The events surrounding this year's Promotional Marketing Awards clearly show that the sales promotion sector is suffering from a bout of insecurity. The awards, organised by the Institute of Sales Promotion (ISP), saw a 50% leap in entries. The rise, argues ISP director-general Edwin Mutton, shows more agencies feel the need to showcase their work - a sign of growing anxiety about their ability to win business.
This impression is confirmed by the mixed reaction to the judges' decision to hand the Grand Prix to smoothie brand Innocent. The winning campaign was fairly low-key. Innocent asked customers to knit hats to 'keep bottles warm' during winter; for each hat sold, 50p was donated to charity. The promotion was handled in-house and was restricted to the 40 outlets of high-street sandwich chain EAT. Yet the combination of a truly creative idea and a clear impact on the bottom line - sales were up 50% year on year and more than £12,000 was raised for charity - meant the promotion won by a landslide vote.
'The Grand Prix received a lot of criticism in some quarters because Innocent isn't a big brand and didn't use an agency,' says Mutton. 'The bitchiness came from agencies who had never been worried about the awards before. It is a sign that there is now more competition.'
The flak directed at the Innocent campaign is symptomatic of insecurity across the sector. Competition for business is intense, and the past year has seen three high-profile agencies - Mercier Gray, Yellow Submarine and Cramm Francis Wolf - go to the wall. What's more, only two of the agencies in the top half of this year's table managed to achieve double-digit percentage rises in profits. Against this backdrop, it is no surprise that sales promotion agencies are desperate to prove their worth.
It has certainly been a tough few years for the discipline. Budgets and margins have been squeezed by a number of forces. Some businesses have seen their profits eroded as clients increasingly use procurement teams when selecting an agency- a factor not confined to the sales promotion industry.
In addition, the growing power of the multiple grocers has affected the strategy of FMCG clients, the mainstay of the sales promotion sector since its inception. For the past few years the multiples have been competing more fiercely on price. To aid their everyday low price strategies, they have pressurised suppliers to switch their promotional strategy from traditional on-pack offers or competitions to price deals such as buy-one-get-one-free. As price promotions do not require the services of an agency, the industry has consequently suffered; there is less work about, and increased competition for what there is, allowing clients to drive a harder bargain.
In the past year, some agencies have noted a further challenge: a shift by clients from using agencies on a retained basis to project work. 'Retainers are a dying breed,' says Steve Richards, managing director of Swordfish. 'There is more competition, and clients realise that they don't have to stick with a single agency.'
Mark Joy, joint managing director of agency Gasoline, believes the move is a reflection of wider economic uncertainty. Project work, he argues, is easier for brands to plan financially in tough times and does not involve the investment of big sums of money up-front. The plus for agencies is that project work tends to be more profitable, but the downside, says Joy, is that 'you don't know who will be paying you the month after next', presenting a problem for small agencies in particular.
The other issue this trend raises is the increased number of pitches in which agencies have to compete, meaning they have to invest more in trying to attract business, with no guarantee that it will pay off. Joy claims this is unsustainable in the current climate, as it will increase the financial pressure on agencies. The result, he says, will be a decline in the service they can offer. 'Simply put, new business costs money, and working on accounts earns money. If the balance shifts too far, something may start to give and both parties will lose out.'
It is not all bad news for the sector, however. Indeed, some in the industry believe it has turned the corner, and that prospects for promotional agencies are good.
The ISP's Mutton expects sales promotion agencies to benefit from the continued movement of budgets away from television. As the TV market fragments, advertisers are looking for more effective ways to reach their audience. 'Above-the-line advertising is in a mess,' he says. 'Sales promotion is cheaper, more accountable and more easily targeted.'
There are other positive indicators. In recent years the sales promotion industry has successfully targeted client sectors beyond its traditional FMCG arena, and there are signs this process is continuing. Financial services firms are expanding their use of promotional work, and another emerging sector is gambling. The growing popularity of online poker, coupled with deregulation of the UK gaming industry, is expected to create opportunities. 'In a year or two it will be far more acceptable to play poker,' says Chris Reed, chief executive of start-up agency Cocktail, whose clients include Betfair.com. 'It will be the big growth sector for sales promotion in 2006.'
