Japan: Long road to recovery

Last year was a modern record for Japan’s advertising industry. Spending rose 3% to 5.86 trillion yen, ending a three-year slump.

The Japanese major agencies fared well. Dentsu, for example, reported a group operating profit up 32% from a year earlier in the nine-months ending Dec. 31. Western agencies generally had good years but, post Sarbanes-Oxley, no longer provide any financial details.
Despite the growth, total billings were still well behind those of 2000. Now, with the economy in recession yet again and increases in personal taxation starting to bite, 2005 looks like becoming another difficult year. Dentsu forecasts a growth of 1.4%, but many are more cautious.

“ I think the best we can hope for is a flat year, with little or no growth overall,” says Max Gosling, President/ceo of McCann Erickson, Japan’s leading multinational agency. “Consumer confidence appears stable but the signs of growth last year were more export-led than a recovery in domestic demand.”

Serious uncertainties about the future have become the norm in Japan did not dampen interest when Japan’s second-largest agency group, Hakuhodo DY Holdings Inc., made its stock market debut on February 16th. HDY’s shares closed 14% above their opening price giving HDY a market capitalization of about 250 billion yen, compared with 787 billion yen for Dentsu. The IPO was mainly an opportunity for current shareholders, including the Seki family who founded Hakuhodo, to pare down their holdings.
Toshio Miyagawa, HDY’s president gave few details of the company’s plans beyond saying he was looking to invest in both China and internet-related businesses

HDY was formed in October 2003 when Hakuhodo Inc., Daiko Advertising Inc., and Yomiko Advertising Inc. integrated their media buying operations into Hakuhodo DY Media Partners.

Though HDY’s market share of around 17% is not large enough to challenge Dentsu’s dominant 26%, it has had impact. “HDY is big enough to make a very competitive media offering,” says Andrew Meaden, CEO of Mindshare Japan. “As a result there have been a large number of pitches called by Japanese advertisers either to consolidate their business in to fewer agencies or to get a better deal.”

Many long standing relationships have perished as a result. Kyodo Advertising, saw its largest client, Honda Motor Co. decamp to Dentsu, who also wrested Honda billings from HDY. Other Dentsu media wins included McDonalds (from HDY), Nestle, and AIG. HDY meanwhile picked up media business from IBM, Shell, and Volkswagen and held on to Vodafone. With media commissions spiralling ever downwards, Dentsu and Hakuhodo are driven to consolidate ever larger volumes to maintain their revenues. The losers are smaller Japanese agencies relying almost entirely on media commissions for their revenue.

Insiders say that both Dentsu and HDY may take on some media buying assignments for no commission. By denying business to their rival, increasing their volumes and therefore their rebates, both agencies can still find a kind of economic return that smaller buyers can not. Whether this is true or not, it remains clear that Japanese advertisers are increasingly looking for much greater efficiencies and economies of scale in media buying, a service only the biggest buyers can provide.

HDY’s birth has posed problems for WPP’s partner, Asatsu-DK. For years, ADK positioned itself as the third force that would one day unseat Hakuhodo and challenge Dentsu. With a market share some ten points less than HDY, that is no longer a possibility. For most of last year, ADK edged closer to Dentsu, even forming a small creative joint venture, Drill, to explore “next generation advertising.” In return, Dentsu has challenged ADK’s hold on at least one of its key clients, AIG. Though by no means a small agency, ADK may prove too small to compete with Dentsu and HDY. Their future strategy may yet prove to be the final chapter about consolidation and media power in the Japanese advertising industry.

Mindshare, like other Western media agencies in Japan, earns its money from planning, consulting, and auditing rather than media buying. Mostly their clients are the Western multinationals who use their services elsewhere, but there are signs that some Japanese advertisers are also becoming interested in modern media planning skills.

Fee-based business models are the norm for Western agencies in Japan and have enabled them to expand services into relationship marketing, PR, design, healthcare, research and other disciplines. For example, McCann Worldgroup provides the full spectrum of its services in Tokyo. Ogilvy’s offer includes public relations, OgilvyOne, and Design. Grey has recently added healthcare to its menu. Japan’s population is aging rapidly. With further deregulation, healthcare should become a major new opportunity for agencies, says Chris Beaumont, president of Grey Japan. Last year, the proportion of Japanese aged 65 or older rose to a record high of 19.5 per cent, while those under 14 fell to an all-time low of 13.9 per cent.

All have found that developing offering expertise in different communication channels helps to deliver sustainable and profitable growth.
The wider offerings not only bring in more revenues from the Western multinational advertisers that Western agencies predominantly serve but also develop contact with Japanese advertisers seeking to go beyond the traditional use of traditional media. This is valuable because Western multinationals account for less than 10% of spending in Japan. Apart from McCann Erickson who rank about ninth, Western agencies are uncharacteristically small players in Japan. McCann owes its position to more than 45 years of cultivating Japanese advertisers.

“ We need to crack the local code,” explains Miles Young, Chairman of Ogilvy Japan. Easier said than done. Japanese advertisers work in very different ways from their western counterparts. Very often assignments are awarded as short term projects, and shared between agencies. The package any major Japanese advertiser brings includes an inordinate amount of leg work, frequent meetings involving 10-30 people, regular reviews, and re-pitches once a year. All this adds to the cost of running an account. “On a truly bad day,” said one Hakuhodo executive, “at least a third of the agency’s manpower could be working on reviews and presentations that earn no money at all.”

Fortunately, there is an easier path to growth than pursuing Japan’s major advertisers. Many smaller companies who may spend no more than £ 25-50 million on advertising find they cannot always get the attention their businesses need from Dentsu or HDY. Some are worried about account conflicts that are the norm at both the Japanese giants.

For these, Western agencies are an increasingly attractive partner. Even if they decline to have a meeting every day, at least they are thinking about your business. Such a strategy has helped Ogilvy increase its local business from 5% to 20% of the total over the past year. “We want to be seen as the first credible alternative to Dentsu for local clients in Japan,” says Young. Ambitious? Yes, and the agency has already prised both accounts and people from Dentsu’s grasp.

Winning Japanese clients helps with more than revenue. It also helps recruit Japanese creative talent. Most Western agencies are perceived as shops that do little more than adapt work from other countries or find local interpretations of global strategies developed elsewhere. Aspiring talent needs a greater sense of creative ownership than such opportunities provide. The opportunity to develop creative for Japanese clients from scratch while using the tools and disciplines of a modern agency can be irresistible.

The ferocious battle for media buying mass that pre-occupies Dentsu and Hakuhodo does create new opportunities. Historically, the giant Japanese agencies controlled access to scarce media space and time on terms they dictated. Now that business model is crumbling as advertisers increasingly call the shots, demand accountability, and talk about ROI. Hitherto, Japan’s advertising industry has resembled a sumo ring where two massive wrestlers, Dentsu and Hakuhodo are locked in endless struggle, egged on by their major clients. “But,” says Alejandro Lopes, president of Beacon communications, “Western agencies have a chance to stand out in the ring, not by size but on performance. However it may take a generational shift in corporate management before the power of these foreign “karate fighters” is recognized.”

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by David Kilburn
Published in Campaign 24th March 2005