Agency Class Struggle

In 2004, the latest year for which data are available, the 100 largest national advertising agencies took in about $9.9 billion in revenue. Half of those dollars went to the top 12 shops, as ranked by Adweek, while 88 other agencies scrambled for the rest of the business.

As seen in graph 1 (below), the largest agency, Grey, chalked up 5.5 percent of the total. The next-largest player, BBDO, accounted for 5.4 percent—meaning that the top two shops accounted for 10.9 percent of business among the top 100. By the time one gets to the No. 12 agency (Publicis), the cumulative total amounts to just over 50 percent.

Even without reading the scale, it’s easy to see that whatever we’re charting goes from zero most of the way to maximum pretty quickly, then levels off. It shows that the agency business is fairly concentrated, with a handful of big outfits—the “Dominant Dozen”—at the top of the industry’s pecking order. Each player in this top group belongs to one of four holding companies: Omnicom, Interpublic, WPP Group and Publicis.

Just as interesting is the concentration among clients, which matches what we find on the agency side. Graph 2, which features client data, is made up of three curves. The top line looks a lot like the curve on the agency graph, reflecting results for the 1,000 largest client-side companies; the bottom trace reflects data for the top 1,000 brands. What we’d really like to see is a distribution of client-agency relationships by size, but there’s no easy way to get that data. Since agencies often handle more than one brand for their multibrand clients, the data we’re looking for would probably plot out somewhere between the company line and the brand line, so the middle curve shows an average of those two as a rough approximation.

Graph 2 is based on data for 2005, and indicates that the top 10.4 percent of client parent companies account for 50 percent of measured-media spending. In other words, as is the case among ad agencies, a relatively small number of client-side players accounts for a relatively large share of the action. A.C. Nielsen, owned by Adweek parent company VNU, is the source of the data.

But what does all this mean? For one thing, it indicates that there are at least two major segments within the ad business—one that does big business and one that doesn’t, or can’t. That holds for clients as well as agencies. In fact, there are probably three layers to this cake—a small number of really big players; a larger—but not truly large—number of mid-sizers; and an almost limitless number of teenies. This class structure explains a lot about the ad business—for one, why acquisitions are so important.

There are three primary ways an agency can grow: by winning a new account (the bigger the better); by working for a client that increases its ad spending (the faster the better); and by buying another agency (again, the bigger the better). All of these tactics can work, but the first is probably the toughest, because there just aren’t that many big accounts to be won. The really big accounts are quite well-settled, for the most part, and even if they are shaky, the mechanics of moving—even just updating everyone’s contact list—can be daunting. Plus, an agency can lose an account as easily as it can win one.

The second way to grow—working for clients whose budgets are growing—is obviously a good tactic, but every agency’s roster has a mix of growers, shrinkers and statics. And there’s not a lot an agency can do to control the mix.

The third way to grow—by acquiring something, especially something big—is the only surefire way to add extra pop to the growth rate. There’s a certain irony here. The practice of growth by acquisition has accelerated the concentration of ownership in the industry, making the bigger shops ever bigger. But in snapping up shops right and left, buyers have left fewer and fewer agencies worth acquiring. As an agency grows, whether by acquisition or organically, it can reach a point—somewhere above the $250 million-revenue mark—where acquiring a small outfit (revenues of, say, below $10 million) may not be worth the risk. Acquiring a big agency, one of roughly equal size, may be impossible because of client conflicts or cost. And as noted, the ranks of the independent mid-sizers have been depleted by prior acquisitions.

That’s one reason agencies—and particularly those that are part of holding companies—go after acquisition targets in marcom disciplines other than advertising: There’s mighty slim pickin’s if you restrict your acquisition diet to conventional agencies. And, of course, there’s another reason: Increasingly, clients, and especially the larger ones, want to use non-advertising marketing techniques. It makes sense for agencies to be able to provide those services, and the fastest way to do so is by acquiring something.

