Pepsi Shops Not Feeling the Love as Marketer Trims Its Ranks 65%

Agencies Await Their Fate as Company Moves to Make Marketing More Efficient and Boost Brand Building With Spending Jump up to $600 Million

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When it comes to agency relationships, it's possible that -- to borrow a phrase from "Project Runway" host Heidi Klum -- one day you're in. and the next day you're out.

PepsiCo made that crystal clear last week when CEO Indra Nooyi announced its North America beverage division had identified 100 agencies that it planned to eliminate from its roster. The staggering number represents over 65% of the division's total number of partner agencies.

The move was billed as a bid to increase efficiency and shift into brand-building money allocated for things such as agency fees. The company also said it will spend an extra $500 million to $600 million to advertise its brands this year, with a focus on North America.

But while PepsiCo knows the fate of its partners, it didn't plan to begin notifying agencies of their status until this week. That prompted widespread panic in adland as agencies scrambled to call brand managers. Some were told not to worry, but several others were in the dark.

Ms. Nooyi made her remarks last week to analysts gathered in New York. She said that in the past five years, advertising and marketing spending in North America has been supporting "too many brands and was spread across too many agencies. ... So we went to work and cleaned house. We reduced agency relationships in North American beverages from 150 to about 50."

Agencies that work with PepsiCo include large networks such as TBWA, BBDO and DDB; digital shops Huge , Resource Interactive, Firstborn and VML; PR agencies Fleishman-Hillard, Weber Shandwick, Edelman and Ruder Finn; Hispanic shops LatinWorks and Alma; and independents such as Olson.

It's not the first time PepsiCo has tried to give some of these shops a squeeze. Last May, the marketer fired off an email to several agencies requesting an immediate reduction in total fees, halts on work in the pipeline and clampdowns on travel. Essentially, agency execs told Ad Age , the marketer engaged in a "shakedown." Some execs say nothing ever came of the process; others say they saw reductions in their fees.

"What we see from them are knee-jerk reactions, but not always the follow-through," said one executive at an agency on PepsiCo's roster who did not wish to be named. The person noted that working with the company can be rewarding for staff from a creative perspective, but also chaotic.

"They're under too much of a microscope from Wall Street ," said an exec at a different PepsiCo agency, who also asked to remain anonymous."I don't think these announcements are any more sinister than the fact that it's earnings season and the company needs to show Wall Street that it's cutting costs."

That person said marketing has become somewhat of a scapegoat. "Marketing and advertising got used a bit," said the exec. "They are using us as a lever to make some news and show that there are sweeping changes happening at the company."

The marketer declined to comment on those statements.

PepsiCo's plans mirror recent moves at another consumer packaged-goods giant, Unilever. During a recent Unilever investor meeting, Chief Financial Officer Jean-Marc Huet said the company has reduced "nonproductive" spending, which he classified as "the money we spend on production costs and agency fees, money that 's not directly driving the exposure of our brands to the community and consumers."

Simon Lowden, chief marketing officer at PepsiCo Beverages, told Ad Age that in the past two to three years, the number of agencies the company works with has ballooned. "It's grown because the agenda has gotten more complex and busier," Mr. Lowden said. But "when we look back on things, the vast majority of the work is still done by our core agencies."

The roster-consolidation process was "transparent," Mr. Lowden said. "We have been open [with the agencies] that it's happening. We've been through qualitative assessments."

PepsiCo didn't consider conducting a series of reviews as a way to eliminate agencies, Mr. Lowden said. Instead, various brand teams were told to focus on partnerships and programs aligned with the company's business objectives. He called the approach "need-based," adding that the roster isn't being pared based on a goal to have a certain number of agencies on each brand.

"There's no question we have to make sure our marketing organization is as efficient as possible," Mr. Lowden said. "We need to make sure we have strong, productive, fewer partnerships that allow us to drive successful, effective marketing programs."

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