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Thursday, June 19, 2014

Is Retail Dying in the U.S?

In recent weeks, I seem to be reading a surprising number of Cassandra style forecasts of the impending death of retail in the United States. Also, a few Media Realism readers have written to me echoing the same sentiment. All seemed to be using the same basic factoids to come to their gloomy conclusion. The list usually includes some combination of the following:

1) There are 100,000 shopping centers and strip malls in America.
2) They contain approximately 1 million stores.
3) The one million stores comprise 15 billion square feet of retail space.
4) The retail space works out to 47 square feet for every person living in the U.S.
5) Our per capita square footage devoted to retail is up to eight times that of other industrialized countries.
6) Over the last 20+ years the median household income has dropped from $56k to 51k but retail space per capita has jumped from 19 to 47 square feet.

I have checked and doubled checked the above numbers and most seem quite close to sources that I respect.

Most analysts that I read plus all of my readers who contacted me are forecasting a big shakeout in retail and a rough patch for the next few years for commercial real estate as more shopping centers have empty space and tenants negotiate harder on their leases.

Interestingly, no one seems to be mentioning on line shopping which would strike me as the biggest threat to brick and mortar retail. When I talk with local broadcasters (not local cable players who often deal in portions of markets), they are having a hard time getting long time retail spenders to maintain budgets consistently.  Some blame it on the struggles of suburban, middle class families while others say that online shopping is largely to blame.

There is no question that retail has always been a tough game and it will get even more difficult. The square footage figures cited above indicate that in certain parts of the country there is definitely some over-saturation of retail outlets.

When people dismiss problems and talk of Whole Foods, Michael Kors, Tiffany and Nordstrom they forget that upscale retailers take up only about 1% of total retail square footage in the country. And, their yield per square foot has to be much higher than the vast majority of players.

So, we have a glut of retail space. And, players in retail need to do even more careful risk assessment than ever. Will these issues disappear if the economy starts to consistently deliver 4%+ growth quarter after quarter?

Probably not as the shopping experience is shifting. Some people think that retail will dry up and blow away as on line shopping gets stronger (on line consistently has grown at double digits in recent years regardless of the strength of the economy). Many, however, still love to “touch and feel” items before they buy them. While on line players facilitate returns, it still remains a time consuming nuisance.

And, customization is morphing in to new shopping experiences. Do not be surprised if within a decade, you can visit a retail outlet and pick out or design attributes of a running shoe, for example. Exact measurements will be taken and, in a few days, you will have shoes exactly as you wanted them and they will fit PERFECTLY. Due to tech gains, the price differential may not be significantly higher than off the shelf entries.

As I am fond of saying, markets always go to extremes. So, it appears that retail was overbuilt. Retail like media will evolve a lot in the next 20 years. And, it is a sure bet that retail will use less conventional media than ever to support their locations.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Tuesday, June 10, 2014

Starting Salaries in Advertising

Around this time of year, you invariably see articles in the media about starting salaries for recent college graduates across a wide variety of disciplines. Also, without fail, I hear from people saying that actual entry level salaries in advertising appear to be much lower than the reported figures. This year has been no exception.

Historically, advertising agencies paid starvation wages to newcomers. How come? An old acquaintance who serves as Chief Administrative Officer (not her real title) at her shop put it bluntly: “You know as well as I that most people are not suited to the advertising business. It always seems that roughly one-third hate it and quit in the first year, another third cannot do it so we ask them to leave, and finally, the remainder tend to be keepers. So why invest much money in a recruit when the odds are one in three or less that he or she will have staying power? It may seem harsh but with rising costs of benefits, particularly healthcare, we do not pay well at first.”

Another straight talker put it this way: “When the recession hit us in 2008-2009, we got clobbered. We laid off a ton of staffers and I vowed never to be exposed that badly again. So, when we began to staff up in 2009, I made sure that we paid each new employee $5,000 less than we did in 2007. There are no shortages of people applying here and we have not raised the starting salary yet. Honestly, the only problem is that we occasionally get spoiled brats who are heavily subsidized by upper middle class parents. One young lady drives a luxury car in each day and our creative director thinks that she earns far more than she really does. So, we do not have much diversity in terms of backgrounds, but we never pay too much and do not feel bad if someone does not work out. Are we exploiting them? I don’t worry about it as we give these kids a chance when others do not."

A small market CEO writes, “I have not had a raise since 2007. A young kid was here four months and told me he needed a raise to buy a new car. I tried to explain that his means of transportation was not my responsibility. He did not get it and left a few weeks later for a job outside of advertising paying $1500 more. Good riddance!”

In some markets, the cost of living requires better starting pay although New York and other major city rents force newcomers to live with two or three others to make ends meet. Also, many say that real stars go to Silicon Valley or Wall Street and the quality of advertising newcomers is not nearly as strong as it was several decades ago.

Virtually, everyone whom I spoke to or e-mailed admitted that stars do get paid well once they have proven themselves. A few confessed that they wait several years before they loosen their purse strings especially if they are in a small to mid-sized market where changing jobs and staying in advertising inevitably requires a move to another city.

I see both sides of this issue. With many shops facing financial challenges, it does not seem as if we will get a big change soon.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Saturday, June 7, 2014

Earthquake or Blip on the Screen?

