In October 2009, PepsiCo and Anheuser-Busch entered into to a joint-purchasing agreement. It came as an effort to lower prices on business-related items like office supplies, travel, transportation services, and travel expenses. As of early April, the two companies announced this agreement would extend to include marketing and advertising efforts.
According to Kantar Media, A-B and PepsiCo spent close to $1.2 billion on measured media in the U.S. last year. By category, the spending works out to be approximately $490 million on network TV, $182 million on cable, $194 million in magazines, and $70 million on out-of-home. The breakout doesn't include online spending.
The agreement between the two giants is an effort to save costs by purchasing media together to wield more purchasing power rather than contracting with media buying agencies. Both companies are top-shelf clients of Omnicom Group, using the agency's creative services. Media placement for A-B is planned and place in-house, while Pepsi previously used OMD for their media planning/buying chores.
Large consumer advertisers like A-B and Pepsi traditionally chose powerhouse media-buying agencies (OMD, Initiative Media, etc.) due to the efficiencies gained as a result of overall buying leverage from the agency's clients.
The agreement between the two companies to purchase media as a unified company will affect buying clout when it comes to negotiating TV (and print) up-fronts. (An upfront is a negotiation meeting held at the start of key advertising sales periods by network TV or national print media outlets. Usually, the press, advertising agencies, and major retailers attend, with the purpose to allow marketers to buy airtime months prior to the TV season.)
When leveraging upfront buys, media agencies use their buying power to leverage the best deals. In an effort to increase buying power and as a result of agency-client negotiations, media departments and agencies have lowered fees and compensation in an effort to keep -- or add -- large advertising budgets that will increase buying power. In order for the in-house media-planning and buying effort to work, Pepsi and A-B would need to have full-service, in-house media departments. Both have these in-house services already, according to MediaPost.
A Pepsi spokesperson explained the decision: "It's a way to allow both companies to purchase media more effectively and efficiently and reinvest savings in our businesses."
Thus, it seems A-B and Pepsi feel that their combined negotiating power will be greater than that of a large media-buying powerhouse. However, the $1.2 billion spend by Pepsi and A-B doesn’t seem to make sense as a solitary venture considering that OMD has other top-spending media clients. According to Kantar, total ad spending in the U.S. for 2009 was roughly $125 billion (Nielsen estimated spending at $117 billion) -- amounts that dwarf the expected spending for Pepsi/A-B.
While cutting out the middleman may seem to make sense at first glance, there are other considerations when going in-house with a media department. If a company pays a 10 percent media commission on a $10 million dollar spend, a million goes to the agency. However, adding personnel, equipment, market research, planning, and buying tools may prove that taking the operation in-house is costly, at least in the near term.
Don't overlook the fact that lots of other time-consuming day-to-day duties and spot negotiations exist as well; it’s not all up-front buying. Another concern is whether an in-house buying service will provide the expertise and tools necessary to conduct research and follow up with measurement.
When the economy tanks, will Pepsi and A-B cut advertising departments and budgets? When the economy sours, the first thing to get axed is the ad spend.