McDonald’s Is Putting the Squeeze on Agency Profitability, Making the Ad Industry Uneasy

Sources say the fast food giant's demands are 'unheard of'

The ongoing McDonald's creative review initially included all three of the ad industry's largest holding companies. But WPP made headlines earlier this month for bowing out (leaving incumbents Publicis and Omnicom in the running), and the alleged reasons behind its decision are even more intriguing.

The client required competitors to complete their respective pitches in 60 days, with a June 30 deadline, and presented contracts forbidding future partners from turning a profit on base compensation, according to sources with direct knowledge of the matter. Agencies would allegedly operate at cost before meeting unspecified targets for performance-based pay.

"Clients have always had the power," said Bryan Wiener, executive chairman of 360i. "And performance-based compensation is not a new topic either, but it's very hard to find ways to make it work so that all parties are aligned."

McDonald's did not respond to Adweek's requests for comment on the claims, which stirred controversy among creative agencies. One source who requested anonymity described the terms as "unheard of" and noted, "I don't know of any business that operates that way."

The 4A's also found this business deal questionable. "If the situation is accurate, then there is no incentive at all," said Tom Finneran, evp, agency management services at the association. "All the performance pay would be to get you back to some degree of profitability, but an ad agency is a for-profit business." He added, "A 60-day turnaround time would seem to favor the incumbents."

Another agency executive with a fast-food client said, "With risk there has to be reward. The two incumbent holding companies know what the business looks like, while WPP has no idea. That's when you fold in poker."

Mcgarrybowen's global CMO Brandon Cooke compared the debate to a moment some years ago when the industry came together in opposition to clients' desire for "ownership of intellectual property from an agency in a pitch situation." He commented: "Anytime things like this happen, we have to step back and say, wait a minute. Where are we going with the structure of this relationship?"

As one of America's largest advertisers, McDonald's has considerable leverage in negotiating details of its agency contracts. But, Wiener said, "there's a fine line between getting a fair deal for the business and squeezing so tight that they don't get the performance they deserve."

Industry groups have long discouraged the very sort of arrangement McDonald's is reportedly demanding. "It has been 4A's recommendation over the last several years that agencies and clients should not even begin to discuss performance compensation until the two parties have established a robust relationship," said Finneran. "Otherwise, there's tension on both sides."

Added the agency executive: "You generally don't see adversarial relationships. The problem is when agencies feel sorry for themselves versus identifying with marketers that are struggling to contain costs."

Another agency insider who has worked with multiple fast-food clients added, "Not only does this arrangement not benefit McDonald's existing agencies, it doesn't benefit their own business. They say they are seeking new thinking that will ignite their sales, but they'll end up with the very same people giving them exactly what they already had."

As Finneran put it: "There has been some discussion that not all business is worth having."

This story first appeared in the May 23, 2016 issue of Adweek magazine.
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