CREATIVE AGENCIES – UNDER FIRE

SPOT ON

CREATIVE AGENCIES

John Kaiser, Oaklins' creative agencies specialist, is

pleased to share some industry perspectives in this

edition of Spot On.

Few industries have been transformed more than

advertising. Agencies have evolved, new participants

have entered the ecosystem and practices have been

upended. With technological innovations, the industry

is in a state of evolution, with the value of creative

ideas and the power of data the only constants. As the

first newsletter about creative agencies, this will provide historical perspective, the general landscape of the

industry, some current trends challenging agencies

and M&A activity.

CREATIVE AGENCIES ¨C UNDER FIRE

Background

Prior to the mid-1980s, most creative agencies

were ¡°full-service¡± in their offerings. They crafted

strategies; created advertising for traditional media

channels ¡ª television, print, radio and out-of-home,

planned and purchased media for the ads, engaged

in promotional activity and delivered a range of other

services. Differentiation was largely based on size,

geography and vertical market expertise. There were

global networks such as J. Walter Thompson, McCann

Erickson and Saatchi & Saatchi, as well as regional,

national and local agencies.

Spot On ¡¤ Creative Agencies ¡¤ 1 st edition 2018

1986 marked a turning point. The Omnicom Group

was formed with the merger of BBDO, Doyle Dane

Bernbach and Needham Harper; Saatchi & Saatchi

acquired Backer & Spielvogel, Dancer Fitzgerald

Sample and Ted Bates; and Martin Sorrell founded

WPP. The following year, WPP acquired J. Walter

Thompson, Hill & Knowlton (PR) and MRB (market

research). Thus began the rise of agency holding

companies and the massive consolidation of the

advertising and marketing services industry.

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Creative agencies ¨C under fire

Agency structures

Digital agencies

Driven by economic considerations, and quite

possibly the prices paid for agencies, clients in the late

1980s began moving from the traditional commission

method of compensation to only paying agencies for

the services they desired. As a result, large agencies

¡°unbundled¡± services, which gave rise to specialist

agencies instead of in-house departments. Media

planning and buying agencies were launched, as

were agencies focused on promotional activity, public

relations and other marketing disciplines.

The adoption of the internet in the 1990s gave rise to

a new group ¡ª digital agencies. These agencies built

websites, developed banner ads and often served as

the digital production arms for the larger traditional

agencies. Further, the constant introduction of internet

platforms was followed by agencies designed to help

clients capitalize on emerging opportunities. With email

came email marketing and lead generation agencies.

As search became mainstream, SEO (search engine

optimization) and SEM (search engine marketing)

agencies proliferated, social networking sites spawned

social marketing and influencer agencies, and the

smartphone facilitated mobile agencies.

Large agencies ¡°unbundled¡± services,

which gave rise to specialist agencies

instead of in-house departments

The unbundling of services was most pronounced

within the holding companies. The services were

spun out of individual agencies and consolidated by

the holding companies. For example, GroupM is the

parent of WPP¡¯s media agencies. It is the largest media

services group, with more than 30,000 employees in

81 countries. GroupM is responsible for over US$100

billion in media billings globally.

While the holding companies have creative, media

and a range of specialist agencies, the larger,

independently owned agencies retained, for the most

part, a full-service orientation, with all skills under

one roof. The holding companies have full-service

agencies; however, they tend to be in small to midsize or less-developed advertising markets.

The internet changed businesses,

marketing practices and the way

people communicate

The internet changed businesses, marketing practices

and the way people communicate. It put individuals

in control and gave everyone a voice. It transformed

marketing, at least a portion of it, from pushing out

ads in a disruptive manner on traditional channels

to creating online experiences to engage audiences

and spark conversations. The internet also allowed

agencies to track online activity, collect user data,

target ads based on the interests, behavior and

location of the user, and gain a better understanding

of the ROI (return on investment) of ad spending.

To a degree, the agency holding companies recently

reversed unbundling practices for some of their larger

global clients. They formed client-specific agency

groups with personnel and resources from other

agencies within the holding company. WPP initially

launched Team Detroit for its Ford client and now has

such units for most, if not all, of its global clients. All the

holding companies offer such tailor-made agencies.