Moreover, the past year has seen a number of health-related campaigns in response to the obesity debate. 'There are more lifestyle-oriented promotions,' says Ian Millner, managing director of iris, the fast-growing agency behind recent campaigns for Powerade, the Milk Development Council and Southern Comfort. 'Many companies need to demonstrate how they contribute to a less sedentary lifestyle.'
There have already been many promotions along these lines, including the Sainsbury's Active Kids programme and pedometer giveaways by Walkers and Kellogg's Special K. Roger Marriott, managing director of Dynamo, which handled the Sainsbury's activity, expects more to come in this area. He says his agency has been contacted by several companies that are keen to make use of its experience on anti-obesity campaigns.
A further growth area is experiential work. Many agencies have sought to expand their business into higher-margin categories to help them cope with the flat sales promotion market. Several have focused on experiential activity as the primary expansion route. This summer Sledge worked on O2's Wireless Festival, creating an exclusive area for the mobile network's customers. Catalyst, meanwhile, has built experiential work into campaigns such as McVitie's 'Dunk for Britain' activity.
There are also signs that some of the multiple grocers are becoming more receptive to brand-driving promotions as opposed to price cuts. One example is Asda, which has adopted a strategy known as 'retailtainment', with a focus on enhancing its customers' shopping experience. This new amenability has grown out of the fact that by uniformly following an everyday low price strategy, the big retailers have failed to differentiate themselves. This has resulted in supermarket chains showing greater interest in attracting shoppers through promotions that offer them far more than just low prices, and, in particular, creating offers that are exclusive to a single store.
'The multiples need to show competitiveness against each other,' says Marriott. 'Brands have been under pressure to do price promotions, but now it seems they can put forward brand promotions as well. That is good for our industry.'
These trends suggest that sales promotion agencies now have grounds for optimism. But the industry has changed a great deal in the past few years, and agencies cannot simply expect to benefit from the upturn in business.
Scott Knox, managing director of the Marketing Communication Consultants Association (MCCA), argues that during the last downturn in the 90s, agencies were simply able to play a waiting game until business picked up. This time, however, he believes only the most 'business-savvy' ones will benefit.
One of the skills such agencies can call upon is the ability to work with procurement teams to the benefit of both parties. It is hardly a new issue, but remains a major factor. According to Knox, too many agencies allow clients to squeeze margins, to the extent that they make hardly anything out of the business. 'In some quarters you have agencies working too reactively,' he says. 'They would rather work on a piece of business with a tiny profit margin than tell the client to get lost.'
It is a view shared by Ian Billington, managing partner of Billington Cartmell. He argues that, to succeed, agencies need commercially intelligent people in their organisation who can handle tough client negotiations. 'All agencies should have the expertise in-house to deal with procurement,' he says. 'They have to be aware of the procedures and demands involved.'
David Hughes, managing partner at Proximity London, also emphasises procurement as a challenge to agencies. The key, he says, is an agency's 'contact strategy', adding that he talks 'as much with a client's procurement person as with their marketing person'. By taking such steps, agencies can have a proper dialogue with procurement teams about what is expected of them and how they should be paid. There is even scope to suggest remuneration models such as payment by results. And by protecting their margins, they will be able to invest more in the business and deliver a better service. 'The next 12 months,' says Knox, 'will show that clients who have been wiser and had a discussion about remuneration will receive much better work.'
The other major pressure on agencies is to broaden their offering. Integration of sales promotion with direct and digital work has been a theme in the industry for several years, but in the past some have questioned whether agencies have been promising more than they can actually deliver.
Now there is a feeling that integration is gathering pace, and that clients are beginning to look for agencies that can deliver more complex campaigns. An increasing number of pitches are being conducted through agency search and selection specialists such as the AAR and Haystack Group, an indication that clients now need greater guidance on what agencies can and cannot do.
