Are digital ad agencies being disrupted?

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By: RickFerguson |

Posted on April 12, 2017

The Wall Street Journal has a report that may send tremors through the world of digital advertising: advertising giants such as WPP and Omnicom are being disrupted not by Silicon Valley startups, but rather by their own CPG clients retrenching and reducing their digital ad spend in the face of increased pressure on profits and changing consumer habits. Is the era of Big Advertising drawing to a close?
By Rick Ferguson
As the Journal points out, big digital agencies face a systemic threat not from Silicon Valley disintermediation, but rather from their top clients choosing to scale back their advertising spend. WPP, for example, found its share price plunging when CPG giant Unilever announced that it would spend 30 percent less on advertising and would scale back the number of agencies with which it works. The reason: Unilever and its competitors are facing dire pressure from activist investors and potential takeover groups to show increased profits in the face of changing consumer demands. Money quote:
"The pressure from investors is partly a response to slow growth in a disinflationary era, and to the gradual decline of the packaged-foods industry as consumers increasingly prefer fresh foods... Consumer goods, including food and beverages, accounted for 31% of WPP's sales last year, according to brokerage Macquarie. Few big groups can avoid wondering who Kraft Heinz - or activists with similar agendas - will buy next. Management teams know their best defense is to show shareholders they can boost returns without outside help."
The Journal notes that ad agencies do indeed face an existential threat from leviathan-like platforms Google and Facebook, which dominate digital ad spend. Programmatic ad buying services further throw into question the necessity of the traditional "planning" functions of traditional agencies.
There is, however, another existential threat, one for which even Google and Facebook have yet to provide an answer: the ineffectiveness of most digital advertising to provide any sustained value to advertisers beyond its ability to drive initial consideration or one-off promotions and discounts. What's missing is a platform or agency that can leverage digital ad spend to provide relationship continuity - the sense that advertisers invite consumers into a relationship that is opt-in, transparent in its exchange of value, and which builds equity for both consumers and brands over time. 
Every consumer doesn't need or want a relationship with every brand they purchase, of course. But every brand does have the opportunity to reward and recognize best customers. Those customers who are interested in a deeper relationship will then reveal themselves - and provide greater return to the brand for the lifetime of those relationships. If agencies want to recapture that spend from retrenching clients, they will need to find a way to facilitate those relationships.
Rick Ferguson is CEO and Editor in Chief of the Wise Marketer Group