This has been a difficult time for promotional marketers: many have been forced to trim costs and cut staff, and there are no obvious signs that an upturn is imminent. Against that background, the 8% increase in gross profit over the past year reported by agencies on a total of £350m, is broadly in line with expectations.
On the other hand, the downturn has been less fierce than some had feared, with good results published by several firms, among them Mosaic, DraftWorldwide and Liquorice. Despite the tough conditions over the period as a whole, many say they are now being kept busy with significant new wins as well as organic growth. Nor is the number of companies reporting a reduced gross profit significantly greater than last year.
But the market continues to be uncertain and the indicators contradictory. For instance, Randle Stonier, chairman of the Institute of Sales Promotion (ISP), notes a recent Institute of Practitioners in Advertising (IPA) Bellwether report which showed that companies increased their sales promotion activity for the ninth successive quarter. Against that, the demand for the ISP's legal advisory services is down by at least 10% on last year, suggesting that there is an overall decline in the number of promotions being undertaken.
Tight rein on costs
Stonier's experience as chief executive of Skybridge is that the market is tight. "Promoters are looking very hard at costs, and procurement departments are becoming ever more aggressive in their dealings with agencies," he says.
Skybridge received a blanket letter from one client demanding that all its suppliers reduce costs by 15% or be struck off its list. Faced with this kind of pressure, some firms are pricing transparently below cost, he says, hoping to achieve a decent yield from add-ons.
Stonier also points out that while spend on promotion may be growing in terms of fulfilment, prizes and point-of-sale, this increase is not necessarily being passed to agencies. Overall, however, the demand for sales promotion activity is not in question: for the foreseeable future companies will need short-term tactical activities to drive sales and win cut-through, he believes.
Carlson Marketing Group retains its dominant position, well ahead of rivals thanks in part to its very large loyalty operation. In April a management restructure saw the departure of chairman Marcus Evans, managing director Steve Grout and creative services director Nick Burton. Frank McCusker has now taken over the day-to-day running of the agency.
Mosaic has consolidated its merger with Mustard and Stretch the Horizon to emerge strongly in second place. Now headed by president Jerry Stone, whose expertise lies in performance management, the company has taken the unusual step of choosing to work only with selected clients, avoiding 'cost-plus' contracts where it does not feel it can make a real difference to the brand.
"To drive the numbers for our partners we need to focus on those that can help our revenues and profits, rather than adopt the usual scattergun approach," says Mosaic senior vice-president Chris Edgington. The agency has expanded its work for Coca-Cola and Disney and is working on a major promotion for United Biscuits' Hula Hoops brand for early next year.
The Triangle Group experienced a difficult period at the end of 2001, but otherwise has seen relatively little budget-cutting. Its director, Nick Hoadley, says that despite the gloom there is no shortage of business opportunities, thanks to the growing intensity of global competition. Like most agencies, however, Triangle has seen an increased requirement by procurement and marketing departments to show value for money.
One specific difficulty is that a greater number of FMCG companies are finding it hard to interest retailers in creative sales promotion, particularly grocery multiples that tend to be exclusively concerned with price and value.
"Trade customers aren't interested at the moment and would rather shave a few pence off the margins," Hoadley says.
Agencies offering integrated services are well placed to deal with this, he adds, for instance with face-to-face campaigns that tend to be more popular with retailers and hugely effective in driving sales.
Dynamo has been thriving since its takeover by Interceptor in 2000, having secured the huge Sainsbury's account and run a £3m 'win-a-car' promotion. The agency is also developing overseas, making acquisitions in Belgium, Germany, and other European countries, and expects to have a full international operation in place by next year. "As Europe homogenises, pan-European campaigns will happen more often," predicts chairman Iain Sanderson. "The change is dramatic, and the euro will accelerate that process."
Another big international player is Haygarth Group, which has been bought by the French company High Co to become part of a major European network. The agency has been handling pan-European campaigns for clients such as Tropicana and Nokia, and is much in demand as a source of best practice.
