Q2: THE GAME OF SURVIVAL FOR AD AGENCIES
From a lofty 12.5% ad agency commission in the 1990s to 3-5% ‘effective’ commission of the total ad spends today (keeping in mind that there is not one fixed payment scenario now and it is divided between retainer, projects, performance-linked fees, etc), the remuneration model in Indian advertising agencies has come a long way. Now, the economic impact of the COVID-19 pandemic is expected to further impact these numbers, with advertisers majorly slashing their ad budgets for the year, and creative agencies facing part of the collateral damage. Will it be a case of survival of the fittest or can the agencies ‘creatively’ adapt to the need of the times to get out of this situation – well, Q2 will be the decider. In the industry, some sectors such as Auto and Travel are more badly hit than the others. Some of the large Mumbai and Pune-based automobile companies pay their creative agency partners a single-digit commission on the overall ad spends. Considering that some of these Auto players have barely advertised on mainstream platforms in the past three months, their agencies’ revenues have dwindled. IMPACT has also learnt that a Travel brand, which is currently advertising only on Digital, is paying 50% less fees to its ad agency; while an eye-care brand has told its agency, which is part of a big network, to waive off an entire month’s fee. Talking about how it has affected her agency, Srija Chatterjee, MD, Publicis Worldwide, India says, “Some of our clients have asked for a discount in fees; some have cut the scope of work; therefore, there is a drop in remuneration and revision in retainer contracts to the tune of 5-20% on an annual basis.” But most agencies claim that their clients’ request for a rebate is only short-term. Rohit Ohri, Chairman & Group CEO, FCB India says, “It is a known fact that clients’ businesses are under pressure; those on retainer who have suffered a big business impact have asked for a three-month rebate for March, April and May. For the other clients who are on commission, there has been a cut in these three months because a lot of the ad spends are not happening on Television, etc. But on the positive side, lots of clients are now looking at consolidation. Clients who worked with four different agencies are attempting to consolidate their business and narrow it down to one or two agencies at best, so creative agencies get a bigger share of the business and clients get a better deal. Basically, it is about economies of scale.” But are advertisers preferring to work with mainline agencies or Digital agencies, considering that scope of work on the Digital medium has increased substantially in these three months? Raj Kamble, Founder & COO, Famous Innovations narrates how one of his clients fired their Digital agency recently: “We have a client which worked with a mainline agency and a Digital agency. But they had to choose between the two because the scope of work was going to reduce across mediums. They picked us, their mainline agency, because they thought we brought much more strategic thinking to the table and our overall thought process was better. They fired the Digital agency and moved the Digital work also to us. Since we are not doing TV, Outdoor or Print ads now, they wanted us to focus on Digital work. COVID-19 has converted all mainline agencies to Digital agencies in one stroke, something we all have been trying to do for years.” CREATIVE AGENCY FEES HOW TOUGH IS THE DEAL? Does that mean that the advertisers who have chosen to stick with certain agencies are paying them more for the increased scope of work? Santosh Padhi, CCO and Co-founder, Taproot Dentsu says, “From 12.5% decades ago, ad agencies came down to getting 3-4% effective commission of the marketing spends, if we still go by the old school commission formula. Right now, I am seeing clients wanting to further bring it down. It will certainly happen with clients in sectors that are badly hit, but it will also become an excuse for those sectors that will do well eventually because of COVID-19 like Health and Wellness, Insurance, etc., to haggle on fees.” Virat Tandon, Group CEO, MullenLowe Lintas says, “There are two big areas where our industry is getting affected. Firstly, new business wins have slowed down considerably. While more and more pitches are happening, clients are not committing on budgets or are slow to take a call on choosing agencies because they themselves are in a state of flux. In any year, the new business contribution to revenue for an agency of our size is at least between 10% to 15%. So, if that engine slows down, automatically that has an impact. Secondly, there are some non-core clients of our agency who have asked for some relaxation on revenue on a temporary basis, because they are struggling. Fortunately for us, our core clients comprise companies which are still stable during the crisis. Then there are others