Inside a converted manufacturing building in the Dumbo section of Brooklyn, N.Y., lies an independent ad agency called Breakfast. Its tiny band of workers sits before a tight cluster of computers in the huge raw space. Breakfast (as in “break fast,” not scrambled eggs) has a full-time staff of eight, including its three principals. And in a Peter Pan kind of way, while the shop will continue to mature, the intention is to never grow beyond a dozen employees.
“We’ve always wanted to be very nimble,” explains Andrew Zolty, Breakfast’s co-founder and creative director, noting that the agency’s focus on unusual out-of-home creative has attracted clients like Major League Baseball and Google. But “we haven’t wanted to get in a trap where we have 30 people and have to take on work that we didn’t want to take on.”
From Breakfast’s small shop to giant-among-the-indies Horizon Media, with $4.3 billion in media spend and 900 employees, independent agencies with national scope are enjoying a vibrant period in the age of the conglomerates. Perhaps the biggest threat to the indies is the tendency of the conglomerates to gobble them up—that, and the occasional bankruptcy, like last year’s closing of KSL Media.
Fear the Giants
In 2013, the big six holding companies tallied 116 agency transactions—an average of about two per week, according to Stewart Shanley, joint CEO of indie shop Iris Worldwide, citing statistics from the research intelligence firm Mergermarket and U.K.-based M&A adviser Clarity. North America accounted for about 20 percent of merger and acquisition activity, down from 30 percent in 2012.
The recently failed Publicis Groupe-Omnicom merger aside, WPP is the most voracious. In the first quarter of 2014 alone, it completed 20 transactions, and last year it inked 62 small and medium-size deals, according to the company’s financial filings. The acquisitions “added 2.2 percent to revenue growth in 2013,” WPP states.
That doesn’t sound like a lot—but in the big-agency world, every bit of growth helps. “Network organic growth is still low-single digits—3.2 percent in 2013, and projected at 4 percent in 2014—so they have to acquire to grow,” says Shanley.
Another shop-happy owner is MDC Partners, which calls itself a “strategic partnership” and “entrepreneurial accelerator” rather than a holding company. It now includes some 50 agencies spread among 60 to 70 offices. “On average, we have never been successful at finding firms at more than a rate of probably one every two months,” says Miles Nadal, MDC’s chairman and CEO. For much of 2012 and 2013, however, MDC didn’t buy a single firm—and so far this year, it has purchased “three or four firms,” which may grow to six before 2014 is through, he says.
For all the acquisitive activity, indies don’t appear to be going the way of the Sony Walkman. In the last two years, 26 independent agencies (both national and regional) have joined the 4A’s, according to the organization’s president and CEO, Nancy Hill.
On the flip side, “we lose agencies every year because they can’t afford the dues or they go out of business,” Hill notes, adding that there are situations in which shops drop out because they’ve merged into other firms. Hill says it is near impossible to say whether the number of indie members has grown or declined.
Agita and Accelerators
Age-old trends and newer developments suggest that independent agencies that don’t seek the warm embrace of conglomerates can rely on fertile aspects of the business to help fend off difficulties that certainly have caused some agita. “The independent agency world is thriving,” says Greg Stern, CEO of Sausalito, Calif.-based Butler, Shine, Stern & Partners. “San Francisco, New York and markets across the country have seen a significant number of independent marketing service startups launch in the last few years.”
Among the positive trends, entrepreneurial staff members at large agencies continue to break free and hang out their own shingles. At the same time, clients are increasingly calling on shops of all sizes to handle specific projects, as some advertisers bring more agency work in-house or opt against naming a lead agency.
The economic winds are favorable as well. “It appears that the agency industry in general has grown faster than the holding companies on an organic basis,” says Brian Wieser, senior analyst at Pivotal Research, citing his own research and an analysis of U.S. Census Bureau revenue stats.
“When you aggregate all the businesses, there’s a lot of economic activity [reported revenue] that is growing faster at the agencies than at the holding companies,” he says. Wieser estimates that in 2012, organic growth at the five holding companies was 1.9 percent while the industry as a whole grew by 9.4 percent.
