Volume 63: The downward spiral of the advertising holding companies.

1. Monetization versus value creation: the downward spiral of the advertising holding companies.

tl;dr: A catastrophic failure of business strategy.

Today, the four largest advertising holding companies, WPP, Omnicom, Interpublic, and Publicis, have a combined market capitalization of $65bn, just 35% of the value of Accenture, and a tiny 1.5% percent of the value of Google, with a valuation gap that is growing rather than shrinking.

How did we get to a position where the relative value of these firms became so weak? Well, it’s largely the fruit of terrible business strategies, a fundamental misunderstanding of their core competencies, and the resulting knock-on effect on their human capital.

About ten years ago, after just leaving an Omnicom-owned agency, I did some projects for one of the Big 4 consultancies and the difference in how people were valued was stark. For all the jibing at how boring accountants are, it was abundantly clear that professional services and creative services had a radically different approach to human capital. The former realizing it as an asset to be developed, the latter an inconvenience to be squeezed dry.

Across the intervening years, this gap has widened. WPP now brags that its employees' average age is under 30, agency jobs consistently rank among the most stressful, and Omnicom and Interpublic made over 10,000 layoffs in the past 12 months.

After slashing to the bone, holding company-owned agencies are now hiring again, but almost exclusively on freelance contracts rather than full-time, which means the whole thing looks a lot more like gig-work Fiverr than trusted advisors to the CMO.

There are several reasons this has happened. As I’ve discussed before, the holding companies were never designed to be operating businesses in the first place. Another massive problem is the systemic confusion regarding monetization for value-creation. Take, for example, production, which has always been treated as profit-center compared to strategy, treated as a cost. While this may look accurate on an agency Excel sheet, it’s fundamentally oppositional to how clients perceive value, and as a result, oppositional to the long-term success of the agency/client relationship. The outcome? In addition to advertising planners leaving to set up their own strategy consultancies, we see things like Coca-Cola placing PwC at their right hand as they go through a global creative agency review. Having interviewed CMOs recently as part of a client project, I don’t find this surprising at all. Systemically misrepresenting what can be monetized by the agency as value for the client, even when it’s clearly not true, has created a gaping gulf in trust. A gulf the likes of PwC are only too willing to step in and fill.

This very same misunderstanding of value creation versus monetization sits at the heart of what can only be described as ten years of strategic failure on behalf of the holding companies. Rather than understand their core competencies were inherent in the commercial application of creativity by their people, which they needed to single-mindedly up-skill to boardrooms facing the challenge of technology-driven transformation, advertising holding companies instead sought to monetize low-hanging technology in much the same way they’d previously monetized production.

However, not only did they spectacularly fail to become credible as technology companies, but in taking their eyes off the ball of being the best at developing commercially creative talent, they also created the conditions for a major disruption of their own business by the consulting companies. (And no, an agency cult of personality is not a talent strategy)

Add this all up and what we’re left with is a stunning failure of business strategy, which means that rather than freeing people to innovate, that their human capital is likely to be squeezed even harder and developed even less in the future, which will inevitably lead to worsening client trust and a spiraling decline of profitability.

I can only see four possible outcomes:

1/ Accenture or one of the “big four” buys one of the advertising holding companies at a discount, keeps the highest value parts with an eye to investing in them, and systematically shutters or sells the rest.

2/ The advertising holding companies set up a good bank/bad bank structure, much the same way Citigroup did after the financial crisis to try and showcase their highest performing assets while at the same time closing, selling, or milking for cash from their low performers.

3/ Accenture, one of the “big four,” or a left-field candidate like private equity, makes an offer they can’t refuse for one or more of the best performing agencies within the various holding company portfolios, providing cash that will be returned to shareholders, and leaving behind a low-value portfolio with a limited future.

4/ Two or more of the advertising holding companies attempt a merger of the weak to try and fend off some, or all, of 1, 2, and 3 above, but this is unlikely to succeed due to ego, as the previously failed merger of Omnicom and Publicis has shown.

It’s entirely possible that more than one of the above will happen and that once it starts happening, there’ll be a domino effect as more and more players seek to snap up bargains and seek advantage.

Make no mistake, this whole situation was created by a fundamental strategic failure to understand that the core competencies of the holding companies was inherent in their commercially creative talent. By not developing this talent, and instead squeezing it in order to pursue a misguided attempt at technology monetization, what comes next is going to look a lot like vultures picking over a corpse.

2. Purposology no longer excuses bad management.

tl;dr: Purpose-focused Danone CEO ousted for underperformance.

