APA working on proposals that could lock out small agencies

BY Kenneth Kwama

The quest by advertisers’ umbrella body — Association of Practitioners in Advertising (APA) — to control sourcing of clients and regulate tenders in the industry could give big firms the power to squeeze smaller agencies and create a monopolistic regime.

If the proposals being fronted by the APA sail through competition and regulatory authorities, advertising agencies pitching for clients in the country will look for clients through the professional body. Of the agencies that send in their bids for a job, only four will be shortlisted.

The decision could potentially create a monopolistic business environment in the advertising industry by locking in revenue amongst the big agencies while barring new entrants into the market.

The move by big industry players to lock in advertisers follows optimistic projections that the economy could grow by five per cent this fiscal year. It is also seen as a bid to get ready to benefit from an expected influx of foreign companies as countries like the US and UK seek to increase their trading volume with Kenya to check the emerging dominance of Indian and Chinese companies in the country.

In the event of a bid failing to make the cut amongst the requisite four, all agencies with failed bids will be on the hook and will be required to pay a rejection fee.

In essence, what this means is that the bigger players who also control APA by virtue of their position in the industry will now have the power to demand and examine private financial records of less financially endowed competitors and even insist that their margins are too high and must be cut or vice-versa.

Although the outcome of the whole process is yet to be mapped out, there is greater likelihood that smaller players in the industry might be forced into damaging concessions in order to make the cut.

Good pitching

But APA chairman Monty Dhariwal, disagrees. He contends that proposals will help the industry to establish collaborative and mutually beneficial relationships with its clients.

"We need to ensure that every pitch counts. Good pitching requires more groundwork, better briefing, and more focus from marketers. We are convinced the benefits will justify that," said Dhariwal.

If the suggestion is adopted, every time a company advertises a tender seeking media buying or advertising creative services, agencies with APA membership will not send their bids directly to the company but to APA that will then evaluate the bids and send the four best applications to the company.

"The people who will benefit most from this will be clients," said Chris Harrison, Young & Rubicam Group, Africa chairman

Although APA says the proposals are meant to professionalise the industry and weed out quacks, smaller advertising agencies say the move is meant to check the exodus of creative talent who are exiting big companies to set up smaller entities, which some large advertisers have realised are as good as big advertising companies.

"Smaller advertising companies have talent and creative minds to produce what most advertisers want, but lack financial muscle to carry out some campaigns advertisers may want. To the contrary, their bigger counterparts have money and capacity to carry out these jobs, but may lack creative minds," says Henry Ochieng’ who works in one of the smaller advertising firms.

Ochieng’ says smaller firms will find it difficult to win tenders fronted through the APA because it is a small industry dominated by ScanGroup, which has a number of agencies in its ambit and is the single largest player in Kenya’s market.

ScanGroup’s subsidiaries are run independently in order to guard client confidentiality and creativity, but back-office operations are centralised and it’s not uncommon to find one agency within ScanGroup’s stable bequeathing another a client.

Generally, the way the firm operates helps reduce operating costs as well as the marginal cost of service delivery and with over 60 per cent of the market under its lock and key, the new proposals could make ScanGroup the dominate agency.

But players in the industry say reforms in the sector will result in a streamlined industry that will increase clients from across the continent and beyond especially for advertising creative services.

"Kenya is recognised as a hub for pan-African advertising creativity due to its well developed industry. These guidelines are intended to help clients to select the best," said Sameer Ambegaonkar Scanad Advertising managing director after the proposals were announced.

Kenya’s advertising industry is amongst the most vibrant in the continent. The industry has posted significant growth in recent years and last year raked in Sh65 billion in revenues up from Sh49 billion in 2010. It has grown five fold in just five years, having generated Sh13 billion in revenues in 2006.

One of the agencies, Millward Brown East Africa attributed the growth to introduction of new products and services, joint communication ventures and new entrants into the local market amongst other factors.

But small advertising agencies fear that they might be caught in the squeeze by big players when the proposals come into effect.

Most of them will not just relinquish profits but will be forced to stay out of the bid process to keep their commitment to the professional body and possibly not attract any failure fees. This will hand the profits to the competition, which in this case are the bigger firms able to participate.

Lack capacity

"Smaller agencies will concede business to bigger ones because most lack of capacity to compete on the scales required to attract and retain well-paying clients," says Ochieng’.

2011’s top spenders comprised of Safaricom, Government of Kenya, Unilever, PSI and Reckitt Benckiser.

Data from Ipsos Media, a research firm shows that while gross advertising spend in Kenya rose from Sh49.2 billion in 2010 to Sh65.4 billion last year, the share of direct bookings rose from 45 per cent to 59 per cent in the same period.

This means that media buyers like ScanGroup saw their combined share drop from 55 per cent to 41 per cent, a trend that threatens their earnings in a market that is quickly getting saturated by smaller players who in turn are driving down prices and fragmenting the market.

ScanGroup is not just the country’s largest marketing and advertising company. It’s also big in East Africa, actually bigger than all its rivals for the entire market combined.