PUBGY Publicis Groupe SA (QX)

By Suzanne Vranica 

An eight-month probe by a marketing trade group revealed that ad agencies are accepting rebates from media companies in the U.S., according to people familiar with the matter, findings that will likely stoke concerns about transparency in the industry.

The Association of National Advertisers found that agencies are getting rebates from media companies for spending a certain amount on behalf of their marketing clients, the people said. The group found that the practice was widespread within the sample it studied.

The ANA, which represents big advertisers such as Procter & Gamble Co. and Johnson & Johnson, briefed some advertisers last week on its probe.

A spokesman for the trade group declined to discuss details of the report and said "its release was imminent."

Rebates or agency-volume bonuses -- which can be cash, free ad space or other services -- are a common business practice in Europe and countries such as China and Brazil. However, historically, rebates haven't been part of the way ad deals work in the U.S. Some ad firms have publicly said they don't accept rebates in the U.S.

The American Association of Advertising Agencies, which represents ad agencies, said in prepared remarks, "We cannot at this time comment on anonymous sources. We have not seen the study, have always preached full transparency to our members, and will act accordingly when the details are released."

The ad industry is dominated by a handful of ad giants including WPP PLC, Omnicom Group Inc., Publicis Groupe SA, Interpublic Group of Cos, Dentsu Corp., and Havas SA, who collectively control hundreds of billions of dollars in spending on behalf of marketers each year.

A spokeswoman for Publicis declined to comment.

"We comply with all regulations in the U.S., and we do not accept rebates in the United States," said Colin Kinsella, chief executive of Havas Media North America. "On the transparency side, we work with clients to achieve desirable levels of transparency in all facets of our business," he added.

"We do not accept non-disclosed rebates, and we believe our existing process as it stands is robust and transparent for our clients and our business," said Dentsu Aegis Network in prepared remarks. "Our media buying process is clear, audited and subject to rigorous compliance processes, and all our clients have the ability to audit us," the statement continued.

WPP's GroupM said that "like the 4As, we don't comment on anonymous and unspecific allegations. We have also not seen the report. We have always maintained that if individual clients have questions of us they should contact us directly."

The company added in its prepared statement that "if there are allegations that are specific to GroupM, we will demand to see the details so that we can fully investigate and fulfill our contractual obligations. If the details are not forthcoming, we will take steps to compel the ANA or their investigators or their advisors to provide the material."

Omnicom said, "While we have not seen ANA's study -- it is disappointing to hear the results are broad-based allegations against the entire advertising media industry."

"In order to serve advertisers," the statement continued, "it seems to us that the specific findings of the study need to be shared with the advertisers and agencies that are implicated in practices that are indeed identified as troublesome. If such issues exists, how else are advertisers to resolve them with their agencies?"

The ANA initiated the probe, which it described as a "fact-finding mission," and hired corporate-investigations firm K2 Intelligence, which has confidentially interviewed roughly 150 people in the ad business, according to some of the people familiar with the matter.

The ANA is expected to issue a report shortly, according to people familiar. The report isn't expected to name individuals or specific companies that have allegedly received rebates, those people say.

The report will likely intensify the concerns of marketers who are worried that agencies don't have their best interests at heart and could be allocating ad dollars in ways that benefit their own businesses, as opposed to those of their clients.

"There was some belief that this was just one bad apple, but it seems to be pervasive," said one marketer who attended the meeting.

The lack of transparency and existence of rebates may be an outgrowth of the enormous pricing pressure that marketers have placed on their agencies as they seek to cut their advertising costs, according to ad executives and marketers. Executives said that has forced ad companies to look for other revenue sources.

During last week's meeting, K2 executives walked advertisers through examples of how rebates have occurred in the U.S.

In some cases, media companies effectively provided a rebate by paying an agency for services such as research, according to some of the people familiar with the matter. Agencies also received free media inventory that could be banked and resold to clients for a profit, one of the people said. And in some cases, cash rebates were given to agencies based on the amount they spent on media.

The trade group told advertisers that while some of the practices it uncovered didn't violate marketers' contracts with agencies, they weren't transparent. And the group said problematic practices extend beyond digital advertising to other media including television, print and outdoor advertising, the people familiar with the matter said.

As a result of the findings, some marketers said they would likely spend the next few months auditing their ad agencies and rewriting contract language to make sure they are more explicit about how rebates are disclosed and handled in the U.S.

Trust between ad agencies and marketers has been deteriorating for several years. In 2014, the ANA and Forrester Research conducted a survey of about 150 senior marketers and found 46% of those polled expressed concern about the transparency of their media buys.

"The reality is that the (ad agency) holding companies are so large, interconnected and incestuous that it's very easy to have very little transparency in that world," Joe Tripodi, now chief marketing of Subway, said last year.

Write to Suzanne Vranica at suzanne.vranica@wsj.com

(END) Dow Jones Newswires

June 02, 2016 13:47 ET (17:47 GMT)

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