DIRECT MARKETING: DM Agency Performance League - Despite some good individual results, operating profits are down throughout the industry, concludes this year’s WKS league table. Below, Robert Dwek examines the big issues facing direct marketing a

One of the key issues thrown up by last year’s league table was

wage inflation, which was rising significantly ahead of revenues. DM

agencies were catching up after their short-sighted underinvestment in

people during the early 90s recession and at the same time betting on

substantial future growth.

The good news is that the industry has continued this unprecedented

boom, with latest figures showing a mountainous volume of direct mail

dropped through the nation’s letterboxes in the first half of 1998. More

importantly, the value of this business, at pounds 1.2 billion, was

almost equal to the spend for the whole of 1997, which at pounds 1.5

billion was itself a record.

This phenomenal growth was fuelled by a boom in consumer mailings

(business to business was actually slightly down), with major increases

coming from credit card companies, charities, and the leisure and

marketing sectors.

Mail order and financial services were also significantly up on previous

years. More recent research from the Direct Mail Information Service

shows just how far the industry has come from its ’junk mail’ roots.

According to the DMIS, direct mail now generates a greater response than

any other medium, with more than 40 per cent of UK consumers responding

to a mailshot in the last year.

The bad news, however, is that this may prove to be a heady market peak

before the next recession - if economic doom-mongers are to be

believed.

Employment costs, which had been hiked by 16 per cent in the 1997

survey, were up by another 18 per cent this year, producing an average

salary of pounds 31,000. According to Willott Kingston Smith, the

accountancy firm which compiled this second annual survey (using figures

from accounts filed at Companies House), the higher wage packets reveal

’the difficulty that agencies are having in attracting staff,

particularly those with relevant skills’. Nonetheless the total number

of employees in the DM agency sector rose by 14 per cent, with 30 of the

top 40 agencies reporting an increase and only eight shedding staff.

Neil Morris, membership director at the Institute of Direct Marketing,

believes it is critical that DM agencies do everything in their power to

attract and retain skilled people in the face of another economic

downturn.

’Their inability to invest in people early enough was a big problem as

we came out of the last recession,’ he says. ’It has become clear that

there is a skills gap in the industry and one lesson people must hang on

to is that the way through any potential problems will be to retain a

commitment to training and development programmes.’

One way to keep employment costs down is, of course, to hold back on

directors’ emoluments. Unsurprisingly, this is not a hugely popular

option but it can work wonders for the bottom line. Witness the

Marketing Store, which apparently used this option to help reduce

employment costs by 26 per cent, despite an increase of five in staff

numbers. At the other end of the scale, WWAV Rapp Collins wins the gong

for highest paid director - pounds 504,000, an increase of pounds

363,000. Across the top agencies, the average remuneration for directors

rose by 18 per cent.

Another important finding from the 1997 survey was the increasing

consolidation of the direct marketing industry. This trend appears to

have been accelerating, since the new figures show larger agencies

growing faster than their smaller counterparts. The biggest increases

came from agencies with gross income in the pounds 5 million to pounds

10 million range, who were collectively up 32 per cent.

The largest agencies, those with a gross income of more than pounds 10

million, saw a healthy increase of 10 per cent and the smaller firms

(gross income below pounds 5 million) were up 12 per cent, but obviously

from a much smaller base. With the increasing importance of integration

across new media, the barriers to entry for direct marketing are likely

to be higher, which would work against smaller DM agencies. ’A DM agency

today has to think about buying decisions and branding issues across so

many more interfaces, such as call centres,’ Morris notes.

But before they get too complacent, the big boys should consider that

apart from the prospect of recession, they may have to deal with even

bigger fish in the future. It seems that globalisation has started to

make its mark in this once very parochial industry, with anecdotal

evidence suggesting that more UK clients are happy to work with non-UK

agencies servicing them entirely from foreign shores - notably the

US.

In total, ten agencies are ultimately owned by foreign parents.

Clearly, there is a big question hanging over the foreign players’

ability to provide the right kind of agency culture and flexibility to

meet the particular demands of the UK and Europe, but assuming they can,

they would pose a significant threat to the agency status quo.

For the moment, however, the big are getting bigger. The mighty WWAV

took one more step towards impregnability, with a 15 per cent rise in

turnover, putting it a whopping 56 per cent ahead of its nearest rival

in terms of turnover. Similarly gargantuan leaps were reported by Grey

Integrated, Tequila UK and Evans Hunt Scott Eurocom, and most of it

appears to be organic rather than by acquisition.

The wider picture does, however, include some bad-luck stories, and no

downfall was more dramatic than that of GGT Direct Advertising, which

saw its turnover drop by 31 per cent, or pounds 3.9 million. This was

before the GGT Group as a whole was taken over by Omnicom. Mike

Cornwell, managing director of GGT Direct, finds his fall from grace in

this year’s table ’quite ironic’ because business more recently has

shown a marked improvement, with some notable client wins such as

NatWest. ’It seems such a long time ago,’ he says of the bad financial

news, and he predicts a very different picture for next years’ survey:

’We’re having a fantastic year.’

