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Side-Giggers And The Future

In the advertising world, moonlighting while holding down a full time job has been around for decades. Millennials have taken it to a new he...

Sunday, May 29, 2016

The Uncertain Future of New Brands

For the last few decades, brands have been a very important facet of our U.S. economy.  There was a time when it appeared that generics and store brands would dominate things but brands bounced back in many categories and grew even stronger.

At first the message was that brands must be warm and friendly and then it morphed in to an era that posited that one must have a relationship with their favorite brands. All that appears to be going away according to the futurists out there. It is difficult to argue with them as we appear to be going in to a “personal data economy.”

In previous postings in MR, I have discussed how the Internet of Things, Big Data and on line shopping lead by Amazon.com are turning the media, advertising and marketing worlds upside down. Truly, we are in a transformational era that may well speed up a new economic system and perhaps even social system.

The advent of accelerating technology has changed the way we shop and how we are persuaded what to buy. Many cling to the concept of emotional storytelling remaining the key to consumer communication but I am growing increasingly skeptical of that idea. As online shopping grows, smart data, if you will, should take center stage in many purchasing decisions. Some are forecasting a huge decline in the importance of grocery stores especially in high income, densely populated areas (i.e., Manhattan) in the years to come as many will order their food and other sundries on line or with the help of their “Smart Fridge” that signals when certain items are running low in the household.

Generally, I have found that seismic change takes longer than futurists forecast as consumers, or many of them, tend to lag technology. Millennials, however, are so tech savvy that they are likely to embrace technological advances far more quickly than any previous generation has to date.

So, what does this mean? I return to a theme that I have tried to articulate in several MR posts over the last few years. Established and firmly entrenched brands have to have a tremendous advantage over new products. In an era where commercial avoidance will continue to grow especially among the well educated and affluent, many automatic orders of groceries and personal care products will likely take place with the overwhelming preference going to established brands. Other than in fashion, where trends often seem bubble up quickly without much traditional marketing support, established players will have a huge advantage over newcomers who may not be as well funded as the deep pocketed giants.

Yes, there will be new players who will break through and somehow upset all precedent and succeed. Not to sound cynical but I would bet that they will be bought out by major players in their category if they grow fast and build market share quickly. A billion dollars remains a sizable amount of money and few entrepreneurs will be able to resist a generous buyout.

So, as the retail world unravels or shifts look for the big producers to get larger and even more powerful. Social media is great but it likely cannot level the playing field enough for newcomers to break through and grab big shares from the global giants.

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

Sunday, May 15, 2016

The Dangers of Advertising Agency Diversification

Today, in the financial world, you often hear the clarion call for proper diversification. That is why index funds, which buy the entire market, are so popular. Many fees are tiny and risked is reduced by buying an entire market rather than trying to ferret out individual winners. The proverb to back it up is “Don’t put all of your eggs in one basket.” On the other side of the coin, steel magnate Andrew Carnegie once said, “Put all of your eggs in one basket, but watch that basket.”

Interestingly, if you look at billionaires, Gates, Zuckerberg, Murdoch and a few others, they tended to find success by focusing on one product or category. A notable exception to this is Warren Buffett and Charlie Munger of Berkshire Hathaway who run a conglomerate but do not see themselves as managers so much as allocators of capital.

Way back in the 1960’s when I first began to study businesses, conglomerates were the coming thing. Harold Geneen’s ITT put together a collection of companies as disparate as Avis, Continental Baking, The Hartford (insurance) and Sheraton Hotels. TIME magazine ran a cover story on “Jim Ling, The Merger King” who had cobbled together a motley assortment of companies under one roof. It ended badly for him.

Sometime in the 1980’s, these diversified companies began disposing of unprofitable businesses. The focus was more on concentration. The argument that if you owned companies in non-related industries protected you from the ups and downs of an industry was true but Wall Street and shareholders were not enchanted and corporate headquarters became top heavy with too many employees. Today, when companies speak of diversification it is often line extensions of their winning brands or adding new products to their existing markets.

The concept of diversification is a topic that I am getting a great deal of mail about from owners of small and medium sized ad agencies. With all the new platforms emerging in the media world, these shops of modest size are feeling some heat. How can they compete going forward? Many became involved with digital after the train left the station. Others still tout their online or mobile “whiz” employee at new business sessions. For clients who are new to advertising or of a very modest size, it may work. Yet, move up in size and there is an extreme disadvantage.

The major mega-agencies, WPP, Omnicom, Interpublic, and Publicas are deeply embedded in diversification. When a new platform or medium emerges, they have the deep pockets to buy either the leader outright or raid key talent and soon have a viable presence in that space. And, you can bet that is what they will be doing for years to come.

What can the smaller guys do? Tom Malone, management guru at MIT, said a decade ago, “All good diversification builds on competitive advantages in core businesses.” Okay, but what does a mid-sized or small shop have to offer other than personalized service? Their online rates are totally outclassed by the exchanges and their online or mobile whizkid cannot possibly work a full day on agency business and still monitor changes in the field effectively.

Those who say that they have a group of small “companies” with one or two staffers in Public Relations, Mobile, Online, or Emerging Media may look and sound good but they are often not just fooling prospects but are also fooling themselves. Some sort of affiliate relationship with a speciality shop of an advertising behemoth, seems to be a workable solution to their obvious gaps in specialization.