who are even launching new products in these times, getting into more relevant categories like health and hygiene. So, we are getting new mandates also now, in fact, we will be launching a campaign for a new product next week.” On one hand, most advertisers are seriously looking at Q2 and Q3 to revitalize their business to avoid a 2020 washout, with the help of creative agencies who are also their strategic partners in the journey. On the other hand, there have been requests to waive off fees. Most agencies are saying such demands are strictly temporary in nature because starting June, with markets re-opening to some extent, the advertising-related work needed will be extensive and advertisers are aware of that. Explaining why it is a temporary ask, Aditya Kanthy, CEO & MD, DDB Mudra Group says, “We have over 100 clients and not all brands are asking for fees to be revised to tide over this crisis. Those who are doing so, are requesting it in the spirit of partnership, rather than a blanket re-evaluation. While these are short-term moves, it is possible that they will have long-term implications for the group. No one knows what the next few quarters will look like, and any long-term decisions by clients or agencies will only be made when a clearer picture emerges.” WHAT ARE THE DEMANDS? So what kind of rebates or reduction in retainer fee are advertisers demanding at this point? Rohit Ohri explains, “There are clients in travel, tourism, the real estate sector, etc., where understandably the business impact has been huge, where the revenues have gone to zero, so it is only fair that they ask - after all, there is an element of partnership between the client and his agency where we also want to help them tide over the crisis. So some clients have sought a reduction in retainer fee, which is an average of 20% to 30% for just three months, not the entire year. Then there are the e-commerce players and insurance companies, whose businesses have done well, they haven’t taken advantage of the situation by asking for a fee reduction.” Aditya Kanthy adds that there isn’t a rulebook for how advertisers are communicating during the pandemic. “While some clients have slowed down activity, there are examples of heightened activity too. For example, we launched a big digital entertainment brand in the middle of the lockdown and have done an extraordinary amount of work on brands such as Delhi International Airport in the past 60 days, more than what we would have done under normal circumstances. It feels counter-intuitive because, after all, their infrastructure is related to air travel which had come to a standstill. But even as the airport remained closed, they used social media to provide information and address queries, making them the number one airport in the world on social media with regards to response and engagement. So it’s not just about whether work has increased or reduced, but also a question of redirecting energies, investments and deploying the right capabilities.” Asked how many of their clients have cut down all marketing communication or agency-related spends, Kanthy says, “The number is less than a fraction of our roster. We have a well-diversified roster of category-leading businesses with strong brand equity. So the foundation of recovery is well in place.” NEW CONVERSATIONS AFFECTED The agency heads we spoke to say that there have been few revisions in the contracts for projects signed before the lockdown, but advertisers that are discussing new ones are bringing the sentiment prevailing outside to the negotiating table. So, if a project cost Rs 10 earlier, advertisers would prefer to close the deal at Rs 8 or 9. Agencies say that they charge for the complexity of the problem as well as the time spent on it, and both don’t change, in fact more time is required because of that many more challenges in production at this point. So, a reduction in fee, unless the advertisers are from some of the battered sectors, is not fair. Interestingly, a fairly young independent agency which has clients like MakeMyTrip, Goibibo, Hindware, etc., didn’t wait for its clients to ask for a rebate, instead within days of the lockdown, it pro-actively offered a blanket double digit discount to clients across the board for the next quarter. Hemant Misra, Founder, Magic Circle explains, “The business of all my clients had come to a standstill because of the lockdown; so I offered them a cut and thankfully all of them agreed and didn’t ask for a further discount. July onwards, most clients will advertise aggressively, even now we are churning out a lot of work. If you have a good relationship with your client, there is no reason why you won’t take a quarter’s cut because I have experienced clients bailing agencies out of their problem at times by giving them money in advance too.” At places where the crisis is genuine, the agency partners have extended support voluntarily. Tejas Mehta, CEO, What’s