COVID Test: Will it now be survival of the fittest for advertising agencies?

Advertising agencies have so far kept their head above water despite their clients asking for temporary rebates. But Q2 will be the decider - if it turns out to be dismal, revenue will be impacted by as much as 40%; if the market picks up, all will be well 

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. We have 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 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.”

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% and 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 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.”

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 we 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.”

WHAT ARE BRANDS SAYING

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.

According to Rajesh Ramakrishnan, MD, Perfetti Van Melle India,“In the last two months, we haven’t really advertised except spending very little on Digital, because our sales had come to a halt owing to the lockdown. We work with McCann and Ogilvy on retainership model where work is on for future campaigns. The way the agencies work and the outputs that they'll deliver, etc., 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. Talking about getting off retainers to save cost and advertise on a need basis, it may work for some industries like travel and hospitality that have been significantly impacted. But for FMCG and our kind of categories, if things get back to some semblance of normalcy, then the demand will come back too,” says

Anil Dua, Executive Director & Group CEO, Dish TV India Limited, adds, “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.”

Sanjay Bhutani, Managing Director, Bausch & Lomb, India, says they did ask their mainline agency for a rebate and they were willing to give a discount.
“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,”he says.

Sanjeev Mantri, Executive Director, ICICI Lombard, shares that they are not looking at revising their 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,” he shares.

“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,” adds Kashyap Vadapalli, Chief Marketing Officer, Pepperfry

Anshuman Chakravarty, Head Brand & Corporate Communication, Orient Electric Limited, says “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.”

Ramnik Chhabra, Executive Director-Marketing,
Motilal Oswal Financial Services, says the work they 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,” he informs.

Amit Sethiya, CMO, Syska Group, adds, “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.”

“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,” underllines Karan Kumar, CMO, DLF Limited