Concentration

DaimlerChrysler’s decision to consolidate its advertising at one shop brought several matters of fundamental investor concern into the spotlight. The most misunderstood, and one that merits a separate examination, is the issue of margins: How much money does an agency make for producing a client’s ads, and what do we mean by “make?”

True North, whose Foote, Cone & Belding shop had been doing a lot of work for Chrysler for years, ought to have become pretty efficient at it, so it would be remarkable bordering on negligent if the account had not been a juicy one. That would be true for any business where something is done well for a long time.

Equally important from an investor’s standpoint was that so much of True North’s revenues—around 9 percent—were derived from work for one client. While that’s not the same as having all your eggs in one basket, it comes close.

The danger, of course, is that if something disrupts the harmony between agency and client, the effect on the agency’s financial results can be—as we are seeing— catastrophic.

Not only is the loss severe and immediate, its remedy will likely be long and painful. There are no accounts of equal size ripe for the harvest, and even if there were, it would take years before the agency attained the sort of efficiencies necessary to produce top-flight margins.

Ironically, the concentration risk would have gotten worse had True North won, not lost, the rest of the business.

While 9 percent is high, it’s not in its own league. Interpublic derived about 8 percent of its revenue from one client—either General Motors, Nestlé or Unilever—in 1999. Omnicom’s largest client, Chrysler, chipped in about 5 percent of total revenue last year, a percentage that could rise once all the new DaimlerChrysler business is weighed.

Another facet brought into focus by this recent development is the degree to which True North depends on North American advertising. Of all the major holding companies, according to Credit Suisse First Boston’s estimates for 2000, True North is the most tied into North America (source of 76 percent of its revenues) and the third most heavily dependent (after Publicis, including Saatchi & Saatchi, and BCom3) on conventional advertising (64 percent of revenue).

The nine largest holding companies—including Cordiant, Grey, Havas and WPP—derive, on average, half their revenue from North American sources and 57 percent from conventional advertising around the world.

That’s important to investors because less mature markets grow faster than mature ones—which is actually part of the definition. And nonadvertising communications techniques, notably public relations, direct response and sales promotion, will likely experience spunkier growth rates over the years ahead than will conventional media advertising.