Your Problem says, “As far as retainers are concerned, nobody has come back asking us to revise the fee overall. But they have asked for a fee holiday for a month or two in cases where products were coming in from China or if manufacturing had completely come to a standstill in those categories. In fact, we have gone back to some clients and said if we have not done any work for you in the past two months, in the interest of integrity, we are waiving off your retainer fee for April or May. As partners, it is our job to be worried about the client’s business efficacy just as the communication efficacy.” ‘A separate vertical for Digital Virat Tandon ‘Research, concept, execution, media: “In-house production will become a big revenue stream, but it is not just about production, in fact any place where I can apply the principles of integrating, will be a revenue stream here on. For example, from crafting an idea, a solution to production, using influencers, brand advocates or even including media as a part of their offering. An agency shouldn’t stop at just conceptualizing an idea; we at WYP as a true partner help a client from consultancy to brief generation, research, concept, execution and also in propagating it and thus each is a revenue generator for us.” Amit Akali ‘Find revenue stream by addressing “Agencies can create new revenue by being updated with the various ways social distancing will impact how a consumer consumes products here on. For example, Retail will be hit because people won’t rush into stores and try on clothes. So how do you use virtual reality or artificial intelligence to actually provide a new solution to clients in these sectors? We’ve accessed technology from our offices in the US and are providing them to our clients here to help solve their issues.” Rohit Ohri THERE’S A BRIGHT SIDE TOO On the bright side, Amit Akali, Managing Partner and Creative Head, What’s Your Problem adds, “We have been lucky to win businesses during this time – one in the OTT space, in insurance and a couple of projects in the jewellery space as well. There are also brands whose scope of work has increased manifold in this period; for them we have had additional fees coming in. So, there are clients for whom we have waived off retainer fees on our own and there are clients who have increased retainer fees for that duration owing to scope of work. We want to be fair in our dealings with clients, even if it is detrimental to the agency’s immediate growth. We are honest and feel supporting a partnership is more important than the contract itself.” Another agency head, who did not wish to be named, said that there are cases where clients have ended their retainer contracts abruptly. Talking about a luxury brand they handled, which was into accessories and décor, he says, “As soon as the lockdown started, they conveyed to us that as a designer brand, they feel that they will be nowhere in the preference zone of the consumer in the next year. They were on retainer so they said that they will pay us for the two-month lock-in period of the retainer contract, and post that, they wanted to close the account. Thus they have called off all their contracts with their partners.” Q2, THE DECIDER Satbir Singh, Founder, Thinkstr says, “All businesses have caught the virus. Some that depended on imports from China, have been impacted from the time Wuhan hit the headlines. That has upset fees and payments in many cases. It is still too early to say how things will be six months from now. With sports leagues opening up in Europe, IPL before Diwali could be a remote possibility. We need morale-lifting events. If the virus is controlled within acceptable limits, Diwali could see an advertising and marketing spike. A lot depends on these twin events.” Business experts IMPACT spoke to say that the real impact of the lockdown will be seen in the second quarter of 2020, because companies had the cash flows to sustain themselves and their creative agencies in the last few months, but once the cash flow dries up, and in the event there is no revival in the coming three months, there will be a bloodbath for the ad agencies, as advertisers will cut down on spends. Neelima Burra, Business and Marketing Strategist (former Country Marketing Director, HP) sums it up: “So far, the clients have been on a wait and watch mode because no one knew how long the lockdown would last. Currently, agency contracts have not been impacted, but you will see a cut-down into these fees by as much as 40% in the next three months time, when you will witness the real impact of revenue and cash flow rotation. That is when the discussions will get tougher. I have worked in various organizations as part of the leadership team and whenever there has been a recession, the cost structures have been questioned and restructured and A&M is always one of the biggest casualties because of the inability to measure its impact accurately. So