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Bombshell report claims US ad agencies unethically pad their profits with rebate schemes

Bombshell report claims US ad agencies unethically pad their profits with rebate schemes

F15E bomb

US Air Force/Master Sgt. Lance Cheung

The report has huge implications for the US advertising agency sector.

  • Association of National Advertisers report finds rebates and other non-transparent business practices are "pervasive" in the US media ad-buying ecosystem - despite agency groups persistently saying they don't take rebates in the US.
  • The study found "evidence of fundamental disconnect in the advertising industry regarding the basic nature of the advertiser-agency relationship."
  • The investigation found senior executive across the agency ecosystem "were aware of, and mandated," some non-transparent business practices.
  • The study also found evidence of "potentially problematic agency conduct concealed by principal transactions; an agency (or its holding company or associated company) purchases media on its own behalf and later resells it to a client after a markup."

Advertising agencies in the US have been systematically padding their profits by using non-transparent practices such as taking rebates from media companies and not disclosing them to clients, according to the Association of National Advertisers (ANA), which released the highly-anticipated findings of an eight-month investigation into the sector on Tuesday.

The ANA - which represents the biggest global brands including Procter & Gamble, L'Oréal, Coca-Cola, Toyota, and Apple - said in its report that "numerous non transparent business practices" were "pervasive" in the media ad-buying ecosystem.

"Advertisers and their agencies are lacking 'full disclosure' as the cornerstone principle of their media management practices," said Bob Liodice, president and CEO of the ANA. "Such disclosure is absolutely essential if they are to build trust as the foundation of their relationships with their long-term business partners."

The 58-page report, which compiles the findings of investigations firm K2, does not name names, but it suggests non-transparent business practice is widespread in the US media buying industry.

The findings will have huge implications on the advertising agency industry, which is dominated by six holding companies: WPP, Omnicom, Publicis Groupe, Interpublic Group, Dentsu Aegis, and Havas. Those companies' media buying and planning arms are the most profitable areas of their businesses. In the US alone, $192.6 billion was spent on advertising last year, according to research firm Strategy Analytics.

Business Insider has contacted all the major advertising agency holding groups for comment and we will update this article once we hear back.

While there is no immediate suggestion at this stage anything illegal has taken place, the report has brought to light practices that lots of marketers might not have been aware of.

Media agencies are paid by advertisers to secure the best-performing advertising slots. Marketers entrust their agencies to spend their money in the most efficient manner possible to achieve pre-determined outcomes - such as the ads reaching a guaranteed number of people, the ads resulting in a certain amount of visits to their website, or an uplift in sales.

Any evidence that media agencies have simply been spending advertisers' money with the media owners that bring the biggest benefit to the agency - such as with media owners that provide a rebate if an agency group spends a set amount of their aggregated client budgets over an agreed period - will anger marketers, not least if those rebates have not been disclosed to them.

Rebates are media common business practice in markets such as Europe, China, and Brazil, but for years, the biggest players in the business have denied that they take rebates in the US.

This report suggests at least some of them do.

What the study found

bob liodice

ANA

Bob Liodice, the CEO of the Association of National Advertisers.

Here is a summary of the findings from the ANA's press release:

  • Cash rebates from media companies were provided to agencies with payments based on the amount they spent on media Advertisers interviewed in the K2 Intelligence study indicated they did not receive rebates or were unaware of any rebates being returned.
  • Rebates were also found in the form of free media inventory credits.
  • Rebates structured as "service agreements" in which media suppliers paid agencies for non-media services such as low-value research or consulting initiatives that were often tied to the volume of agency spend. Sources told K2 Intelligence that these services "were being used to obscure what was essentially a rebate."
  • Markups on media sold through principal transactions ranged from approximately 30% to 90%, and media buyers were sometimes pressured or incentivized by their agency holding companies to direct client spend to this media, regardless of whether such purchases were in the clients' best interests.
  • Dual rate cards in which agencies and holding companies negotiated separate rates with media suppliers when acting as principals and as agents.
  • Non-transparent business practices in the U.S. market resulting from agencies holding equity stakes in media suppliers.

The ANA said the study found non transparent practices were found to exist "across the spectrum of agency media entities" as well as across digital, print, out of home, and television media.

The impact

As we detailed last month, at the very least, the report may lead to many marketers asking to renegotiate their contracts with their current agency.

