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Can Dentsu’s transformation bring the Japanese giant back to growth?

Is Dentsu’s reorganization drive paying off?

Dentsu’s Q1 results, released late last week, and recent skirmishes in pitches offer the first clues as to whether the Japanese ad giant’s restructuring efforts are working – and whether clients are on board.

Japanese advertising titan Dentsu has been struggling not only with the economic impact of Covid-19 on ad spend and client activity, but with a huge effort to rationalize its sprawling global empire. While it’s still early days, there are clues pointing to the transformation’s success or failure to be found among the mixed blessings of its first quarter results.

Dentsu’s overhaul has been going on since the end of 2019, when it announced a restructuring of its operations in Australia, China, Singapore, the UK, France, Germany and Brazil.

That was followed by a farther-reaching reorganization of its 160-strong agency roster into six global agency brands, according to a company-wide ’Master Service Set’ blueprint. “We simply have too many brands, almost 300 across both Japan and internationally,” Toshihiro Yamamoto, president and chief executive officer at Dentsu Group, said at the time.

The Dentsu Aegis Network moniker was dropped for the more succinct Dentsu International, and most of its creative agencies were merged into Dentsu Mcgarrybowen. Just three months and 6,000 redundancies later (10% of its global workforce), the group announced an 11% year-on-year drop in revenue.

“Our accelerated transformation continues at pace,” a company spokesperson says. “We have optimized over 50 brands YTD – ahead of internal targets. These are mostly small and specialized brands being integrated into leadership brands – therefore there is low risk of disruption or increased client attrition.

“We will end this transformation in a new state, as the most integrated agency group able to deliver solutions for clients that drive their top-line growth.”

First signs

While its 2020 results were heavily affected by coronavirus, the Q1 results released last week provide the first clues as to whether the transformation has been successful so far.

While holding company rivals IPG and Publicis posted revenue growth in the same period, Dentsu’s revenue slipped 2.1%.

Jay Pattisall, principal analyst at Forrester, says that’s progress on Dentsu’s 2020 figures. He tells The Drum: “First of all, they had a terrible 2020. To be at -2.4%, relative to -11% the year before, clearly that’s a sign of of a return to business and a comeback in the numbers. They have confidence and feel that that growth is possible for the rest of 2021. I think that’s a realistic expectation.

“When you compare Q1 2020 to Q1 2021... it reflects a beginning of a return to growth.“

Avi Dan, principal partner at Avidan Strategies, is more pessimistic: “Q1 was a strong quarter for most holding companies, with Publicis and WPP transitioning from negative to positive growth. The fact that Dentsu is still posting negative growth, especially in its international operation, is sobering and suggests that the reorg has not benefited its top line yet.“

While the company was able to boast major cost savings – its operating margin increased 16.4% – savings are likely due to the temporary impact of the pandemic as much as the reorganization. Tristan Rice of SI Partners says: “Agencies are still operating on reduced costs, with substantial savings across employment, travel, entertainment and marketing. Margin improvement cannot be attributed to consolidation efficiencies alone and may, in part, be temporary.”

Pitch battles

While its recent results tell one part of the story, account wins and losses tell another. “Retaining their key clients over the next few years will be a key challenge for all the global holding companies,” Rice says.

In November, Dentsu Mcgarrybowen carried the creative account for American Express and scooped up Heinz Beanz in then UK earlier this month. But just last week, United Airlines recently ended its 10-year relationship with the agency, moving its creative account to 72andsunny.

“Rebranding and co-locating businesses is one thing; getting them to work together in a way that benefits clients and drives revenue growth is quite another,” says Rice.

“Dentsu and the other holding companies are surrounded by credible competitors able to offer increasingly global coverage and without the dragging effect of large, legacy operations in ‘traditional’ disciplines that are on the wane. Not to mention Accenture. Retaining their key clients over the next few years will be a key challenge for all the global holding companies.”

Dan suggests clients aren’t yet swayed. “I’m not sure clients understand what’s in it for them and they view the reorg as cost savings,” he says.

Transformation and competition

Chief executive Yamamoto pointed to his vision for the company in the earnings report, when he suggested its “leading position in the structural growth area of customer transformation and technology” would give it a winning hand in the future.

Dan agrees: “Digital transformation is a winning strategy because that’s what clients want. Firms that focus on this, like S4, have been very successful. Dentsu has some excellent assets in Merkle, 360i and its media agencies that it could focus on and deliver a unique offering.”

Pattisall points particularly to Merkle and Isobar as engines of future growth. “The opportunity to generate revenue and growth is coming from those two [agency brands]. Those two businesses will provide the signs that the transformation is working,“ he says.

The integration of its media offering – in particular the relaunch of iProspect under boss Wendy Clark – appears indeed to have been the most successful part of the restructuring. Dentsu states that the merger was the “largest to date” for the company, and that there has been “no client attrition to date.”

According to Rice, “there is clear logic to this approach,” but Dentsu will have to fight for the patch. “Digital transformation ... has to be at the center of every agency group’s strategy if they are to remain relevant,” he tells The Drum. Cognizant, Infosys and Accenture are each already established in the sector, while fellow holding company Publicis also has a stake in the form of Sapient and Epsilon.

“Developing a broader digital transformation offer makes sense, but whether Dentsu can develop an offer that plausibly completes with the established giants in this space remains to be seen.”

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