those conversations will happen soon, unless Q2 is fabulous in terms of consumer spending.” Neelima Burra, Business and Marketing Strategist (former Country Marketing Director, HP) says, “Agencies and clients are contemplating if the retainership can be converted to success fee of the campaigns, more of a quarterly performance-linked or percentage of revenue model as opposed to annual retainership based on management fee and cost, which runs into crores. So a need-based retainership module over annual retainership module will prevail because a bleeding client wants maximum returns on every penny spent.” Burra adds, “The big problem for agencies is to retain those costs and people structures which they always had. So to tide over that, agencies like Lintas, TBWA and Leo Burnett are already working on re-bundled packages or COVID-19 specific packages, saying if you want to do branding, this is a small package for you. Very customized, need-based packages are being offered on the basis of the new norm which is more Digital, more measurement-driven, more success rate-driven, especially to attract SMEs for which the Government has offered huge benefits. Incidentally, they couldn’t afford the same big agencies earlier. So for the first time, focus is on the bottom of the pyramid.” Talking about sustenance, independent agencies such as Thinkstr, Famous Innovations and What’s Your Problem have not yet cut salaries of their employees. On the other hand, some of the big network agencies have decided to move in that direction with minimal salary cuts. Most big agencies have already locked in real estate contracts for the next year or so but are looking at reducing their footprint on real estate to reduce costs and allow more work from home in future. Aditya Kanthy of DDB Mudra says, “At this point in India, we are doing corrections through temporary wage cuts, but not across the board. But it is very much a part of our coping strategy.” FCB India says they have not enforced salary cuts yet but will be forced to do so if they don’t see a revival in the next 2-3 months while Virat Tandon of MullenLowe Lintas says they have kept the salary cuts very low at this point. While many believe COVID-19 has been a great leveller, others believe it will reignite the Big vs. Small agency debate. Raj Kamble, Founder & CCO, Famous Innovations says, “The big network agencies will suffer more than us because they have so many people, and they are not agile. The big networks will have to cut down their fees further because they have to send monies to New York and London, while independent agencies will be able to sail through. Many big agency offices will shut down, they will fire people.” WEATHERING THE STORM The network agencies argue that in the smaller agencies, there is overdependence on a few clients while the big agencies have a more diversified portfolio, deeper pockets and work with more stable companies that can weather the storm. Rohit Ohri, CEO & Group Chairman, FCB India says, “When there is a storm will you take out your biggest and most stable boat or a dingy? When you are part of a network, you have enough resources and backing from the global company to tide through. Looking at it from a revenue point of view is myopic, every week we have a global category call where insights from 16 countries are shared on what are the challenges in the big categories and how were they overcome, how did the competitor react, etc. Because of the sheer novelty of the crisis, clients are looking at agencies to help them navigate these choppy waters and these insights from a global agency network thus become invaluable. Also, agencies that have deep access to technology across the world with the best companies can in turn provide those quickly to clients.” That brings us to another point - because of the uncertainty with regard to media spends, will advertisers prefer to have a fling over a marriage with an agency? Many advertisers had become comfortable with projects even before the pandemic, so will this thrust them forward into the direction of temporary relationships with specialist agencies on a need basis over a retainer even more? Aditya Kanthy, MD & CEO, DDB Mudra Group responds, “I don’t think clients want to be spending disproportionate time managing multiple agencies in this situation. Even in project-led engagements, most clients see merit in getting the same group of people working on a sequence of projects as against working with different agencies. There is value in having a consistent team working with you. Particularly at a time like this, you see value in deeper relationships where agencies and clients are helping each other out through a difficult time. This does not happen in a one-time short-term relationship. Regardless of the size of the agency, big or small, the way out of this situation is to do the basics well. Do things better, faster and get them right the first time.” MORE