The determination and power of some procurement departments to drive down costs is eroding media buying margins across some channels to an unsustainable level, one of Australia's top media executives has warned.
Over the weekend, GroupM agency MediaCom choose to walk away from 17-year client Carlton United Breweries(CUB) after failing to agree on commercial terms in a media review that was eventually won by Omnicom's PHD.
A staff email that was seen by AdNews on Monday claimed MediaCom would lose money if it had agreed to the terms put on the table by CUB parent company AB InBev. The pitch, which also involved Starcom and Vizeum, was won by PHD Australia yesterday.
When speaking to AdNews, before the CUB news, GroupM Australia and New Zealand CEO Mark Lollback flagged the growing influence of procurement as a concern.
“I've been surprised to see - and I say this politely - the power that procurement has taken over in the whole (media buying) process,” said Lollback, who was one of Australia's leading marketers until joining WPP's media investment arm last year.
“My concern is that procurement is driving cost down really, really hard and I think at some point the value exchange is not going to be sustainable. There is a disconnect between the cost reduction procurement is trying to achieve and the high level of service marketers expect of media agencies and that we want to deliver.”
Lollback is a former CMO of McDonald's, ANZ Banking Group, Pepsi Lipton International and a VP of marketing at Unliever Foods Australasia.
His recent experience at the helm of major brands gives him a unique perspective on the state of the media buying ecosystem.
Cutting their way to profit
Lollback believes the problem is being driven by several factors. Firstly, many companies are under pressure to find profit margins by cutting costs in a largely flat economy where GDP growth is around 2% to 3% growth.
“Some of the procurement consulting companies are looking at how do they extract more value and how do they reduce their clients cost structure to help accelerate their profit growth either in line with or faster than what their sales growth is for their clients,” Lollback explains.
“Normally their mantra is I will save you 3%, 5% or 8% of your current cost structure and then you will look at the biggest cost lines.”
At most companies, marketing is among the top two biggest expenses and the procurement consultants will view marketing and media budgets “as a number” in which fat can be trimmed from.
“I think they are doing it mathematically, maybe with not the insight required to generally understand that we are a people business,” Lollback adds. “They don't have to work with the outcome.”
Lollback says the marketing communications industry needs to become much better at articulating and demonstrating to boards and senior leadership the impact of budget cuts to growth and short-term thinking.
The squeeze is being exacerbated by investments media agency groups are making in technology and data analytics to refine media planning for clients.
GroupM, for example, is rolling out its mPlatform, an expensive piece of tech that provides agencies with sophisticated audience targeting and insight capabilities.
“We are a human capital and technology company so I need to be able to invest in amazing people, I need to be able to train and develop those good people,” Lollback says.
“I have conversations with people that are on the client's side - not necessarily our clients - and I will say to them, 'did you give anybody in your team a pay rise last year? Did anybody in your team get a bonus last year?' Because I've got a thousand people here in GroupM and they would also like pay rises and expect their salaries to go up and they expect bonuses for really good work,” he says.
He continues: “At the same time, the business has become very tech heavy and we need to invest in engineers and invest in technology to make sure we are bringing the best service and best capabilities back to our clients. Now that takes money so, again, I think there needs to be a fair value exchange. Luckily most of our clients get this. It is the whole pitching process that seems to be creating desperate media companies “buying” business at all cost”
Another driver of short-term thinking in media and marketing is that companies are cautious about committing to long-term media investments due to instability in the economy. Short-term buying provides them with greater flexibility, particularly in highly volatile industries.
“I think the short-termism from the company's point of view is purely about results. It is purely about the reporting cycle and it's a need to make sure that they are delivering their quarterly cycle,” Lollback adds.
“Again if you look at an organisation - as I said I've worked for Unilever, ANZ, McDonalds - one of the easiest lines to actually cut and know that it won’t have an impact on that quarter is unfortunately the marketing line.”
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