General Motors Cutbacks Could Strike Ad Agencies

It’s the fourth quarter and time for General Motors to renegotiate agency compensation. It’s an annual rite, but this time the talks come amid another round of cost-cutting at financially troubled GM, which said last week it would eliminate 5,000 jobs on top of a previously planned cut of 25,000.

The more sweeping cost reductions, which include plant closings and health coverage give-backs from GM employees, may result in deeper concessions from GM’s dozen or so agencies, sources said.

In past years, GM has asked roster shops to accept slimmer profit margins; this time GM is said to be focusing on incentive compensation, with the No. 1 automaker looking to toughen the criteria for such bonuses. Sources also expect a greater emphasis on sales results, while other metrics, such as ad recall, will remain in the mix.

One source described GM’s stance as, “We’re paying people for ‘B’ performance and we can’t afford to do that anymore.” Said a top executive at a GM shop: “You may be putting a little more at risk in terms of incentive compensation.”

It’s not surprising that ad agencies are being caught up in the belt-tightening, but sources who have felt years of cutbacks by the carmaker said the prospect of further slashing is particularly harsh. Still, GM shops don’t appear to have much leverage if they want to hold on to their respective accounts. The automaker typically spends more than $2 billion a year in measured media domestically, per Nielsen Monitor-Plus.

GM is in “pretty dire straits,” said the GM agency exec, “and agencies better be pretty empathetic.” An exec at another roster shop added: “Agencies are getting crushed. There’s a huge squeeze going on right now. Whether agencies buy into it or not, who knows? But they’re out there in Detroit talking about it.”

A GM rep wouldn’t comment on agency compensation but said, “We are in the process of reviewing our plans and the plans that drive our budgets. The two principles that we always act on are efficiency, but also effectiveness.”

One consultant who handles compensation negotiations between clients and agencies said GM’s look at bonus changes seemed logical, given the client’s larger problems. “It’s fair and reasonable for agencies to tighten their belts when clients have to tighten theirs,” said Arthur Anderson of Morgan Anderson Consulting in New York. “In good times, agencies likely get more. In tough times, they likely get less.”

Interpublic Group appears to be the most vulnerable since six of its shops work for GM. McCann Erickson has Buick and GM corporate image duties; Campbell-Ewald handles Chevrolet; Lowe works on GMC and Saab; Mullen has GM credit cards; and Deutsch joined the roster last month, picking up marketing duties on three Chevrolet sponsorship deals. Draft also handles some direct marketing tasks in the U.K.

The brands outside of IPG are Cadillac and Pontiac (Publicis Groupe’s Leo Burnett), Saturn (Omnicom Group’s Goodby, Silverstein & Partners) and Hummer (independent Modernista!). Another independent, Digitas, handles interactive and customer relationship marketing duties.

Publicis Groupe’s Planworks handles all of GM’s media duties, which until recently were split between Planworks and IPG shops GM Mediaworks and LCI. The May consolidation to Planworks came after a review; the hand-off from IPG was completed last month.

Despite the cost-cutting and an uptick in sales during the summer when GM offered employee pricing, some analysts maintain that the carmaker should go further. One suggestion has been to eliminate some nameplates, such as GM did in 2000, when it moved to fold Oldsmobile.

Publicly, however, GM has rejected such talk. “We are not considering dropping a brand. We don’t discuss it, think about it or analyze it,” said Mark LaNeve, GM’s vp of vehicle sales, service and marketing for North America. “You can certainly argue that we didn’t help our share by dropping Oldsmobile. Our plan is to sharpen the positioning, product plan and identity for each brand [and] make sure each brand has a specific role and run the business that way. The issue is not how many brands, it’s how well you manage them.”

The key to GM’s divisional strategy will be bundling Pontiac, Buick and GMC within one distribution channel, so the company isn’t “badge engineering” to satisfy single-brand GMC, Pontiac or Buick dealers, said Tom Kowaleski, GM’s vp of global communications.

“We believe it’s possible to make each one of those brands have a sharper, tighter and clearer focus. What we are doing is creating one channel of those brands,” Kowaleski added. “We believe the market is getting bifurcated. In the North American market, there is a greater need for more brands, not fewer. Toyota is getting growth because they have Lexus and Scion. BMW has had growth in North America because they have Mini.” By 2007, 80 percent of Pontiac and GMC dealers will also sell Buick, he said.

Nonetheless, analyst Wesley Brown believes GM must eliminate brands to stage a comeback. “I don’t think they have a choice,” said Brown, of IceOlogy in Los Angeles. “I doubt if we would be having this conversation if they were two brands fewer.”

Analysts expect that GM’s market share will continue to fall. Global Insight projects that GM’s share, averaging 26 percent this year, will dip to 25.2 percent next year, and trend “downwards from there,” said Guido Vildozo, a market analyst at the Lexington, Mass., firm. “We see them hitting a low point of 23 percent by the end of the decade,” Vildozo added.

Given the circumstances, profit, not market share, should be GM’s goal, said Jesse Toprak, executive director of industry analysis at “For years the domestics went after market share blindly. But you can make money on lower market share,” said Toprak. “That’s what GM is going to have to do.”