This week, Emmanual Faber, Chairman and CEO of yogurt to mineral water giant Danone was fired. Ordinarily, I wouldn’t pay all that much attention to a CEO firing, but Faber is significant because he’s one of the highest-profile business leaders advocating for corporations to serve a higher ESG purpose over and above simple profit-making for shareholders.

While the initial headlines focused breathlessly on whether Danone would walk back from its stated ESG commitments, I think that’s pretty unlikely as it’s a certified B-Corporation. Instead, the real story seems to look a lot more like common or garden mismanagement combined with a compliant board's governance weaknesses (ironic for a self-stated ESG company). While the recent advertising campaign for Danone-owned brand, Evian, is vomit-inducing, what matters isn’t the campaign itself, but that it was created at all. You see, under Faber’s watch, Danone systematically starved its brands of marketing resources relative to the competition and saw predictable market share declines as a result. For all of his purposology, this just proves that bad management is bad management and that you still can’t cut your way to growth.

As a result, anyone reading this who believes that corporations should be more responsible (as I do) should probably read this as a good thing because it shows that it’s no longer enough to just talk a good game about the good your company intends to do, you also have to demonstrate sound management of the company in the process.

This is important because ESG investing has become truly supercharged due to massive capital inflows in recent months. When this much capital starts flowing into a specific type of funding vehicle, executives quickly take note because it represents an opportunity to boost their stock price and, more importantly, their own compensation packages.

As a result, what has happened has become a self-fulfilling feedback loop. Initially, only a small number of companies qualified to meet ESG requirements, so funds buying these stocks made their prices go up, which created nice investment returns for the ESG funds, which encouraged more capital to flow into these funds because of the gains.

Seeing huge amounts of capital flowing into companies with ESG commitments, a broader group of CEOs are then incentivized to make similar commitments in the hope of also getting a share of the ESG investing action. Hello, carbon-neutral supply chains and carbon-negative data centers.

The great thing that’s resulted is that this places environmental, social, and governance factors firmly on every executive leadership team's strategic agenda globally. But, as the Faber firing demonstrates, we’re now reaching the point where strategic decay is beginning to kick in.

What is strategic decay, you might ask? Well, put very simply, it’s the observation that a new and novel strategy can create outsize gains for first movers for a while, but that over time these advantages tend to be competed away as more competitors do it too. Design is a great example. Firms that committed to design in the early 2000s saw big gains, but over time these gains declined, and it became table-stakes as more and more corporations embraced design. As a result, the marginal advantage of design decayed, and we’re left where we are today, which is that good design is the new bad design. It’s something you have to have but isn’t enough on its own to give you an advantage.

Anyway, as more corporations make ESG commitments, there’s going to be more strategic decay, as more competition for ESG capital leads to a rising tide that no longer floats every boat. As a result, and as Danone now shows, ESG commitments alone will no longer have the power to disguise poorly managed companies.

3. Ghost brands.

tl;dr: Delivery everything is creating a new breed of brand.

Moore’s law for microchips - that we’ll see twice the performance for half the price every 18 months - also reflects a bigger technology effect: it commodifies what it touches. It takes things that were hard, and slow, and expensive and makes them easy, and fast, and cheap instead.

And once things that were hard, expensive, and slow become easy and fast, and cheap, what happens is that we can now add new layers of value and innovation over the top. This is why we now have the app economy. Smartphone ubiquity made powerful connected computers cheap and everywhere, which then allowed us to build entirely new forms of value over the top in the form of apps.

Now, that very same fast, easy and cheap ubiquity is creating a new breed of brands duking it out for our delivery dollars.

You may have heard of ghost kitchens, which aim to cut the restaurant out of the mix entirely, but now we see ghost franchises too, which are nothing more than a brand name and a menu, and not much else. Rather than growing by signing up franchisees who then build restaurants, a ghost franchise simply signs contracts with existing restaurants desperate to make it through this pandemic-shaped winter we’re going through, and hey presto, you now have the potential for an instantly scalable franchise.

Which is exactly what’s happening. Take any category on your favorite delivery app - say wings - and chances are that 2-3 of the top 5 you see will be brands that are all owned by the same ghost franchiser, that will all be prepared by the same small restaurant franchisee. You see, they’ve realized that what matters in these COVID times isn’t a physical presence but the ability to effectively navigate the delivery apps' pay-to-play marketing environment.

Where does it go from here? Well, I’m not sure. While you can instantly scale through contracts with existing restaurants, it doesn’t change the fact that building a brand is still an expensive proposition, it doesn’t change the fact that you’re at the mercy of the delivery apps for who gets to see your menu, and it doesn’t change the fact that quality control will be really, really hard.

But it is fascinating, and I deeply suspect we’re going to see at least a few successful national, and perhaps even global, franchise brands rise through this model.