The Big Squeeze : Bitter Competition for Few L.A. Accounts Sends Ad Firms Packing
Dinkum Dog wanted a Los Angeles identity. Not to mention a little name recognition. So, last spring, the Australian hot dog chain went searching for an ad agency. From the reaction, you’d have thought McDonald’s itself had put its ad business up for grabs.
Local ad firms chased after it. And so did several West Coast branches of giant New York ad firms, such as Ogilvy & Mather and Grey Advertising. They fought tooth and nail over a $1-million advertising budget that most of their big New York counterparts wouldn’t have sneezed at. Indeed, for several months the hot dog chain with big franchising plans wagged the tail of the Los Angeles ad community.
With the branch offices of the biggest ad firms in the nation scratching for business, someone had to lose. And, increasingly, there are losers in the competitive Los Angeles market.
Earlier this month, the New York ad firm Scali, McCabe, Sloves said it planned to shut down the same Los Angeles office that it opened with great fanfare two years ago. And last May, William Esty Co. closed its Los Angeles office after losing the giant Nissan advertising account.
Over the last few years, shrinking business forced another New York agency, Wells, Rich, Greene, to greatly reduce services in its Los Angeles office. And the Los Angeles office of the Dallas-based ad firm, Tracy-Locke Inc., has recently seen the number of its clients dwindle.
“There’s a lot of chest-thumping about what a world-class ad center Los Angeles is,” said Richard Kelly, president of the soon to be closed West Coast office of Scali McCabe. “But I find that laughable. There simply isn’t the resources and professionalism in Los Angeles to the extent that there is in New York.”
None of Top 20 Based in L.A.
On one hand, Los Angeles ad firms continue to gain recognition for creativity. An increasing number of national ad awards are won each year by ad firms here.
But on the other hand, not one of the nation’s 20 largest ad firms is headquartered in Los Angeles. And of the 30 most profitable ad firms in the United States in 1986, only one--Chiat/Day--is based in Los Angeles, according to the trade magazine Advertising Age.
What’s more, New York ad firms posted six times the annual billings of Los Angeles ad firms in 1986, according to Advertising Age. That year, New York ad shops reported $16.9 billion in annual billings, compared to $2.6 billion in the third-largest ad market, Los Angeles. In fact, Los Angeles posted half the annual ad billings of Chicago in 1986, and that same year, total ad billings in Los Angeles were only 12.7% higher than those of Detroit--a city with a third the population of Los Angeles.
Of course, what puts Detroit so high on the list is automobile advertising from the U.S. auto firms. And it may be the Japanese auto imports that have helped keep the Los Angeles ad market from falling out of the No. 3 spot.
But the fact is, few companies headquartered in California make highly advertised consumer products like breakfast cereals and laundry detergents. In Los Angeles, for instance, the defense industry is a major employer but does very little product advertising. Also, most of the entertainment companies, such as Walt Disney, create their own ads.
“Most of the major American advertisers like Procter & Gamble and General Foods are not in Los Angeles. What you have in L.A. are a lot of agencies struggling for a little business,” said Marvin Sloves, New York-based chairman of Scali McCabe.
“You can’t go into Los Angeles thinking that what you do in New York or Chicago will work there,” said Joseph W. O’Donnell, chairman of the New York ad firm William Esty, which closed its 50-person Los Angeles shop after losing the Nissan business. “In Los Angeles, you’re talking about retail operations like movies and franchises that want short bursts of advertising. This is far different from the long-term image-building campaigns for things like packaged foods and beer.”
O’Donnell says he didn’t give up on Los Angeles. Although his firm closed its Los Angeles shop in July, it has now decided to open a smaller shop here to service a new client, Southern California Chrysler Jeep/Eagle dealers.
In Los Angeles, it sometimes seems that there is never a client too small. Ad executives say that just about every agency in town will chase after any available account worth $1 million in annual billings. Most big ad agencies in New York or Chicago won’t even blink unless the client’s annual ad billings are upward of $5 million.
More Bark Than Bite
It is illustrative of the Los Angeles market that some of the same agencies that chased after the $150-million Nissan account also tried to land the infamous $1-million Dinkum Dog business.
Late last summer Dinkum Dog finally named its ad firm--the Los Angeles office of D’Arcy Masius Benton & Bowles, a New York agency with annual worldwide billings of $2.3 billion. But Dinkum Dog proved to be more bark than bite. By the end of the year, the cash-short company scrapped its franchising and advertising plans and filed for liquidation under Chapter 7 of the federal bankruptcy code.
And for all of its efforts, D’Arcy, which never got to create a single ad for Dinkum Dog, had mustard on its face--along with the rest of the local ad community.
Some New York ad executives admit that they should never have opened Los Angeles branches. “I didn’t do enough thinking before opening a Los Angeles office,” Sloves said.
“One of the great needs of humanity is not another ad agency in Los Angeles,” said Jack Roth, president of Admarketing, a Los Angeles-based ad firm. “But when one big-name New York ad agency gives up on Los Angeles, that may eventually cause others to give up, too.”
Generally speaking, the ad agencies with the most business in Los Angeles are those headquartered here.
“You’ve got to at least act like a local agency to make it in Los Angeles,” said Kelly, president of Scali’s West Coast office. “You can’t come here and talk about your New York resources or brag about bringing executives out from New York. People here have all been burnt by that before.”
Act Like Headquarters
Three of the top five ad firms in town call Los Angeles home. Chiat/Day, the biggest Los Angeles ad shop with annual billings of $350 million, was founded here 20 years ago. Admarketing, the third-largest Los Angeles ad firm with annual billings of $205 million, began here 17 years ago. And No. 4, Dailey & Associates, with billings of $143 million, took root in Los Angeles in 1968.
Only a few out-of-town ad shops have prospered in the Los Angeles market, and most of those operate more like headquarters operations than satellites of New York or Chicago agencies. The Los Angeles office of the Chicago ad firm Foote, Cone & Belding ranks as the second-largest agency in town. But it has been here for 80 years.
Others, with much shorter lifetimes, have found it a real struggle. When Wells Rich’s Los Angeles office lost the Jack-in-the-Box ad business in 1985, rumors were rampant that the office would close. Although the office has remained open, it has only a fraction of its former business. Almost all of its $30 million in annual billings is the media time it buys for MGM/UA.
Although the Los Angeles office’s recently named president, Dick Macedo, has hopes of building up new business, he is still realistic. “Whether or not a branch office stays alive is mostly contingent on one thing: Is there a piece of business valuable enough to warrant keeping the office open?”
Tough for Latecomers
Sometimes, these branches become revolving doors for executive talent. When executives do well, they are rewarded by being bumped back to New York. But not everyone thinks that’s such a good idea. “You can’t build long-term relationships with clients by changing people all the time,” said Phillip Joanou, chairman of Dailey & Associates. Joanou has been with Dailey for 16 years, while the agency’s creative director, Clifford Einstein, has been there since it opened 20 years ago.
That makes life tough for the latecomers. Ask departing Scali McCabe. It originally entered the Los Angeles market when it won the $3-million Continental/West airlines advertising business. But before Scali could create its first ad for its client, the airlines went belly up. Since then, the office has struggled for business and lost money every year. Its staff has already shrunk from 20 to 10, and the remainder will be let go within the next few months, said Kelly, who now hopes to catch on with another Los Angeles ad firm.
“If you haven’t got a base of $20 million worth of business, you shouldn’t open an ad agency in Los Angeles,” Kelly said. “Unless you’re prepared to work out of a garage.”