This past week, two of the world’s largest advertisers, made announcements regarding their digital efforts:

1) Procter & Gamble, arguably the world’s largest advertiser, disclosed that going forward 70-75% of their U.S. digital activity will be done programatically and in-house.

 2) Separately, fast food giant, McDonald’s announced that it is opening a digital office on Market Street in San Francisco so that they will be better able to recruit digital talent. Their digital chief described the move as “a way for us to be more plugged in to the flow of ideas.”

To me, this is heady stuff. Of the agency people whom I canvassed, many seemed to be  yawning. Yet, what is happening? It seems clear that both huge players in the ad world are bypassing their agencies and going direct to the source to optimize activity in the burgeoning digital space.

One agency chief dismissed that echoing his long held sentiment that his small team at a mid-sized shop “was cutting edge and on top of all changes in the digital world. My folks also have a great relationship with Google.” I gently responded that they may have a great relationship with the Google SALES TEAM. The McDonald’s initiative sounds as if they will raid, Google, Yahoo, Facebook, Oracle and fellow travelers and get people who know where the bodies are buried in key companies and have a handle on what they may be coming up in the near future. Also, they can push the envelope better than any agency team can of what might be done that has never been tried before. These companies will also  have an edge over competitors in our new era of Big Data.

Am I overreacting? What do you think?

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Monday, June 2, 2014

Pricing Digital Creative Services

Joseph Alois Schumpeter was an economist who studied in Vienna and London. I would put him in the top five of all economists in history along with Adam Smith, Karl Marx, John Maynard Keynes and Friedrich Hayek. He popularized the term “creative destruction” in economic and political circles. After a failed early marriage and living beyond his means in London, a friend wangled a job for him managing the estate of an Egyptian princess living in Cairo. He jumped at the lucrative position and was quite successful. It turns out that the prior trustees had been stealing the princess blind. By simply taking his precise contractual fee, Schumpeter was able to lower rents for the tenants of the princess to their great delight yet still managed to double her annual income. Once things were set up his time was largely his own and he drafted his first book, THE THEORY OF ECONOMIC DEVELOPMENT. His reputation spread and soon he was called back to Vienna as a professor.

Why tell this story? Well, it reminds me a bit of what has been happening over the last 15 years in the digital advertising arena. Some years back, when the internet was just getting rolling as an advertising medium, a new player showed up at a large client that I handled. He was not too smooth and people said that he was not the sharpest tool in the shed regarding marketing or media. I tried to be a bit kinder than that as he seemed to simply use different terms for certain items than we did and when any one used a standard term he would often blurt out “what’s that” which had some people stifling laughs. After a while I noticed how he seemed to have an inordinate interest on the cost of all creative jobs, copying and anything that could be remotely defined as “digital.” When he asked what a job cost he would write it down and sometimes smile and other times frown but he would not comment.

I bumped in to him once by accident at a social gathering two weeks before we were to begin negotiations for a multi-year contract renewal. He told me that we had better lower fees for certain jobs or we would be on very thin ice. I got him a drink and he opened up to me. He essentially said, “You have always treated me with respect but your associates do not. Yes, I have had five jobs in the last eight years. In that time, I have dealt with seven agencies and I monitor fees closely. You guys charge way too much on certain items. I am not the marketing director but you are not going to rip us off any longer.”

The next day I reported back to the CEO and we did some digging. Yes, we were overcharging for some items but, after checking with other shops around the country, we were virtually giving other tasks away. We slashed prices on the sensitive items and obtained the contract renewal. The client moved on a year or so later and I doubt his boss had a clue about how much his lieutenant had saved the company.

Were we really price gouging? I talked to some people recently and a common thread ran through their comments. One CEO who retired in the last few years weighed in as follows: “Don, when digital began we were clueless. We did not know what to charge. So, we took some guesses and found we were high in some places and low in others. When new young designers came on board, we got a handle on what others were charging. Still, we got stung by boutiques who could do a job overnight for a third of what we charged. As young talent moved client side, we had to adjust quickly as they had contacts all over. My successor is a great guy and ethical. He asked me how to bill attempts at viral videos.  Charging by the number of hours would not work so he puts two young creatives on the job who work nights and weekends as they love the assignment. Their batting average stinks. They are way below the Mendoza line (this is a baseball term attributed to George Brett describing a hitter in a slump with a batting average below .200 which was the normal average of infielder Mario Mendoza). Now, there appears to be some niche shops who know how to make them work with some consistency. How do we price something we know will likely not work?”

Another mid-sized CEO takes a different approach. “While no two compensation agreements are alike, we try to do a flat fee for all agency services allowing us to make what we think is a fair profit. We may lose our shirt on some tasks but, overall, the clients know we are playing things straight with them. By doing this, we are learning a lot about new platforms. If we charged a la carte, I am sure that we would be bushwhacked by some boutiques. We are not that big, but we cannot respond as a three person shop can that is truly cutting edge”.

So, the young lions at the boutiques who work quickly and know shortcuts and tricks are beating the small and medium sized shops badly and charging way less. They are the Schumpeters of our new century in terms of providing better service for less money. With scores more changes coming on board on scads of new platforms, traditional agencies who claim to be digitally savvy are in a tight spot.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com