The challenge is to build promotions that can run across multiple channels. This does not mean that sales promotion agencies are now expected to be direct and digital specialists, but they are increasingly being asked to run campaigns that encompass these areas.
The web, for example, is now an integral part of most major activity, and is set to grow in importance. 'All decent promotions in the future will involve online,' says Simon Darwell-Taylor, executive creative director at Arc Worldwide. 'It has so many applications across relationship-building, brand-building and data capture and is the modern language of consumers.'
Integration is easy to talk about, but far harder to deliver. One barrier is finding staff who are capable of working across several channels. Digital technology, for example, does not stop at the web. Mobile content is growing in importance, and techniques such as podcasting are opening up further routes to consumers. To run a campaign across this spectrum requires skilled employees. Similarly, as promotions tie in more closely with direct work, there is a greater focus on data capture, meaning agencies need analysts who are skilled at reading and manipulating the information.
To complement the specialists, agencies also require account handlers with an understanding of a broader range of channels. 'The staff the best agencies need are of a higher calibre than before,' says Phil Bourne, chief executive of Euro RSCG KLP. 'An account director's job is much tougher than it was 10 years ago. The pressure to find the right people is high.'
For agencies that get it right, the rewards are great. More clients are looking for integrated below-the-line campaigns that can build their brands as well as drive sales. Significantly, they are now looking beyond their creative agencies for the ideas at the heart of their campaigns. Whereas once sales promotion agencies simply took their cue from creative shops, now they are coming up with strategic promotional ideas that can form the basis of broader campaigns. As a result, they are becoming involved in a brand's planning process far earlier.
'The fastest aspect of change is for promotional agencies to become the lead agency in a campaign,' confirms Billington. He points to Billington Cartmell 's work on the launch of Heinz Mean Beanz, for which it developed the positioning for the product, the brand name and the pack design.
This is also the approach of Intelligent Marketing, the fastest-growing agency in this year's league table, which has recently completed an on-pack promotion for Ferrero confectionery brand Kinder. Managing director Tricia Weener agrees that the creative idea is now central to what a promotions agency does. 'The ideas side of marketing is no longer limited to above-the-line agencies,' she says. 'The boundaries are disappearing faster than many people expected or planned for.'
It is a view shared by Adrian Troy, Britvic's brand controller for Tango. He has overseen promotions based on TV activity - what might be termed the traditional model - but has also run activity that spread from a promotion to other channels. 'Now we look for the idea first,' he says. 'It can come from anywhere.'
Naturally, the big integrated below-the-line agencies claim they have an advantage, as they can handle direct and digital work in-house. However, the MCCA's Knox claims that smaller agencies can take advantage of this trend, too. 'Integration is about understanding how an idea could be implemented,' he says. 'It is not about actually implementing it.'
What smaller agencies must do, however, is begin to work far more closely with other marketing services firms. Simon Marjoram, director of Geoff Howe Marketing, believes that sales promotion shops have been too isolated - a reflection of both agency and client attitudes to the discipline.
Geoff Howe has recently worked on an integrated drive to back Nintendo's latest games releases. Marjoram believes the work, which included a nationwide roadshow to demonstrate the titles, is a sign of things to come. 'Nintendo is the first major account I have worked on where there is true collaboration between agencies,' he says. 'It doesn't matter who comes up with an idea, everyone gets together to make it work harder.'
The calibre of work in the UK promotions sector is not in doubt - its campaigns swept the board at the industry's European awards last week, taking gold in 14 of the 17 categories. But the boundaries of sales promotion are blurring and what is expected of agencies is changing. The trend is for fewer promotions, but carried out on a far bigger scale. While there will always be a role for traditional activity, and for agencies that can deal with the grocers, the real opportunity is for promotional firms that can assume the lead role in an integrated campaign.
The expected upturn in the industry, therefore, may not ease the pressure on agencies that have failed to evolve, and the squeeze on margins will remain. Yet for those companies that have invested in staff recruitment and training, keeping up with technology and finding new communications channels, there is plenty to look forward to.