However, like many of his industry peers, Cornwell is concerned by

soaring salaries. ’Wages are escalating to ridiculously high levels,’ he

complains.

’I think there are many people in our business who are horribly overpaid

for the kind of experience they’ve got, but things have spiralled out of

control. The real talent in this industry is spread very, very thin and

good people at good agencies tend to stay there, provided they think

their careers are being properly progressed.’

The wage inflation and skills shortage problem is confirmed by the DM

agency recruiter, Direct Recruitment. ’Certain people, particularly

account managers, expect a lot of money and also want promotion very

quickly.

Employers feel that if they don’t give them everything they want, these

people will walk.’

Mixed agency fortunes were also apparent in terms of operating profits,

as opposed to turnover or gross income, which were both up 15.3 per

cent. There were some stunning performances by Colleagues Group (up 187

per cent), Marketing Drive (up 157 per cent) and Claydon Heeley

International (up 153 per cent).

But these achievements are offset by some alarming reversals of

fortune.

Both GGT Direct and Limbo converted the previous year’s operating

profits into an operating loss, while Craik Jones Watson Mitchell

Voelkel, Aspen Direct and Brann all fell by more than 90 per cent. The

latter company’s results are for 1996 and it partly explains the drop by

referring to ’a significant restructuring and reorganisation within the

business’ that has increased non-staff overheads - probably something to

do with its acquisition in 1997 by the US-based Snyder Communications.

Since publishing this survey, WKS has seen the 1997 results for Brann,

which show much of this fall being reversed.

Grey Direct, which has slipped one place from 10 to 11, would also have

fared much worse in the rankings had they been calculated on profit

rather than turnover. Although its turnover increased by 19 per cent,

the agency still managed to record a fall of 80 per cent in operating

profit. This may be partly explained by an office move which, according

to one insider, ’cost an arm and a leg’.

There are, inevitably, distortions in all league tables, and this one is

no exception. Individual company results may well be skewed by eccentric

accounting practices, especially if the agency is part of a larger group

and can write off large chunks of income as internal management

charges.

WKS also had problems comparing like-for-like with some agencies who

have not provided comparable financial figures for either of its two

surveys - notably Carlson Marketing Group and OgilvyOne.

WKS is heavily reliant on agencies providing meaningful accounts, even

if they would normally be submerged in holding group figures. When this

doesn’t happen, the result is one or two glaring omissions, such as

Wunderman Cato Johnson, which does not produce separate figures for its

UK operation.

However, the agency says it will make sure it has figures ready for next

year as it is keen to appear in the league table. Pedants might also

query the accuracy of comparing agencies with year-end accounts in 1997

and those filing for 1996, but these distortions will always apply.

Although turnover and profits were up on average, operating margins are

actually down on last year by about 10 per cent. WKS attributes this

decline to the aforementioned increased staff costs, but also

acknowledges the distorting effect of GGT Direct and Limbo’s unhealthy

figures. It notes that the average sector margin of 12.6 per cent was

exceeded by 22 agencies, with nine of them generating operating margins

above 20 per cent. Once again, Marketing Drive put in a storming

performance, with a figure of 34 per cent, followed by Colleagues on 28

per cent and the BLP Consultancy with 27 per cent.

Steve Waring, a partner at WKS, finds the overall results of the survey

this year ’disappointing, bearing in mind the successful profile the

sector has had in recent years’. While acknowledging certain

distortions, such as the ’Brann’ effect, and noting some ’excellent

individual performances by agencies such as Marketing Drive’, he

nevertheless concludes that average operating profit margins of 12.6 per

cent and average operating profits per head of pounds 7,248 are both

down on last year and ’below the levels the sector should be achieving,

given the increased levels of income.’

So, what lies behind the success of an agency like Marketing Drive,

which would be ranked in the top ten if the league table were compiled

by profitability? Mark Timbrell, chairman, says his agency ’maintains a

low cost base in most things other than people, although we pay at the

top end of salaries in our sector. We place great emphasis on running

this as a business. We’ve never been a turnover organisation, preferring

to work on fee income rather than commission. We sell time and are more

of a consultancy than a traditional high-volume production agency with a

commissionable margin.’

Overall productivity, as measured by the gross income generated by

employees, is up 6.3 per cent, although no agency has been able to match

the record pounds 100,000 per head set by Tequila in 1995. Large

increases were reported by Colleagues Group, the BLP Consultancy and

Grey Integrated.

