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 ? 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 -- 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.

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 ? 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.

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 adoption of the internet in the 1990s gave rise to a new group -- 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.

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.

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Creative agencies ? under fire

Agency landscape

The five agency holding companies sit on top of the organizations, generating between US$8 billion and industry pyramid. They are publicly traded global US$22 billion in revenue annually.

Company WPP Omnicom Publicis Dentsu Interpublic

Agency holding company revenue

2017 revenue (US$bn) 21.581 15.274 11.941 8.678 7.882

2017 EBITDA (US$bn) 3.337 2.342 2.201 1.803 1.131

EBITDA margin % 15.5 15.3 18.4 20.8 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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Creative agencies ? 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:

kyu -- 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.

Stagwell Group -- 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.

Sandbox -- 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.

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Creative agencies ? 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

186

103

39 25 15 590

2017

212

176

100

35 24 14 561

2016

207

166

98

33 23 14 541

2015

193

158

95

31 22 14 513

2014

185

147

93

29 21 14 489

0

100

200

300

400

500

600

North America Asia Pacific Western Europe Latin America Middle East & Africa Central & Eastern Europe

Source: eMarketer and MAGNA Global (2018)

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