current "It's Better Here" campaign, which helped increase same-store sales 6.2% for the first half of 2002, and net income to rise 13% in the same time. The business moved because "we were not comfortable with the move of Bates' in-house media-buying function to a separate company," Mr. Calhoon said.

Bates several months ago announced plans to transfer all media buying handled by Bates North America to Optimedia, part of Zenith Optimedia Group, which is 75% owned by Publicis Groupe and 25% owned by Cordiant.

"The seamless integration of media, message and creative is at the heart of our successful marketing strategy. ... It simply made prudent business sense for us to pursue other options," Mr. Calhoon said.

David Hearn, Bates Worldwide CEO, said discussions between client and agency on the matter took place over the past few months. "We offered options. We thought they were right for Wendy's as well as for our other clients."

He declined to comment about layoffs, though he acknowledged that Wendy's "was a big piece of business and adjustments will have to be made."

contributing: hillary chura, david goetzl, jean halliday, richard linnett, kate macarthur, laurel wentz

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