Entrepreneur’s Noteboo

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When American Honda Motor Co.’s Acura division shifted its $150 million ad account to a new agency last week, it was the biggest change in L.A. advertising this year and a huge victory for Santa Monica agency Rubin Postaer and Associates.

But for Rubin Postaer, which already handled Honda’s $350 million ad account, the win might have come at a steep price: profits.

According to a source close to the negotiations with Honda, Rubin Postaer was forced to cut its fee to practically nothing in order to win the Acura business.

“It will make Acura the largest pro bono advertising account in history,” said a veteran car advertising executive.

Rubin Postaer President Gerrold Rubin declined to comment about the commission being paid on the Acura account, saying that such information is proprietary. While acknowledging that Honda will save money by switching the Acura account to his agency, he said much of the savings will come from economies of scale.

“When you combine Honda and Acura and you have close to half a billion spent in the media, it’s only natural that efficiencies would be generated,” Rubin said.

Honda officials concede that they switched the account for cost savings and are paying Rubin Postaer less than Suissa Miller, but they declined to discuss how much lower the new agency fee is.

“It’s appreciably lower (than the fee that was paid to Suissa Miller), yes. Obviously, it’s low enough to have made such a decision,” said Eric Conn, assistant vice president of national automobile advertising with American Honda.

The issue of commissions is a sensitive topic in the advertising industry, and news that Honda has trimmed an already-low fee even lower is likely to be met with concern. After all, if Honda could use its enormous leverage to wrest discount service out of its ad agency, other large advertisers may well follow suit.

In the past, ad agencies had been paid a commission of 15 percent of the total media billings (media billings is the amount spent on TV, radio, newspapers and other media to run the ads). But few agencies actually get 15 percent; a wave of cost-cutting during the early part of the decade forced many to reduce their fees, so accounts now run in the 11-14 percent range.

According to a source, however, both Suissa Miller and Rubin Postaer were getting a commission of less than 10 percent for their work on Acura and Honda. During the negotiations with Honda, the source said, Rubin Postaer agreed to accept an even lower percentage to handle both accounts effectively meaning that it is being paid only slightly more to handle both Honda and Acura than it was making to handle only Honda.

Rubin says that as a private independent, he doesn’t have all the overhead of a large public company and will be able to effectively create entirely separate staffs to handle the Acura and Honda accounts.

“I don’t know if that statement is entirely correct,” he said, when told a source had pegged his agency commission on Honda and Acura at well below 10 percent.

The advertising account is only the latest part of the Honda empire to feel the cost-cutting ax. In March, American Honda consolidated various back-office functions, such as sales training, that had been handled separately under the Acura and Honda banners. Honda officials said only temporary positions were cut, and no permanent employees lost their jobs.

On a wider level, the cost cutting at American Honda is part of a major effort by Tokyo-based parent Honda Motor Co. Ltd. to squeeze maximum efficiency out of every division, as it fights to maintain its independence in a consolidating industry.

With last year’s merger of Daimler-Benz AG and Chrysler, and Ford Motor Co.’s acquisition of Volvo, Honda finds itself the world’s No. 8 auto maker. It’s trying to maintain its perceived design and technology edge against giants that have much larger budgets for research and development.

While many analysts believe Honda would benefit from a merger of its own, the company’s top executives are a fiercely independent bunch. Honda Chief Executive Hiroyuki Yoshino told Business Week earlier this month that he thinks “nothing” of the idea of seeking a partner. “I am not interested in that,” he said.

Instead, Yoshino is overhauling Honda’s plants in the United States, Britain and Japan to wring greater efficiency out of them. And he’s looking at other areas where cost savings can be had such as its advertising accounts.

“Overall, Honda has made very much of a worldwide commitment to staying independent,” Conn said. “(The ad account switch) is just one move on top of many across the entire company. We’ve all been asked to look for efficiencies.”

Conn emphasized that Honda was not unhappy with the performance of Suissa Miller on the account.

“That’s what made the whole thing so difficult,” he said. “They had done an excellent job. The entire review was just on a financial basis.”

Acura’s sales have been fairly strong this year, with 56,282 vehicles sold through June, an 11 percent increase over last year. That’s better than the sales gain at Honda, which was up 6 percent through June, but not as good as the gains enjoyed by Acura’s luxury competitors like Lexus (up 31.4 percent) and Infiniti (up 21.3 percent).

Sales for both of those makes, however, were driven by sport utility vehicles, while Acura does not have an SUV in its lineup.

Rubin Postaer, which has been handling Honda’s advertising account since 1974, was considered the front runner for the Acura account in 1996 when it went up for review. To the surprise of advertising-industry insiders, Acura instead shifted its account from now-defunct Ketchum Los Angeles to West L.A. upstart Suissa Miller.

The loss of the account nearly three years later represents a harsh blow to Suissa Miller, but agency executives maintain there are no hard feelings.

“The three years that we spent (with Honda) were the best years of my career,” said agency President Bruce Miller.

Miller said about 75 people were working on the Acura account, and while some will be shifted to other accounts, there will be layoffs. Rubin has said his agency will give consideration to Suissa Miller employees for any new positions created by the account win.

Although many ad agencies have been forced to shut down after losing a car account of the size of Acura, that fate is unlikely to await Suissa Miller. Acura represented slightly less than half its billings, but it is left with 11 accounts and about $160 million in billings still making it among the 15 biggest agencies in Los Angeles, and maintaining its place as the city’s second-largest independent after Rubin Postaer.

Rubin Postaer, already the second-biggest ad agency in L.A. County after TBWA Chiat/Day, will swell to around $700 million in billings once the account switch becomes official in October.

It’s unclear at this point how many employees Rubin Postaer will add to staff the Acura account. “If you were to ask me approximately what our needs are, I would say 100 (people),” Rubin said.

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