An unprecedented number of major media agency accounts have gone up for review since much of the industry became aware of practices related to undisclosed agency compensation. The scale of these reviews reinforces our view on the sector and recommendation that investors exit it or stay on the sidelines for now.
In a note we wrote last July entitled “Agencies, Trading Desks and Marketers: Time to Talk About Rebates” we highlighted the looming problem around undisclosed forms of media agency compensation emerging in the United States. Evidently there wasn’t much talk within the industry until March where a presentation related to an ANA task force on the topic revealed findings to many of the country’s largest marketers. We subsequently downgraded the sector in part because we recognized that marketers would become even more aggressive in fee negotiations with their media agencies as a consequence.
Since then, what has happened to the global media agency business might not be directly related to this topic, but it appears unprecedented, whatever the cause. Marketers with more than $1 billion in annual media spending now under review include P&G, 21st Century Fox, L’Oreal USA, Johnson & Johnson and Sony – so far (the Wall Street Journal reported last month that Mondelez would soon be announcing its own media agency review as well). This equates to at least six billion-dollar-plus accounts, and at least seven in the market if we include the statutory review from Unilever.
So far as we can tell, five was the previous annual record. “Smaller” reviews announced since March include Volkswagen, BMW, Citibank, Coca-Cola, CVS (all US-only), Visa and Coty (both global). On our count the reviews announced in the last eight weeks alone amounts to $13 billion in annual media spending. This approaches amounts that might be awarded in a typical full year, on our analysis of data from RECMA. As it is, the $25 billion of media agency accounts awarded and likely to be awarded before the year ends – only including accounts currently in review – is in record territory.
As we are not yet half way through the year, this record will surely go higher: accounts put into review as late as October could realistically be awarded before the end of the year. While we wouldn’t want to assume that a marketer would simply put their account up for review in order to audit how their agency gets paid, some marketers may have realized that either they didn’t have audit rights or those rights weren’t comprehensive enough. Some may simply be angry or were already looking to make a change. Others may have realized there would be no better time to put their agency up for review given the defensive position they would be in with respect to negotiating terms. Certainly, most of these reviews would have happened under any circumstance, but the scale of what is happening suggests to us that the undisclosed compensation issue is contributory.
The tangible consequences of these reviews and other contract renegotiations which occur outside of the spotlight could be notable. First, for every agency involved in a major review there are usually at least two others engaged in a competition for the business. Each review of this scale requires senior management attention as well as upfront expenses from labor and travel for scores of other executives over a multi-month period. By itself this could cause some incremental margin pressure for the holding companies.
However, the bigger concern is that with every review marketers will squeeze winning agencies on fees as they have done for many years. As well, we think that marketers are not in a trusting mood with respect to affirmations that agencies make about other ways they don’t generate revenue. Marketers are more likely to believe both that rebates exist in media where they likely don’t exist and are also more likely to believe that all agencies engage in similar practices.
If there is a silver lining for anyone it may be that a media agency group playing a “hot hand” or with a particularly compelling pitch may be positioned to gain more share this year than has ever been the case. However, this would be an optimistic interpretation of current activities. Whatever the cause of this series of review announcements, we think the rebate issue remains far from over.