Some marketers may look to appoint auditing firms to assess whether their current agency is providing them value for money - potentially getting media money refunded if it was found not to be spent in their best interests.

It could cause some marketers to want to switch agencies - or take their media-buying in-house.

There's a slight possibility some brands could even sue their agencies if they are found to be in breach of contract. However, most of the industry experts we spoke to ahead of the report's publication said this would be unlikely: it's a time-consuming, costly exercise that, for a marketer, could expose to their CFO and CEO that they were negligent in their decision making.

Coca-Cola's former marketing boss Peter Sealey told Bloomberg on Thursday, ahead of the report's release, that the Securities and Exchange Commission "should be involved." If evidence of criminal behavior or fraud is found, that's when things get really serious. Advertising executives have gone to jail for over-billing clients and for their part in operating kickback schemes before.

From the agency perspective, the report is hugely damaging to their reputations - not least as the report suggest the practice is widespread, meaning companies that have not been involved with the types of activities outlined may be still be hurt by association.

Not only that, but investors in ad agency holding company stocks may also now start questioning the business practices of media-buying firms if they believe their margins are padded with money that may be at-risk for legal challenge.

Luis Di-Como, SVP of global media at Unilever, told Business Insider: "Trust and transparency are critical to any relationship, so we take the ANA's findings very seriously. We support its work to ensure that as the media industry evolves these values remain a top priority."

He added: "At Unilever, we are actively engaged with our agencies and the industry at large to exert greater control and responsibility around media transparency. We go to great lengths to make certain that our proprietary procedures and policies maximize our investments and fulfill our contracts, in both the letter and spirit. We're confident the right steps will be taken to strengthen our industry."

How the investigation came about in the first place

In March last year, the former CEO of WPP media agency MediaCom, Jon Mandel, alleged agency kickbacks were still "widespread" in the US and cited them as one of the reasons he left the industry.

jon mandel

Stephen Shugerman/Getty Images for HRTS

Jon Mandel in 2004.

"Have you ever wondered why fees to agencies have gone down and yet the declared profits to these agencies are up?" Mandel said at the time.

Later, he told Australian trade publication Mumbrella: "It was like somebody had died in the room."The interview was headlined: "Is this the most hated man in advertising?"

Meanwhile, the ANA was brewing its plan to investigate the kickbacks issue and the general transparency issues plaguing the sector. A survey it had commissioned the prior year, conducted by Forrester, revealed there was growing concern amongst marketers about whether they were receiving full transparency from their agencies about how their money was being spent.

In October 2015, the ANA appointed two firms to investigate the issue.

One of those firms was K2, an investigative consultancy staffed by former FBI agents and founded by "father-son detective duo" Jules and Jeremy Kroll. Jules Kroll founded the Kroll Inc. private security and intelligence empire.

The ANA also hired Ebiquity's Firm Decisions division, a specialist marketing auditor, which works with clients including Unilever, Coca-Cola, Microsoft, and Jaguar Landrover.

K2 interviewed 150 sources between October last year and May this year. Interviewees included media agency professionals, trade association executives, consultants, attorneys, barter company employees, and post-production professionals. All interviewees were granted anonymity.

K2 said five of the six major holding companies and their affiliated companies declined formal request sto make any of their current executives available to be interviewed.

Firm Decisions is set to publish a report later this week that will contain a list of long-term recommendations.

But in the near term, the ANA suggests marketers re-examine all their media agency contracts and "meticulously review" all the terms and conditions.

The ANA also recommends marketers implement media management training across their businesses, and assess whether contract terms permit them to "follow the money" by having full accountability for every dollar they invest with a media agency - allowing their audit rights to cover not only the media agency, but the holding company, and ever affiliated ad company that touches their business.

How the agency groups have reacted

martin sorrell

Slaven Vlasic/Getty Images

Sir Martin Sorrell is the CEO of the world's largest advertising agency holding group, WPP.

Business Insider has contacted all six major ad agency holding groups and we'll publish their responses once we hear back.

Earlier this week, Publicis Groupe CEO Maurice Levy said ahead of the ANA report's publication that it was an "unfair and unwarranted attack on the entire industry," The Wall Street Journal reported, citing a letter he had written to the CEO of another media buying firm.

Levy said in the letter the choice not to name names and make "broad, unsubstantiated and unverifiable assertions of unethical behavior" had the potential to cause "great financial and reputational damage."

More to follow ...

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