Mark Ritson: McDonald’s zero-margin Omnicom deal sets welcome precedents for agency contracts

McDonald’s appointment of Omnicom to its advertising account is a significant first – both in terms of agency integration and the performance-based pay structure that incentivises achieving brand objectives above media buying rebates.

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After a long drawn-out affair, McDonald’s has consolidated its North American advertising business with the Omnicom Group. A new, as yet unnamed, dedicated agency will be created to serve McDonald’s drawn from various Omnicom agencies – both creative and media – and led by DDB, which won the pitch.

“Exactly 18 weeks ago today, we received a dream brief from one of the most iconic brands in the world…to create ‘the agency of the future’,” DDB North America CEO Wendy Clark announced in a statement on Monday. “The result is a customised agency built with intelligence at the core, to fuel brilliant creative work that’s delivered at the speed of the marketplace at an efficient cost.”

In this case, it is appropriate to overlook the usual agency bazookas filled with horseshit because this really is a huge deal. The move severs the 35-year relationship between McDonald’s and Leo Burnett – one of the longest remaining agency marriages in the US. There is also the not-insignificant matter of the $820m (£627m) that McDonald’s spent on advertising last year and the almost $1bn (£760m) it is anticipated to spend in 2017, as the burger behemoth attempts to reverse recent declines on its home turf.

READ MORE: McDonald’s applies ‘forensic analytics’ as it looks to replicate UK sales success globally

But there are two other reasons why the Omnicom/McDonald’s deal should be top of mind today, other than the simply gigantic nature of the deal itself.

First, look closely at the design of the new Omnicom approach. For more than two decades big clients have struggled with the right structural approach to communicate with the market. Does the surfeit of communication options require a single integrated agency? Or should a client hand-pick the best dedicated agency to handle each specific medium or channel? The former suggests a ‘jack of all trades, master of none’ mentality. The latter alternative requires the client to essentially become the integrator of non-aligned, openly hostile competitive firms. The advent of the entirely stupid but incredibly widespread dichotomy between digital and ‘traditional’ media has merely exacerbated this issue.

It would appear that McDonald’s prefers a middle position – a large holding company that can offer a range of specialist agencies but all within the single operating group. “Omnicom has built a new agency of the future for us. This agency of the future really has digital and data at the heart, which allows us to be customer-obsessed at a whole new level in everything that we do,” McDonald‘s US CMO Deborah Wahl told AdAge this week.

The second fascinating implication for marketers is the remuneration that Omnicom can expect to receive from its newly won client. Apparently, McDonald’s asked the winning agency to sign a contract requiring them to work for zero margin. McDonald’s will pay all of Omnicom’s variable cost but nothing more. Any profit the agency will make will come from performance-related pay – a move that allegedly saw WPP drop out of the pitch at a very early stage of the process.

The arrangement sparked the usual agency uproar. But ignore that for a second and the client-side appeal is enormous. Given this is a media as well as creative contract, the deal instantly avoids any of the shadowy gouging of client funds that the recent Association of National Advertisers report uncovered in the US, because all media will be supplied at cost.

READ MORE: What marketers need to know about the ANA media transparency report

Provided McDonald’s chooses the right metrics and sets the right levels of reward it can only win from the deal. If Omnicom can’t deliver the kind of communications that will grow brand equity, drive traffic into restaurants and increase sales, then McDonald’s has a sophisticated hedge that will save it money. If Omnicom is successful, McDonald’s will have no problem paying a small proportion of its profits to its agency partner for its hard work.

Perhaps best of all, the agency’s skin is now very much in the game. Rather than obsessing over billing, creative work or ‘extra-curricular activities’, McDonald’s can now rely upon its trusted agency to exhibit a passion for burger sales like their life depended on it. Because it does.

Of course, all this hinges on McDonald’s being able to measure what it wants to manage, but there is no good reason why decent marketers can’t benchmark their brand tracking scores and customer funnel data and use it to first brief then judge and finally reward their agency. With more than 60% of new advertising business in the US featuring a performance-based component as part of the contract the Yanks are now significantly more data-led and bottom line-focused than their British ‘I know half of my advertising is working – yawn – but I’m not terribly sure which half’ peers.

The McDonald’s deal underlines that the new ‘digital first’ era of advertising planning still hinges on an integrated approach that is driven by strong metrics and performance-based incentives. Once again I conclude that the players may be changing, but that old game of ours remains exactly the same.

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There are 11 comments at the moment, we would love to hear your opinion too.

  1. Bill Crandall 31 Aug 2016

    Hey Mark … Forget “variable costs”. How does any agency make a dime without their “fixed costs” at least being covered? Dedicated office space rent, utilities, account administration, etc. As for “performance incentives” sans fixed fee on variables (like agency staffing and payroll) forget about it. Even Trump would walk away from that deal. LOL …

  2. I believe all agency costs are covered. From the experiences I’ve had in similar situations, there’s a declaration of salary costs on the agency side and a factor for all overhead. That’s all covered by the client. The agency profit is what’s at stake. Regardless, there are 2 significant issues in this set-up: One, agreeing upon the metrics that will determine whether or not the agency earns its profit and to what percentage. Two, when the agency believes it has a powerful, business-building idea for say, Big Macs, but the client doesn’t want to go with it. On the first point, let’s say an agency is working on a beer client in a similar situation. Great creative is developed, tests well, and then the Northeast is faced with an unusually wet and chilly summer. Sales don’t come close to forecast and the agency, despite delivering on everything under their control, loses money because the largest determinant of agency’s profit is sales.

