Direct marketing continues to be dogged by the 'junk mail' tag, but is nonetheless enjoying tremendous growth as a discipline - so much so that its practitioners are starting to challenge for traditional advertising work. Squeezed marketing budgets, coupled with the unstoppable rise of digital media, has put direct and sales promotion agencies in pole position to reap the benefits. The agency boundaries have never been so blurred.
In recognition of the significant crossover that now exists between direct marketing and sales promotion, we have merged our league tables for these disciplines. Indeed, the majority of the agencies that responded to our survey revealed that their work is a mix of the two.
The usual network agency suspects are toward the top of the table, but Iris, Gyro and Tangible have also put in strong performances, the latter showing a 100% year-on-year rise in profits. Despite these successes, the industry remains 'remarkably misunderstood', according to Dennis Kerslake, chairman of Publicis Dialog, who admits that recent scares over data protection have not helped. 'There is clearly a concern about data, and that hasn't been helped by some of the high-level cock-ups we have seen in the news,' he says. Richard Marshall, business development director at Tullo Marshall Warren, adds: 'We only have ourselves to blame. We are still sending junk mail to people who don't want it. It has to be a combination of client and agency to stamp out poor practice.'
While consumers continue to rebel over junk mail and data security, the direct marketing industry is quietly continuing its digital revolution, generating one-to-one relationships with consumers through new technologies and media channels. Kerslake believes the trend toward greater use of digital media is irreversible. 'Technology has enabled us to do the things we have been on about for 20 years - engagement, immediacy. The future for the DM agencies is very bright because the thinking at the core is relevant to challenges that our clients face,' he says.
To underline this point, Marshall predicts that within two years, 50% of TMW's turnover will be derived from digital activities. This encroachment on the digital space could, in turn, put pressure on digital-only agencies. Rapier chief executive Jonathan Stead agrees that direct agencies are increasing their range by adding to their skills base. 'There has been a lot of experimentation in digital creative and digital channels and now there is pressure to have a smart, integrated approach to digital alongside the rest of your activity,' he says. 'That is putting pressure on digital-only agencies that haven't necessarily invested in the channel planning and strategy skills required.'
Marshall believes purely digital shops are going to find life more difficult as direct practitioners move into the space traditionally occupied by ad agencies, in response to client demands for brand engagement. 'When we pitch against generalist digital agencies, we do well - they have digitally literate people, but not necessarily the marketing acumen,' he says. 'They are better at website design-and-build work, but if you ask them to come up with a marketing strategy, maybe they would struggle.'
David Atkinson, managing partner at sales promotion specialist Space, spies an opportunity here. 'The boundaries between disciplines are becoming blurred. We would like to see more agencies of our type being able to win advertising and digital business and competing in most of the environments our competitors do. We yearn for the integrated approach.'
The growth of direct mail has also reignited the debate over independent versus network agencies. The former claim that they are free to focus on what they do best, while working in collaboration with other agencies. But networks argue that they can offer clients all the expertise they need under one roof.
David Prideaux, executive creative director at Publicis Dialog, says it is tougher than ever for independents to survive, citing the recent acquisition of Partners Andrews Aldridge by Engine Group. 'It is hard to start small - you need so many abilities at your disposal,' he says. 'It is getting harder for independents, if they are not connected in some way.'
Stead takes a pragmatic approach. 'Agencies that invest in the strategic capability to advise clients on how to use channels most effectively, and how to optimise budgets across them, are the agencies that will become lead advisers,' he says. 'The need for agencies to collaborate has never been greater. Most clients accept that their above-the-line agency is no longer the automatic choice to lead their communications strategy.'
One of the main frustrations highlighted by respondents was a lack of understanding of direct marketing among clients. While the senior marketing team busy themselves with the latest TV campaign, the job of looking after the direct or sales promotion activity is often left to a junior, inexperienced member of the team. This can leave agencies frustrated by the time it takes to explain and justify their work. 'Knowledge is lacking on the client side. We find ourselves working with people who haven't got experience in these fields. It leads to bad decisions being made,' explains Atkinson.
Another bugbear is the pitches that seemingly go on forever before fizzling out into nothing, leaving the shortlisted agencies disgruntled and out of pocket.
Marshall feels that some clients operate with a silo mentality. He points out that the COI has both a direct agency and a digital roster. 'This is a complete disincentive to the direct agency to recommend digital,' he says.
Frustrations aside, direct agencies are in rude health. The vast majority in these tables have shown profit growth over the past 12 months. There were some stellar performances among the smaller agencies, reflected in triple-digit growth. The focus of all direct agencies will now be on protecting and expanding their territory to offer clients the brand engagement they seek. There is a real opportunity to cement their position at the heart of the marketing mix.
'There is an argument that all marketing in the future will be direct, that all marketing will be about engagement,' says Kerslake. 'It is about combining the rigour of direct marketing with the flair of traditional advertising.'
Methodology and Sarbanes-Oxley
Information was collated by Marketing by sending an online survey to each agency directly. For agencies affected by the US Sarbanes-Oxley Act, which restricts the amount of information firms are allowed to make public, we have used Companies House data provided by Willott Kingston Smith. These agencies have been placed in the table as a guide to their size, but not ranked.
No data could be found for the following agencies: Harrison Troughton Wunderman, Momentum Worldwide, OgilvyOne and The Communications Agency. Financial data for the year ending 2007 was not available for CDMS, Inferno, TDA and Wax Communications. The latest gross profit data that could be sourced for Tequila was for the year ending 2005, which was £19.2m.