Spot On ¡¤ Creative Agencies ¡¤ 1 st edition 2018

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Creative agencies ¨C under fire

Agency landscape

The five agency holding companies sit on top of the

industry pyramid. They are publicly traded global

organizations, generating between US$8 billion and

US$22 billion in revenue annually.

Agency holding company revenue

Company

2017 revenue (US$bn)

2017 EBITDA (US$bn)

EBITDA margin %

WPP

21.581

3.337

15.5

Omnicom

15.274

2.342

15.3

Publicis

11.941

2.201

18.4

Dentsu

8.678

1.803

20.8

Interpublic

7.882

1.131

14.3

Source: S&P Capital IQ

Positioned immediately below the holding companies

are other agency groups. Similar to the holding

companies, these groups are typically international

in scope and have multiple agency brands under

the corporate umbrella. Some of the key players are

Havas, Hakuhodo, MDC Partners and Blue Focus. In the

context of an M&A transaction, these agency groups

offer an alternative to the agency holding companies

and a proposition appealing to many entrepreneurial

owners, since acquired agencies are often able to

retain their identity and a degree of independence

post-transaction. Following the agency groups are

international agency networks, independent agencies,

and a sizeable and diverse group of specialist firms.

The latter are defined by a focus on a specific industry,

audience segment or capability.

Agency holding companies

Agency groups

International networks

Independent agencies

Specialist agencies

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Spot On ¡¤ Creative Agencies ¡¤ 1 st edition 2018

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Creative agencies ¨C under fire

New agencies

There is a long tradition in advertising of new agencies

being launched. The classic scenario is a creative

director, or two, plus an account manager leaving a

large agency for greater independence. They will often

start with a client with whom they have a relationship.

There are also instances of larger organizations or

financial firms backing the creation of a new agency

venture. A few examples include:

¡ñ¡ñ kyu ¡ª In 2014, Hakuhodo launched the kyu collective.

Led by a former Omnicom vice chairman, kyu has

acquired seven firms spanning consulting, creativity

and design. Included are Red Peak, SYPartners, Digital

Kitchen, Sid Lee, C2 and BEworks. The company also

took a minority stake in the design firm Ideo.

¡ñ¡ñ Stagwell Group ¡ª In 2015, Mark Penn, a former

political advisor and strategist at Microsoft, launched

the Stagwell Group to build a portfolio of marketing

services companies. In two years, the Group has made

16 acquisitions, including SKDK Knickerbocker, Code

& Theory, PMX, National Research Group, Forward3D

and the entertainment marketing division of CAA.

¡ñ¡ñ Sandbox ¡ª In 2016, four agencies in the US and

Canada with different specialties (GA Communications,

McCormick, Underline and One Advertising) came

together to form a new integrated and collaborative

marketing agency. They adopted one name and have

made subsequent acquisitions to build scale and

capabilities.

Spot On ¡¤ Creative Agencies ¡¤ 1 st edition 2018

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Creative agencies ¨C under fire

Ad media spending

The vitality of the industry is driven by marketers¡¯

willingness to make media investments in support of

brands. While procurement departments have forced

agencies to do more with less, there tends to be a

correlation between increased media spending and

agency growth.

During the past five years, there have been consistent

annual increases in total ad spending worldwide and in

each region. In 2017, global spending reached US$561

billion, with North America accounting for 37.8%, Asia

Pacific 31.4% and Western Europe 17.8%. Forecasts for

2018 call for a 5% spending increase worldwide, with

gains of 5% in North America, 6% in Asia Pacific and 3%

in Western Europe. Latin America, which ranks fourth

in ad spending, is forecast to have the highest growth

at 11%.

Ad spending worldwide by region (US$bn)

2018E

222

2017

212

2016

207

186

176

0

100

North America

Asia Paci?c

200

Western Europe

33

95

147

93

300

Latin America

35

98

158

185

2014

39

100

166

193

2015

103

31

29

25 15 590

24 14 561

23 14 541

22 14 513

21 14 489

400

Middle East & Africa

500

600

Central & Eastern Europe

Source: eMarketer and MAGNA Global (2018)

Spot On ¡¤ Creative Agencies ¡¤ 1 st edition 2018

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