  3. Scouserphil 31 Aug 2016

    I completely agree with rdix, below, there are too many variables outside of the agencies control that come into play in this type of arrangement. These variables, like the ones in the examples below, typically favor the client 9 out of 10 times so it builds tension into the relationship from day 1. I’ve tried many times to construct incentive-based compensation programs with my prospective clients but it’s usually the clients who ultimately decide not to do it. Mostly for the same reason: too many variables. It’s the variables that make it difficult for them to ultimately justify the incentive payment to their board and get the agency paid. Give this a year and I don’t believe either party will be singing, “I’m loving it!”

  4. Al King 1 Sep 2016

    Absolutely. Introduced Integrated Launch Planning (ILP) to EA in the 90’s. Functional heads and agency reps work together on the launch plan and budget allocation. Anyone trying to unjustifiably get more budget is immediately exposed so it doesn’t happen. Its the best of both worlds.

  5. There’s a whole lot more to QSR than just marketing. Operations is the foundation of the customer experience. There are countless examples of over performing marketing campaigns bringing in more footfall than an outlet can handle, results in posts & tweets expressing rage over slow service. Unless the new agency has direct control over operations or its improvement, it can’t be held accountable for what happens when a prospect enters an outlet, owned or franchised.

  6. Max Wiseberg 5 Sep 2016

    OK I hear you about success of the agency being undermined by customer service failures. But what about failure of the agency to generate more sales where there are no customer service issues? The risk remains with the client. In a performance. Many of the variables will be outside control of both the client and the agency. So why should the client always take the hit for things they have no control over? For there to be a genuine partnership, there must be shared risk. The client always has the risk that they pay for marketing which, when successfuly placed, does not lead to increased sales – whatever the reason for the lack of sales. The Agency in the usual model has no risk. Our agency is paid when they gain coverage for us. So if they don’t get coverage, they don’t contribute to their overheads from our account. That’s their risk. (But they do get coverage – because they are good at what they do and we have a great product!). Our first risk is that they won’t get coverage so we don’t get coverage. Our second level of risk is that if they do get coverage, that the coverage does not increase sales. Our third risk is that they get more coverage than we expected so our costs are, effectively, unlimited. The latter risk could be mitigated by increased sales. So even in this model, our risk is greater than that of the agency. But it works because we communicate constantly, we agree targets, we have mechanisms for dealing with syndication of stories and both sides get what they want. The McDonalds deal still covers the Agency’s overheads, the risk is the profit. I think they could have gone further! But i don’t expect anyone to agree with me!! Let’s see how it goes. If it succeeds, Agencies need to look out. Their charging/funding model might have to change.

  7. If the “game remains exactly the same” why do Omnicom feel they need to create an entirely new agency? That says to me that they (or McDonalds) clearly don’t believe any of their existing ‘integrated’ agencies cut it?

    • m ritson 7 Sep 2016

      True. But the single, dedicated client agency model (and the debate about whether it makes sense or not) is 30 years old.

  8. brianelliott 9 Sep 2016

    In what world does providing a product or service at cost constitute a win? Try that on Dragon’s Den. What business model, creative or otherwise, works on that basis? Does MacDonald’s provide its burgers at cost? “Ignore the agency uproar”? What kind of B school b.s. is that?

    The only way this works for the agency is that in a world of a global billion in spend, and zero interest cost of money, a few pennies fall of the table somewhere for the group as a whole to a make a marginal single digit real profit. And the cash flow is substantial enough that it enables the large network supertanker to cover its operations, and try to build other business – effectively an indirect subsidy.

    As for the performance based rewards, I’ll believe it when I see it listed in the Omnicom annual report.

  9. Mark Scott 9 Sep 2016

    When did you go off your medication? Usually, I like your views on the industry But, This is a terrible idea.
    Having worked with many retail accounts, I know they are challenging to begin with. There are so many factors that go into the success or failure of a retail business. Here is what suspect will happen: 1) it will not be long before there is conflict on what the agency is spending time on and the bean counters will be brought in to police the agency spend. 2) The excitement to work on this account will go down the drain. 3) McDs will start to bring more and more in house, with their own creative people 4) McD will demand new personnel on the account, hope springs eternal. 5) McD will bring more in house. 6) sales will continue to go down 7) McD will announce w new agency search. 8) You will write a new column on how maybe this was not such a a good idea.

    Mark please read Bob Hoffman’s more realistic take on this.

    P.S. I still think you are are great on going after the frauds in digital and social media but on this one you put out a stinker

  10. My kids convinced me to go McD’s today. Half of their “happy meal” went in the bin, it was revolting.
    They don’t need a new agency, they need a better product

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