But the Marketing Store (Hertford), Limbo and Tullo Marshall Warren all

saw a decrease of more than pounds 10,000 per head. Size seems to play a

key part in productivity. WKS notes that both this year and last, six of

the ten most productive agencies employed less than 50 staff.

Perhaps the most notable thing about this year’s league table can be

deduced from the unfortunates that have been relegated. All but one one

of them were new entries last year. As WKS concludes, ’This is an

indication of the competition at this level, where small fluctuations in

profit levels can have a significant effect on a company’s ranking.’

The question is whether the DM pie can continue growing quickly enough

to allow even the scavengers plenty of sizeable crumbs. According to a

1997 ISBA report, a massive 71 per cent of clients were planning to

increase their spend, and 18 per cent of respondents were spending more

than pounds 5 million with a single agency. The report also concluded:

’Interestingly, the question of costs did not feature highly on the list

of criteria for the selection of a direct marketing agency.’ The quality

of an agency’s creative ideas was considered to be far more

important.

TOP 40 DIRECT MARKETING AND SALES PROMOTION AGENCIES RANKED BY TURNOVER

RANK/AGENCY NAME         year end   year end   turnover  turnover   % chg

                         latest     previous   latest    previous

                                               pounds    pounds

                                               000       000

1   WWAV Rapp Collins    31.12.97   31.12.96   65,444    56,934     14.95

2   Brann                31.12.96   31.12.95   41,922    39,639      5.76

3   IMP Group            31.12.97   31.12.96   41,874    35,701     17.29

4   Colleagues Group     31.12.97   31.12.96   37,297    31,208     19.51

5   Carlson Marketing

    Group                31.12.96   31.12.95   36,287    13,929    160.51

6   OgilvyOne Worldwide  31.12.97   -          32,866    n/s            -

7   Evans Hunt Scott

    Eurocom              31.12.96   31.12.95   28,329    18,640     51.98

8   Barraclough Hall

    Woolston Gray        31.12.97   31.12.96   26,395    21,322     23.79

9   The Marketing

    Organisation         31.12.96   31.12.95   23,093    19,668     17.41

10  Grey Integrated      30.09.97   30.09.96   20,702    12,720     62.75

11  Grey Direct          30.09.97   30.09.96   19,951    16,737     19.20

12  Purchasepoint

    Group                31.12.96   31.12.95   18,403    18,563     -0.86

13  WWAV Rapp Collins

    North                31.12.97   31.12.96   17,018    13,184     29.08

14  The Triangle

    Group                31.12.96   31.12.95   13,663    10,023     36.32

15  Clarke Hooper

    Consulting           31.12.97   31.12.96   12,504    12,414      0.72

16  Tequila UK           31.12.96   31.12.95   11,393    7,314      55.77

17  Judith Donovan

    Associates           31.12.97   31.12.96   10,283    8,067      27.47

18  Claydon Heeley

    International        31.12.97   31.12.96   10,120    7,800      29.74

19  1995 Ventures        31.12.97   31.12.96   10,030    7,584      32.25

20  Finex

    Communications

    Group                30.06.97   30.06.96   9,723     7,568      28.48

21  Promotional

    Campaigns            31.12.96   31.12.95   9,679     9,828      -1.52

22  Craik Jones Watson

    Mitchell Voelkel     31.12.97   31.12.96   8,880     6,893      28.83

23  The Marketing

    Store (Hertford)     30.04.97   30.04.96   8,800     12,223    -28.00

24  GGT Direct

    Advertising          30.04.97   30.04.96   8,715     12,656    -31.14

25  CBH & Partners       31.12.96   31.12.95   8,461     8,382       0.94

26  KLP London           31.12.96   31.12.95   8,239     8,094       1.79

27  Sheard Thomson

    Harris/CBH           31.12.96   31.12.95   7,459     5,251      42.05

28  Zimmer Gellett

    Constantinou         31.12.96   31.12.95   7,312     6,672       9.59

29  Target Direct

    Marketing            31.08.97   31.08.96   7,217     5,534      30.41

30  Incepta (prev

    LGM Marketing

    Services)            28.02.97   29.02.96   6,995     7,092      -1.37

31  The BLP

    Consultancy          31.03.97   31.03.96   6,952     5,254      32.32

32  Option One           30.04.97   30.04.96   6,197     6,213      -0.26

33  Marketing

    Perspectives         30.09.97   30.09.96   5,848     6,103      -4.18

34  MBO/RCF              31.12.96   31.12.95   5,559     7,153     -22.28

35  One Four One         31.12.97   31.12.96   5,556     5,009      10.92

36  Limbo                30.06.97   30.06.96   5,520     5,462       1.06

37  Aspen Direct         31.12.97   31.12.96   5,046     4,631       8.96

38  Tullo Marshall

    Warren               31.12.96   31.12.95   4,884     5,701     -14.33

39  Cramm Francis

    Woolf

    (prev The FD Grp)    31.12.97   31.12.96   n/a       n/a            -

40  Marketing Drive      31.12.97   31.12.96   n/a       n/a            -

RANK/AGENCY NAME             pre-tax profits  pre-tax profits      % chg

                               latest pounds  previous pounds

                                         000              000

1   WWAV Rapp Collins                  4,531            3,561      27.24

2   Brann                               -154            2,728    -105.65

3   IMP Group                          2,149            1,541      39.45

4   Colleagues Group                     -86            1,012     -108.5

5   Carlson Marketing Group            1,268              225     463.56

6   OgilvyOne Worldwide                1,899              n/s          -

7   Evans Hunt Scott Eurocom           1,066              705      51.21