"In this country we have been doing it longer than many other markets, so are ahead of them in terms of expertise and experience, as long as we can apply it to local conditions," says Deborah Wallace, director of promotional marketing. In the UK the agency is involved in a major trade launch for the new generation of MMS mobile phones.
The pace of mergers and acquisitions has slowed somewhat, but the table this year shows two other notable changes. A year ago Clark Hooper became part of Proximity London, itself part of a worldwide operation with more than 2000 staff in 35 countries, and is working alongside interactive specialist Traffic and other BBDO-owned agencies. The integrated company now handles a variety of different activities for clients such as TV Licensing, Heinz and mail order giant N Brown.
In another change, Ignition Claydon Heeley took over the UK arm of Omnicom-owned Alcone Marketing Group eight months ago. This California-based network is one of the world's largest and it is hoped that taking its name will provide greater recognition overseas. In the shorter term the agency has benefited from the addition of the Mercedes Benz account, which together with other clients has helped double its turnover.
Alcone's growth lies especially with retail promotional activity, for instance with Scottish Courage on Fosters. "Retailers demand individual promotions that fit their objectives, and we are doing much more bespoke activity than before," says board director Jean-Pierre Lincoln. The agency has been building expertise in this area, and has successfully taken retailers to the implementation stage, no easy matter in today's climate.
Overall Alcone has seen no discernible reduction in spend by FMCG firms, Lincoln adds, as food and drink are relatively recession-proof. It has also seen strong organic growth with existing clients such as Warner Village Cinemas, whose business has been booming.
Indications continue to emerge of the way some firms have been able to strengthen long-term relationships with their marketing services and consultancies. One example is in the pitching process for Barclays. Tequila London found itself joining other agencies in a two-day workshop, being introduced to the business and meeting its opposite numbers.
"It wasn't the typical beauty parade," says chief executive Paul Biggins. "Barclays' view was that our reputation for creativity is established, and that it really needed to focus on the human chemistry and behavioural aspects."
Tequila London has also extended existing contracts with HP and Shell. Recent staff appointments include Julia Foster from the Institute of Direct Marketing as new business director.
Inevitably in a mature industry, the number of sizeable self-owned agencies is always declining. But for those that remain, independence is a major selling point. "Because we don't benefit from global alliances we have to fight harder to win and keep every piece of business, and that leads to better standards of client service," argues Rob Gray, chairman of Mercier Gray.
Being 'lean and hungry' in comparison with its bigger agencies means it can react more quickly to a downturn, as well as encouraging higher standards of creativity. Nevertheless, as one of the largest independents in the league table it enjoys a critical mass that enables it to compete with group-owned rivals, Gray adds.
The agency's growth in recent years has been helped by the emergence of new marketing sectors such as leisure and computer games. "These sectors have large budgets and clients that don't share the obsession with big agencies typified by most traditional FMCG marketers,"he says.
Smaller agencies often fare better in a recession than their larger rivals, at least to begin with, being less
burdened with expensive overheads. But with the slump varying in intensity across different sectors it is essential to have a balanced portfolio of clients.
Pulse Group reports that some companies have cut back by as much as a quarter in sales promotion, and in a few cases a lot more: Motorola reduced its spend "enormously," for instance. Fortunately that has been balanced with a continuing strong demand from automotive companies such as Renault, says managing director Gerry Ellender.
23Red too has found the market slow, particularly as its client base is largely in government business, sports, entertainment and leisure, sectors that have tended to pull back in the past 12 months. However, this has not prevented the company doing well in its second year, particularly with clients such as Flextech and UK Online.
An almost universal experience in the past year has been a trend for clients to look for immediate and measurable results.
KLM believes that this probably accounts for the demand it has experienced for incentive schemes and for channel and customer promotions, particularly in the area of business-
"Clients are still spending, but very carefully," says KLM chairman Jon Derry. "We all know money is going from brand-building advertising into sales-orientated disciplines, but we see growing rewards from influencing the channel members directly. These can then play a greater role in driving sales at point-of-purchase, whether retail, telesales or online."
