Korea remains a notoriously difficult market for international agencies to break into, dominated by in-house agencies. For that reason, many international agencies have looked at acquisitions as the best way to enter Korea.
In the most recent example, digital agency Portfolio earlier this month relaunched as Publicis Modem Portfolio, following its acquisition by Publicis in the summer.
But while a clever acquisition can give agencies a good foundation in the Korean market, few local purchases can match up in terms of size or revenue, against the big in-house players such as SK M&C (SK), Innocean (Hyundai), HS Ad (LG) or Cheil (Samsung).
"Unless an agency network can somehow replace an in-house agency of a chaebol conglomerate, it is highly unlikely that it can create the scale necessary to become a top local player," says a Korean agency head.
Given how in-house agencies can use their scale - and personal connections - to cluster talent and create advantages in the bidding process, business opportunities for independent agencies are slim.
One solution is to buy into one of the in-house players, although even this is far from a guarantee of success.
"Even if you manage to buy shares in those in-house agencies, you may be confronted with trouble later if there is no "Royal Family" - family members of those conglomerate companies - remaining in the agencies," says Scott Rhee, CEO, Euro RSCG Korea, adding that these family members often set up a rival agency shortly after acquisition, taking the chaebol business with them.
TBWA, for example, came into the Korea market seven years ago, through purchasing a stake in SK Telecom's in-house advertising agency. This catapulted TBWA into a top 10 agency. However, once the licence ran out, SK Telecom took all the business back and set up SK M&C TBWA in 2009.
"Acquisition has its pitfalls," says Martin Patmore, CEO, Grey Group Korea, "The key to a successful acquisition in Korea is ensuring a compatible creative culture, especially given the complexity of the Korean market."
Another way newcomers can differentiate themselves is to concentrate on specialised marketing sectors, which looks to be the case with the Publicis Modem Portfolio merger.
But the digital sector in Korea is competitive, with many small agencies biding for tight margins.
"Acquiring a digital agency is a faster way to get a foothold, however, such agencies tend to be unprofitable in long term," one agency source says. "Digital agencies are very unstable. They do not get annual contracts with clients, but rather everything is project-based, which makes it nearly impossible to predict a stable annual revenue stream."
One area that is proving to be profitable is healthcare. Ogilvy recently bought Pharmax, while McCann acquired Medicom.
"The healthcare industry is becoming more interactive, and more pharmaceutical companies are getting more proactive online in Korea," says Rhee. "We see a niche in the interactive healthcare space and I'm confident that this is a real differentiation point."
This article was originally published in the 12 August 2010 issue of Media.