That leads to another interesting dilemma, a challenge faced by clients and agencies in the middle ranks. It’s clear that big clients with lots of demands can be well-served at big agencies with lots of capabilities. Small clients, which need less in the way of marcom support, may be just fine at a mom-and-pop shop. But mid-sized clients, which themselves are competing with the giants in their industries, are in a tough position. They can award an account to a large agency, but they’ll be amongst the least important clients on the roster. Or, they can go with a smaller outfit and face, perhaps, competitive handicaps relative to the bigger brands they sell against.

In many product categories—financial services and restaurants, to name two—competitors come in a wide range of sizes, from national chains to regionals to locals. But from the consumer point of view, the size of the corporation that owns an outlet may not be all that important. In the New York area, for example, North Fork Bank goes up against Citibank and Bank of America on the retail side. And without picking on any of these worthy companies’ marketing programs, it’s surely a challenge for the smaller operator—smaller by a factor of 20 or so, depending on what you measure—to maintain the same marketing presence as the giants.

The situation would be tough enough for mid-sized agencies working for mid-sized clients if their only worry was how to provide a full range of services. But there’s also the risk that this agency tween set could lose bigger accounts, particularly their most successful clients.

North Fork, for example, just announced it was selling to Capital One, a much larger company that uses two Omnicom ad agencies. It will be interesting to see, assuming the deal is consummated, whether North Fork’s ad account is shifted out of the small shop that currently handles its business.

It wouldn’t be unusual.

One suburban New Jersey agency owner tells of working for a very successful specialty foods company. The client was so successful that a multinational consumer packaged-goods outfit bought it. The account was forced into one of the new parent’s shops.

The same agency saw another of its clients—this one in the household products sector—acquired by a large multinational. Shortly thereafter, the marketing director of the client’s new owner came by to deliver the bad news: The agency was getting fired in favor of one of the Dominant Dozen. Why? Because having the New Jersey shop’s name on the big company’s agency list might be bad for the marketing director’s career. (Perhaps clients looking to get acquired should seek out this shop.)

The mid-sized agencies face yet another handicap. Every mid-sized agency head we spoke with has at least one story about entering the new-business process for a modest account—annual fee income of less than $500,000—only to learn that he or she was pitching against one or more of the Dominant Dozen. (No one would speak for attribution.) There’s a history of accounts coming back to a more appropriately sized shop after a year or two of lackluster service at the giant, and there’s no point sounding like a sore loser when you might have a second shot at pitching for the business.

One very senior executive for a holding company admits his agencies will sometimes go after the small accounts, especially during periods of slow growth. “There’s always the need to stoke more coal into the furnace,” he says. “And as long as the energy from burning the coal is more than calories used by the stoking, we’re OK.”

As a matter of good business practice, an big agency is not likely to have, say, a $750,000 creative director spend a lot of time on an account where the fee is $500,000. Cheaper and less-experienced staff will do the bulk of the work. Plus, the size mismatches are not always bad business or counterproductive. Some large ad shops work for attractive tourist destinations or other “fun” clients whose accounts may be pretty small. These can be good opportunities for junior staffers to hone their skills. And the research, client-service visits and shoots can be nice perks.

Still, agencies in the middle face particular challenges. They are in a constant struggle to win and keep accounts from mid-sized clients for which, in most respects, they are ideally suited. If there’s any good news in this, it’s that there is business to be won on the rebound from accounts that become disaffected with the service they receive at the bigger agencies.

There are ways for an agency that isn’t big to act big, to provide its mid-market clients with the services that the big shops offer their mega-accounts without sacrificing their high-touch advantage. Some make acquisitions, some form loose affiliations with complementary service providers, and some rely on homegrown talent to supplement the basic advertising offering.

None of these is easy, and often it’s expensive. But it can be worth the effort, since any shop that figures out how to overcome the middle muddle could find itself on the steepest part of the growth curve.