Recent announcements by consumer goods giants Mondelez and P&G that they would extend payment terms to 120 days and 75 days (from 45), respectively, will therefore hit an industry that is already under pressure.
“It’s been common practice in the industry for a while now, and these announcements by the major clients are just formalising the practice,” said Darren Woolley, managing director of marketing consultancy TrinityP3. “Agencies have been accepting it and it’s become a golden rule.”
Woolley added that the practice of forcing agencies to bankroll billion-dollar clients can be described as ‘bullying’. “The advertisers think they are saving money, that they’ll have more cash and the cost of money at present is relatively cheap," he said. "But why would you turn a smaller business into your bank, when as a big business you have far more clout with financial institutions?”
Although one source indicated that certain agencies may be offering delayed payment terms as an incentive during the pitch process, Greg Paull, principal and co-founder of pitch consultancy R3, doesn’t believe this is so. “While agencies do include a number of financial benefits in any review to secure a client, usually this relates to discounts on fees or rates, rather than payment terms,” he said.
“The reality is that many agencies operate on already skinny margins and, though not contractual, are being 'extended' in their payment terms already,” said Jeff Estok, managing partner of agency-client relationship consultancy Navigare. “We have one Asian agency that has been 'extended' by their blue-chip client and has not been paid for 12 months.”
If already long payment terms are extended, it will be the smaller agencies and production houses that are most affected, said industry experts.
“It will potentially have more impact on smaller, independent agencies than on larger ones with hundreds of clients,” said Paull. “But if the hundreds of clients follow the leaders, then this will have a major impact on the larger agencies.”
These terms are even tougher on media agencies, Estok and Woolley indicated. “It would be hugely onerous on media agencies, as they 'pre-pay' millions of dollars on behalf of their clients, so an extra 30, 60, or 90 days of playing 'bank' would be hugely detrimental to their cash flow,” said Estok.
This will eventually also affect media owners, who are likely to push payment terms out to 120 days for big clients, added Woolley. “Someone’s going to end up paying for this.”
At present market conditions, these payment terms are as yet not impossible to sustain, said a senior agency-based source. “However. when interest rates increase, it will become a nightmare to carry money on behalf of clients.”
The impact on Asia-Pacific is still uncertain as senior industry sources have deemed the issue a global rather than regional one and that HQ markets—the UK and the US—will be first hit.
A spokesperson for Mondelez Asia-Pacific said that the 120-day payment announcement cited in an article in the FT will affect Asia-Pacific but wasn't able to speak about the issue in detail.
Advertisers will also suffer if they insist on this practice, said Woolley. Agencies are unlikely to place their best resources and talent on an account where payment is uncertain, and the quality of advertising may spiral downwards in the long-run.
The major advertising groups approached for this article declined to comment, and clients P&G, AB-InBev and Johnson & Johnson did not respond to queries as of press time.
Update (2 pm): An international spokesperson from Mondelez came forward with the following statement:
The revised payment terms are for all types of suppliers, and in Asia Pacific we launched this program with key suppliers. We reached out to each of them to initiate conversations, provide background, and discuss this initiative. We look forward to working with our business partners to reach a viable way forward that will be mutually beneficial.
Update June 14: A Japan-based finance executive of one the world’s largest advertising agencies who declined to be named got in touch with CT to explain that in the ad industry, it’s fairer to use billings than receivables. CT's Dan Bland ran the data gain, this time using RECMA billings figures, which should be noted are unaudited and representative of only the media agencies. The results are described as dramatic and reduce DSOs to much more manageable numbers. For example, compared with the 303 days in 2012 indicated by our original analysis, Interpublic recorded 66 days. Publicis Groupe has only 49 DSO, compared with the eye-popping 367 days using receivables and revenue.
This article was updated in June 18 to temporarily remove DSO figures pending clarification from agencies.