Direct agencies feel the pinch as margins tighten

by Claire Foss, Marketing Direct 07-Dec-06

Direct marketing agencies experienced a decline in profits last year because of increasingly high overheads, according to an industry report.

DM and sales promotion (DMSP) agencies showed a drop in operating and
pre-tax profits in 2005, despite an increase in gross income, according
to consultancy Willott Kingston Smith's Financial Performance of

Marketing Services Companies 2006 report.

The study, which assesses the top 40 agencies in the sector using
Companies House data, showed that although gross income increased 3.9
per cent to £83,130 per head, employment costs rose by 4.4 per
cent. Other costs, including property charges, rose by 8.2 per cent.

Stuart Archibald, managing partner at agency Archibald Ingall Stretton,
and a speaker at the launch of the report last month, said the costs
incurred by DM agencies were reflective of a period of expansion into
digital and increased staff costs. "At AIS, we are finding that when we
put in offers for potential candidates, other employers are coming back
with higher counter offers. It's worrying, but it's a trend in the
industry."

At the same time, however, agencies are becoming more efficient. The
report showed that productivity was up by 1.5 per cent on average.

Jim Surguy, senior partner at Results International, said: "Improving
productivity is important if margins are being squeezed by procurement.
It bodes well that efficiency is improving, particularly with agencies
increasing their reach and service offering."

The report singled out some agencies that had made significant
improvements in their financial performance, including Tullo Marshall
Warren, whose operating profits increased from £385,000 to £3m in 2005. Carlson Marketing recorded the biggest loss - a total of
£1.2m.