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Could McDonald’s’ Zero-Margin Advertising Deal with Omnicom Completely Change the Ad Game?

When McDonald’s decided to consolidate its nearly $1 billion annual advertising business with Omnicom Group in late summer, severing its relationship with longtime incumbent Leo Burnett, the restaurant giant reportedly required Omnicom to sign a contract that went well beyond the usual agency concessions. Industry buzz was that Omnicom must now create a new agency dedicated to the account and move its headquarters to Chicago.

But the biggest concession Omnicom will make will be to accept zero-margin compensation for its output, an arrangement that will restrict its profits to performance-related pay. The last criterion is the one that has tongues wagging. What would be the benefits of your company wielding that kind of clout  with your agency, or for that matter, with suppliers, and would you even want to?

The new compensation arrangement, according to reports, forbids Omnicom from charging mark-ups of any size to its new mega-client, a plan that reverses generations of industry precedent. McDonald’s will repay Omnicom’s costs for ad creation and ad buying, but pay nothing additional. Instead, the restaurant giant will pay the agency as it reaches a series of benchmarks, which have not been publicly disclosed.

The arrangement is notable both for its size—McDonald’s is one of the nation’s biggest advertisers—and the establishment of performance benchmarks as the sole basis for profitability. As a result, the relationship between the firms, and the success of the campaign Omnicom goes on to produce, will be closely watched not only in the ad business, but in executive suites across the nation where services of all kinds are produced and purchased.

“The focus on transparency in billing and in getting business results, as opposed to winning awards for creativity, has been the prevalent direction of the ad business,” said Mike Schreurs, founder and chairman of Strategic America, a Des Moines ad agency. “Agencies typically talk in terms of reach, impressions, exposures, and so on, rather than point-of-sale activity. Clients are looking at agencies differently than they have in the past. They’re saying: ‘What part of the sales process can you be responsible for?’”

“Performance-based deals “suggest a major fault line in the perceived value of agency services, and thus is a damaging game-changer.”

To some agency heads, the McDonald’s situation is unsurprising, given the restaurant industry’s shrinking margins. “Restaurant leaders are being forced to reorganize their communications to stay competitive, and that’s true even of McDonald’s,” said Linda Duke, CEO of Duke Marketing in San Raphael, CA. “Some CEOs are asking their agency partners to prove their efforts will get results. In McDonald’s’ case, they simply won’t pay unless they do.”

Industry leaders have acknowledged that traditional revenue generators such as rebates and markups are increasingly inadequate as a business model. In June, the Association of National Advertisers acknowledged what had become an open secret—that unethical rebates, excessive markups and non-transparent payment terms have become prevalent—and called for reform.

“Clients want transparency so they can follow the money as it goes through the chain,” said Bill Bruno, CEO of Ebiquity, a provider of marketing analytics to brands worldwide, and co-author of a new study on media transparency commissioned by the ANA. Advertisers spend billions on media buys, but generally lose track of their money once it’s been allocated to agencies. “Without transparency, you can’t say with confidence how effective your advertising is.”

For advertisers, the McDonald’s-Omnicom arrangement offers justification for focusing firms on tangible criteria like revenue. On the agency side, chiefs worry that they’ll increasingly be offered zero-margin, take-it-or-leave-it contracts—a pattern that could affect other service industries as well.

Performance-based deals “suggest a major fault line in the perceived value of agency services, and thus is a damaging game-changer,” said Strategic America’s Schreurs. Even so, “the focus on business results is where the industry is going.”

About Warren Strugatch

Warren Strugatch
Warren Strugatch is a writer, speaker and consultant based in Stony Brook, NY. He covers economic development, global business, management and marketing.