Technology is also working to the indies’ advantage. “You can have a small agency somewhere in the Midwest and deliver an idea that through technology you could run in a hundred countries,” says Avi Dan, founder of the consultancy Avidan Strategies. “You don’t need that many offices to run an efficient operation anymore.”
For all the upside, the small guys need to stay vigilant on a number of fronts.
“The biggest challenge for a small agency is making sure you don’t depend on only one or two clients,” Dan stresses. Lose one lucrative advertiser, and a small agency is at risk of falling apart.
Balance is crucial to survival. “For a creative agency—and it’s different for media—the challenge is having enough resources to manage a client’s business, and having enough income to warrant having enough people,” says Judy Neer, president and CEO of the ad consultancy Pile + Co.
One way to achieve balance with the dilemma of resources is to ally strategically with other independents, says Stern. For example, his shop is affiliated with Worldwide Partners, a global network of over 80 indie agencies.
Sell? Who, Me?
For some independents, the endgame is to eventually sell out, allowing their owners to laugh all the way to retirement. At least that’s Dan’s observation. But several owners of agencies actually seem fiercely committed to their independence. “The biggest thing that I’ve always realized as we’ve gotten interest from someone who wants to purchase us is the real soul of the agency would be lost—and what they’re purchasing would actually be lost to a large extent,” says Ellis Verdi, a principal of the New York agency DeVito/Verdi.
Dave Luhr, global president of Portland, Ore.-based Wieden + Kennedy, elaborates: “The most important asset we have is our culture, and why would we ever sell our culture? It allows us to attract the very best talent, to attract the best clients and do the best work. There are too many good examples of once proud and good independent agencies selling out, and slowly over time they have lost their culture and their momentum.”
MDC’s Nadal contends that agencies his firm has acquired have grown in size while their souls remain fully intact, and MDC gives them freedom to make their own decisions. But that is far from standard operating procedure among the conglomerates.
Stan Richards, principal of Dallas-based The Richards Group, says he only has to look across town to see what happens to an agency when it’s bought by a holding company. “Some have gone from 500 or 600 people down to less than 100 people,” he notes. He references the Bloom Agency (which was gobbled up by Publicis), Temerlin McClain (acquired by Interpublic) and TracyLocke (now part of Omnicom).
Selling out has different implications for Mike Robertson, founder and CEO of the media agency Ocean Media, based in Huntington Beach, Calif. “We really don’t want to answer to anyone else,” he says. “We can afford to do the right thing, even if we don’t make money in the process.”
An example of the right thing? Says Robertson, “Scaling [client] budgets downward, which rarely happens at the larger agencies. We’re not driven by the almighty dollar and it’s not what really motivates us.”
As with other independents, Ocean Media has other attributes that attract clients. “I think we selected the best agency no matter what,” says Elizabeth Francis, CMO of e-commerce site Gilt. “But because they are an independent agency, they have the luxury of choosing to be high-touch with us.” She refers to how closely Ocean Media staffers work with Gilt, and how quickly the agency responds to its needs.
Client trends can play to the independents’ advantage if they play their cards right. Bob Liodice, president and CEO of the Association of National Advertisers, notes that in general, “marketers are finding that the agencies aren’t always adding the incremental value that they need. They’re looking at agencies differently, and they require sometimes very specialized services and don’t necessarily want to be caught under the blanket of a holding company.”
Fulfilling those specialized needs fits right into the game plan of many an agency with a strong streak of self-reliance, like Breakfast. For Zolty and his team, it really comes down to something quite simple: “We haven’t been about building a massive company that one day we want to sell. We’re about trying to do really good work.”
Photographed from left to right:
Michael Lipton, Co-founder, Account Director
Jacob Roberts, Intern
Mattias Gunneras, Co-Founder, Tech Director
Ben Cohen, Lead Mechanical Engineer
Andrew Zolty, Co-founder, Creative Director
Dan Lee, Instaprint Operations
Kristi Murphy, Admin
Mick Maloney, Lead Developer
Illustration: Matthew Hollister