Ad credit insurance reaches crunch point

Few agencies in their right minds would allow a client with a 24m media budget to take their business elsewhere without a fight. But that’s what M&C Saatchi and ZenithOptimedia did last week when they parted company with furniture retailer MFI.

MFI%2C%20Credit%20insuranceFew agencies in their right minds would allow a client with a £24m media budget to take their business elsewhere without a fight. But that’s what M&C Saatchi and ZenithOptimedia did last week when they parted company with furniture retailer MFI.

This was no act of madness. The agencies failed to secure credit insurance for MFI’s media spending and ZenithOptimedia was concerned that if it booked a heavyweight television autumn advertising campaign for the retailer, it had no guarantee that MFI would be able to pay its way.

Under UK law, the agency is liable to cough up for media it books as “principal in law”. So if MFI defaults, the agency would be left footing the bill.

Credit offer

However, it seems such concerns are no worry for McCann Erickson Birmingham, which last week took on the MFI account. According to the agency’s chief executive Dean Lovett, MFI was attracted by ME Birmingham’s integrated offer and the agency will both create the ads and book the media. He points out that McCann Erickson is the biggest agency in the world. “We are able to extend them credit and don’t see any issues. We are able to handle it,” he says.

One observer is surprised by this, saying: “So is McCann now extending loans? McCann seems to be bank-rolling a client and doesn’t apparently see the credit crunch as an issue. It seems that apart from being the world’s biggest agency they are also financially robust enough to do that.”

In a terse statement, MFI Retail says: “MFI has appointed McCann on the basis of its integrated offering and approach. McCann has offered terms.” The retailer was bought by Merchant Equity Partners in 2006 for the nominal sum of £1. MFI says this purchase was debt free and that it is now owned by a number of investors. But the retailer refuses to comment on whether it was unable to obtain credit insurance.

A source says credit insurers are looking closely at companies acquired under private equity deals and are concerned that they could be vulnerable given the difficulties in servicing debt due to the credit crunch.

Falling sales

Meanwhile, it should not be forgotten that furniture retailers are having a torrid time with falling sales. The furniture and fittings sector is worth some £300m in advertising a year, with nearly 40% of that spent on television. Some of the biggest furniture advertisers are taking an axe to their ad spends following a collapse in sales.

For instance, leather sofa retailer Land of Leather, which last year spent 8% of sales – some £20m – on ads, is paring back the spend substantially after its sales fell by nearly a third in the second quarter of the year. “The most important thing we can do for shareholders is conserve cash. We came to the conclusion that it doesn’t matter how much you advertise, it doesn’t increase sales,” says a spokesman.

Rival sofa seller ScS, which spends £12m a year on advertising, is understood to be pursuing a similar ad-slashing strategy. DFS, with a spend of over £100m, was unavailable for comment.

A tough market for the furniture sector is translating into uncomfortable times for agencies and media owners.

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