MOMENTUM EXPECTED Santosh Padhi, CCO and Co-founder, Taproot Dentsu says, “Project momentum will be a lot more now. Even earlier, big brands like Pepsi and Airtel were willing to give a chance to smaller and independent agencies that rose to the challenge and showed that it doesn’t always need a defined structure like the big agencies to execute a good idea. But unfortunately, COVID-19 will allow clients to bargain even more with the agencies on projects.” On whether advertisers will choose small agencies over big to cut corners, irrespective of whether it is on retainer or projects, Padhi says, “There are big FMCG clients who would never go to an agency which doesn’t have defined verticals like planning, account planning, etc., and are just creative-led. They thrive on structures themselves and will expect that in their agency too. With network agencies, you get everything under one umbrella. They feel if they have five teams from the same network, the understanding is much better than five teams from different places and the onus doesn’t fall on the brand to hold the teams together. Those kind of brands won’t change; their global mandates are such.” Raj Kamble Rohit Ohri “I don’t think clients want to spend disproportionate time managing multiple agencies in this situation. Even in project-led engagements, most clients see merit in getting the same group of people working on a sequence of projects as against working with different agencies. There is value in having a consistent team working with you. Particularly at a time like this, you see value in deeper relationships.” Aditya Kanthy Santosh Padhi Agencies have often accused brands of negotiating to the last penny, but during the lockdown, most brands have not been ruthless, say admen. Here, MDs and CMOs of a few major brands tell us why most of them chose to go for temporary or no cuts instead of yearly revision of agency fees “The work for our creative agencies has become more critical and increased significantly. We have virtually turned out hundreds of creative elements across various media. We have long-standing and continuous relations with our creative partners. As a general process, we are evaluating all our contracts and services and discussions will be based on scope and deliverables as and when agreements come up for renewal. We are working with multiple agencies on the basis of brand requirements. As of now, we are continuing with the retainer model as brands need continuity in strategic and creative inputs. Our brands Dish TV, D2h and Watcho have been working with some of the biggest and best agencies in the country. But we have never hesitated to work with new creative outfits if they have a better fit with our deliverables. Size is really not a criterion.” Anil Dua “In the last two months, we haven’t really advertised much, except for some minimal spend on Digital, because our sales had significantly come down due to the lockdown. We work with McCann and Ogilvy on a hybrid model, currently work is ongoing for the future campaigns. I believe that the way the agencies work and the outputs that they'll deliver might go through some optimization because of the situation. But fundamentally, I don't see too much of change in our existing contracts, even if we reduce spends for the coming months. Regarding reducing retainers to save cost and advertise on a need basis, it might be more relevant for some industries like travel and hospitality who have been significantly impacted. But for FMCG and our kind of categories, as things get back to some semblance of normalcy, the demand too will come back.” Rajesh Ramakrishnan “IBD India, a Percept-Hakuhodo company, is our mainline agency on retainer. I think their job has increased during the lockdown. They have had to put out more content, which is very situational or thematic, and are going beyond communication to think how we can create more revenue and demand for our products. For example, we had to make our products available at medical shops and kirana shops during these two months. Syska LED was synonymous with Irrfan Khan, but now the agencies have to work doubly hard to create the same magic. We need them to prepare for August onwards, when festivals will begin in India. There are brands that are looking to save 10%-15% money by cutting agency fee but that is not us. We started the journey with the agency five years ago, and they have seen our business grow from nothing to what it is today; this is the time that we should support them. So we are not revising any fee.” Amit Sethiya “We work with FCB Ulka, which is our mainline agency and Kinnect, which is our digital agency. Both are on retainer basis. So with the lockdown, we did ask our mainline agency for a rebate and they were willing to give us a discount too considering that the work pressure which used to be there earlier, is not there now. We haven’t thought of revising the yearly fee yet because we are