If they abandon the absurd fiction of being truly diversified and stick to their circle of competence, they may evolve in to a survivor as many of their size are swept away in the years to come.

Should you wish to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Tuesday, May 10, 2016

The Competitive Environment for Advertising Agencies

Back in 1980, Michael Porter wrote a book now famous in certain circles called COMPETITIVE STRATEGY: TECHNIQUES FOR ANALYZING INDUSTRIES AND COMPETITORS. I devoured it, gave it to my boss who said he was dying to read it, and it sat on his desk for three years unopened. One day I found it in his wastebasket but said nothing. Porter’s thesis is more timely than ever, so after 36 years, it might be a good moment to share my thoughts with you.

The basic point was that what we think of as competition--direct competition, is only one part of the total landscape. He identified five forces and only one, internal rivalry in the industry, was always evident, but the remaining four came from the outside.

The five forces were:

1) Competitive rivalry among existing players--this is where most advertising agencies put 90% of their focus and nearly 100% of their frustration.

2) The bargaining power of suppliers.

3) The bargaining power of customers--why is Integrated Marketing Communications taking hold and advertising a declining segment of the marketing mix? It can be explained in two words--Wal-Mart and Target. Power shifted over last quarter century from manufacturers to retailers. Wal-Mart wanted you to lower their price rather than accept massive advertising support. And now, on-line retailers, led obviously by Amazon.com, are reshaping the retail landscape and perhaps destroying conventional retail. So a few large buyers are dominating things.

4) Threat of new entrants--in a free market, any profitable market will attract new players making the overall industry less profitable. Warren Buffett and Charlie Munger of Berkshire Hathaway have looked for companies with “moats” around them. They buy companies with high investment or fixed costs, or utility franchises or those with very high switching costs for customers. How many manufacturers can take on Boeing in aircraft manufacture when the cost of entry is in the billions? Ad agencies are different. A few disgruntled employees can quit, rent some office space or use a kitchen table and start a shop. The threat of new entrants is always there.

5) Threat of substitutes--if brand loyalty or switching costs are high, a manufacturer is protected somewhat. Otherwise, look out!

As we look at today’s advertising agency environment, it is not an exaggeration to say that this may be the most difficult period ever to grow your agency business.

I talked and had lively e-mail exchanges with a number of agency principals largely in the U.S. Here are some of their comments (obscenities deleted):

--Mid-Sized agency partner--we have a great deal of pride about our ability to keep up with changes. Two years ago, we hired a young art director. He impressed all of us but in each interview around the shop he kept pressing all of us on our digital capability. He signed on and was a big hit internally and especially so with clients. After seven months, he came to me and resigned. When I asked him why he said (paraphrase), “You guys lied to me. It is crazy to tell people you are up to speed on digital. You may fool most of your current clients, but not me. I am out of here.” We all wrote him off as an angry young man and kept our heads down and continued to march. A year later a bright young intern joined us. The kid was on fire with ideas and seemed to read everything about the industry in his free time. He peppered us with articles, blog posts, and a few new marketing books. After 90 days, my partner and I offered him a job. He laughed and said, “No way. I have learned nothing here. You are nice people but you are at least five years behind most agencies your size. I am heading for NYC.” A month later, a young copywriter of ours told us that the young intern had landed a job at a mega-shop in New York and seems to be doing great. The two young people were a wake-up call for us. If we simply talk to each other and unsophisticated clients, we do not know how far out of the loop that we really are. We are trying to recruit staffers from larger shops and are sending key people to industry conferences. Can we ever catch up?

--Small agency owner (12-15 staffers)--"when we pitch new business now, we are stunned to find much larger shops chasing the nickels and dimes some of these small advertisers are offering. A beach community tourist board had 12 finalists. We could only offer serious attention from me and the whole staff. Competitors had departments twice as large as my whole shop.”

--Mid-Sized CFO--"we tried incentive based compensation some years back . We got clobbered as the Great Recession made it hard to sell anything. Also, one client, privately held, appeared to lie to us. His staff said we were great but he said sales were flat and our bonus was tiny so we resigned it.”

--Mid-Sized Creative Chief--"our competition lies all the time. Our media director and I keep fighting for more staff. How can we possibly do due diligence on all the platforms that we need to cover for a campaign? When we ask for an increase in fees, existing clients usually say no despite agreeing that we have more work to do than years ago. In competitive shootouts, someone always lowballs us (and others) and say that they can do it all for a few hundred thousand less. It always ends badly for the client and they switch shops. Meanwhile, we lose some good opportunities.”

--Anonymous Ad Agency Owner--"we try to upgrade staff and facilities but we are outclassed right and left. Fifteen years ago, we could pitch a big piece of business and our TV executions could compete with the big boys and girls. They might let us buy media in some spot markets and a mega-shop’s buying service would do the network TV negotiation. Now, we are light years behind in digital and I cannot afford to pay young talent what they deserve. So, our client roster is getting less and less sophisticated. The young kids hate it. One told me as he left that working here was like working at an assembly line at GM. The people were pleasant but the work was the same with nothing new coming on board. I did not dispute what he said.”

So, the atmosphere is tough out there and may get worse. It is difficult to analyze your competition when you do not have their tools or they are unethical.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or leave a message on the blog.