8   Barraclough Hall Woolston

    Gray                               2,297            1,862      23.36

9   The Marketing Organisation           327               26   1,157.69

10  Grey Integrated                    1,507            1,203      25.27

11  Grey Direct                          149              294     -49.32

12  Purchasepoint Group                  496              691     -28.22

13  WWAV Rapp Collins North              617              525      17.52

14  The Triangle Group                   735              717       2.51

15  Clarke Hooper Consulting           1,106              589      87.78

16  Tequila UK                           486              309      57.28

17  Judith Donovan Associates            503              487       3.29

18  Claydon Heeley International         990              339     192.04

19  1995 Ventures                        545              290      87.93

20  Finex Communications Group         1,019              902      12.97

21  Promotional Campaigns                707              724      -2.35

22  Craik Jones Watson Mitchell

    Voelkel                               12              454     -97.36

23  The Marketing Store (Hertford)       128              148     -13.51

24  GGT Direct Advertising              -382              283    -234.98

25  CBH & Partners                       210              527     -60.15

26  KLP London                           587              418      40.43

27  Sheard Thomson Harris/CBH            637              272     134.19

28  Zimmer Gellett Constantinou          423              356      18.82

29  Target Direct Marketing              241              287     -16.03

30  Incepta (prev  LGM Marketing

    Services)                            471              329      43.16

31  The BLP Consultancy                  785              742       5.80

32  Option One                          -789              272    -390.07

33  Marketing Perspectives               148               81      82.72

34  MBO/RCF                              541              670     -19.25

35  One Four One                         842              644      30.75

36  Limbo                               -301              301    -200.00

37  Aspen Direct                       2,712              215   1,161.40

38  Tullo Marshall Warren                546              586      -6.83

39  Cramm Francis Woolf

    (prev The FD Grp)                    427              244      75.00

40  Marketing Drive                    1,156              497     132.60

RANK/AGENCY NAME                       staff       staff       % change

                                      latest    previous

1   WWAV Rapp Collins                    264         218          21.10

2   Brann                                737         645          14.26

3   IMP Group                            148         134          10.45

4   Colleagues Group                     132         154         -14.29

5   Carlson Marketing Group              315         149         111.41

6   OgilvyOne Worldwide                  138         n/s              -

7   Evans Hunt Scott Eurocom             136          82          65.85

8   Barraclough Hall Woolston Gray       172         106          62.26

9   The Marketing Organisation           107         105           1.90

10  Grey Integrated                      100          84          19.05

11  Grey Direct                           53          44          20.45

12  Purchasepoint Group                  173         177          -2.26

13  WWAV Rapp Collins North               48          41          17.07

14  The Triangle Group                   160         130          23.08

15  Clarke Hooper Consulting              53          50           6.00

16  Tequila UK                            32          24          33.33

17  Judith Donovan Associates             65          55          18.18

18  Claydon Heeley International          74          56          32.14

19  1995 Ventures                         29          23          26.09

20  Finex Communications Group            73          58          25.86

21  Promotional Campaigns                 67          58          15.52

22  Craik Jones Watson Mitchell Voelkel   39          34          14.71

23  The Marketing Store (Hertford)        52          47          10.64

24  GGT Direct Advertising                52          65         -20.00

25  CBH & Partners                        69          75           8.70

26  KLP London                            86          63          36.51

27  Sheard Thomson Harris/CBH             31          25          24.00

28  Zimmer Gellett Constantinou           56          44          27.27

29  Target Direct Marketing               59          43          37.21

30  Incepta (prev LGM Marketing

    Services)                             38          39          -2.56

31  The BLP Consultancy                   30          38         -21.05

32  Option One                            53          59         -10.17

33  Marketing Perspectives                44          45          -2.22

34  MBO/RCF                              116         126          -7.94

35  One Four One                          55          51           7.84

36  Limbo                                 44          38          15.79

37  Aspen Direct                          50          44          13.64

38  Tullo Marshall Warren                 36          29          24.14

39  Cramm Francis Woolf (prev

    The FD Grp)                           43          39          10.26

40  Marketing Drive                       36          35           2.86

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