seeing the demand coming back, but it’s quite slow. Post June, things may improve in a hurry or may even get worse, and that is when we can make predictions on the numbers. Some brands have kind of gained during the lockdown, so their spends might go up.” Sanjay Bhutani “We were working on a retainer with L&K Saatchi and Saatchi since 2014 but last year, switched to the project model. If I’m forced to do a deal right now for a project, I will actually go for the conservative approach and say ‘Hey, I want a certain big discount because we all need to kind of share the pain’. For most brands, 25% to 30% discount on a project model is fair, and when it comes to a retainer, 30% or so. If you think about it, we have lost 2.5 months fully and even the next month largely. So 25% to 30% of the year has effectively gone away, where brands have made zero revenue; so by direct proportion, the cost on retainer should be 25% to 30% lower, maybe even zero for these months and then another 25%-30% cut in the balance months.” Kashyap Vadapalli “Our last campaign ended by March-end. We had plans for April, but then decided against any advertising for both April and May. Going forward in June, we will take a call in the first half on how to go about it. In the last two months, our mainline agency Contract Advertising was working on campaigns which were in the pipeline. For our digital agency, Digitas, their work has gone up. There has been no change in the contracts as yet. As the market opens up, demand patterns will change, so, we will evaluate agencies and the capabilities that are required to go further, but it would be on a short-term basis, not yearly at this point. As far as small and medium-sized companies are concerned, project-based work will go up.” Anshuman Chakravarty “We are not looking at revising our retainer contract. Our belief is that some highs and lows will happen, and for that necessarily do we need to go about renegotiating our contracts. We work on retainer basis with Ogilvy and some others on project basis. Because we are in a long-term partnership, we haven’t gone about it in terms of seeking any massive renegotiation from Ogilvy. Having said that, there is a correlation between what we spend and what we can earn. So June-July-August will be a critical period to see some bit of rebound and we do believe that May has been better than April, and June will be better than May.” Sanjeev Mantri “The work we did during the lockdown was managed in-house. Our creative agency, Mullen Lintas, is working on a much larger campaign for after the lockdown, that’s for TV and Digital both. We decide on an agency and work on a series of projects with that agency only. That way, we both get the benefit of long-term partnership. Every year, we do two-three campaigns with the agency and the plan is the same for this year too. We had worked out our project fees for the agency in February, and everything has changed in the market after that. But we don’t want to change their contract because they are providing a service, and adding certain value, and must be compensated correctly for it.” Ramnik Chhabra “Today, our agencies are busier because they are not making one-size-fits-all ads, but focusing on customized messaging. We work with Mastergram Conway + Partners, Aagneya Advertising and Wondrous, and just called for a pitch for a fourth one as the amount of creative development required at this point is humungous. For the longest time, we had these agencies on retainer, but just after lockdown, we relooked at relationships and moved them into a hybrid model customized to each agency. In fact, costs have gone up in a hybrid model, but we are getting better efficiencies this way. At no point was the objective to cut agency costs, but to realign costs to get serviced better. I would prefer to work with specialized boutique agencies over a network agency, with one partner offering multiple solutions, each of which they may not specialize in.” Karan Kumar
NEW SOURCES OF REVENUE
NEW SOURCES OF REVENUE FOR AD AGENCIES
content production at Lowe’
Group CEO, MullenLowe Lintas
each stage is a revenue generator’
Managing Partner and Creative Head, What’s Your Problem
challenges due to social distancing’
CEO & Group Chairman, FCB IndiaBIG AGENCY VS SMALL AGENCY
Founder & CCO, Famous Innovations
CEO & Group Chairman, FCB IndiaWILL IT BE PROJECTS OVER RETAINERS?
MD & CEO, DDB Mudra Group
CCO and Co-founder, Taproot DentsuIMPACT OF COVID-19
THE TRENDS
WHY ARE BRANDS NOT REVISING YEARLY CONTRACTS?
Executive Director & Group CEO, Dish TV India Limited
MD, Perfetti Van Melle India
CMO, Syska Group
Managing Director, Bausch & Lomb, India
Chief Marketing Officer, Pepperfry
Head Brand & Corporate Communication, Orient Electric Limited
Executive Director, ICICI Lombard
Executive Director-Marketing, Motilal Oswal Financial Services
CMO, DLF Limited
Tags : cover story advertising Neeta Nair creative IMPACT magazine