Despite individual successes, there is a sense that the worst of the slump is not yet over, with casualties still to come. Quentin Boyes, chief executive of Liquorice, expects the pain to continue until 2004 and thinks it will contribute to changes in the structure of the industry.
"We believe sales promotion agencies will become marketing and communication consultants. They will be smaller rather than bigger, and flatter in structure," he says. "Also they will be focused on 'big idea generation' and not necessarily implementation."
A trend observed by Gary Rapps, joint managing director of Toucan Sales Promotion, is a huge increase in the number of new business development companies contacting his office.
"In the past, this role was the sole responsibility of the new business director. But now it seems to have been taken over by a collection of consultants, ranging from one-man bands to established businesses," he says.
One recent seminar predicted that up to 70% of all agency new business would in future be gained through independent consultants.
A similar situation has already occurred within recruitment, with many sales promotion agencies routinely using head-hunters or consultants instead of advertising directly for candidates.
"Could this be the beginning of the end for the traditional new business development role?" Rapps asks. "Many of those responsible for winning clients are rethinking their approach to the task and I am sure that in the process many will also be considering joining the rival companies."
Recruitment continues to be a major concern, particularly for agencies that regard quality of staff as a differentiator. One is iris, whose managing partner Ian Millner speaks of a "culture of over-delivery and investment in people" as an opportunity to score over those bigger agencies more concerned during a recession with keeping costs down.
"There is a direct relationship between people and client churn, also between client churn and profitability," he says. "Many agencies, particularly those owned by a group, have real problems there."
Millner also remarks on the difficulty of finding top notch people in an industry that tends to put far too little emphasis on genuine coaching.
"Companies tend to use the ISP Diploma as an easy alternative, and as a result they struggle to keep their people motivated and happy."
But some other agencies are finding that recession is helping ease recruitment difficulties, boosting the supply of talented candidates for the first time in years.
Perhaps the most notable feature this year, although by no means a new one, is the accelerating trend toward supplying integrated solutions. What clients want, many agencies stress, is a holistic set-up encompassing advertising, direct marketing, PR, events, design, and new media. Some also extend their services to include field marketing and telemarketing.
"By bringing these disciplines together you end up with a much richer answer than by operating in different silos," says Simon Hall, chief executive of Proximity London.
"As a result we now have a broader relationship with our clients and are more deeply immersed in their business, which is good for both of us." A key to success is ensuring that all the agencies involved are of similar quality,
he adds, as the service offered to clients is only ever as good as the weakest link.
This integrated approach is now widely endorsed, to the extent that many agencies say they find it increasingly difficult to determine where sales promotion begins and ends.
To reflect the shift, the Sales Promotion Consultants Association has rebranded as the Marketing Communications Consultants Association.
Chairman Matthew Hooper goes as far as to argue that the day of the sales promotion agency as a distinct entity is over. "The membership now comprises a wide range of disciplines, and we felt that the new name better reflected our membership and the services they provided," he says.
A number of factors are causing the edges to blur, and not the least of these is the fragmentation of media, Hooper continues. Clients are looking for better ways to target consumers and reach them at different points, and this is often best handled by a single agency rather than several.
Jane Asscher, chairman and managing partner of 23Red, sums it up by saying: "The day of the sales promotion agency is gone, and none shall call themselves that anymore."
The sector has benefited from becoming inherently much more flexible and responsive to changing client needs, she believes. "Clients come to us with problems and opportunities and ask us to come up with a holistic solution that starts with the brand," she says. "So we are becoming greatly involved in brand development, designing, developing and delivering across a number of media."
Typical of the new approach is Carlson, which sees sales promotion as a fundamental element of relationship marketing, in which brand building is the overall objective. "Clients are increasingly interested in building relationships with their employees, distribution channels and consumers, as a means of winning competitive advantage," says McCusker.
The second part of this feature will be published next week.