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A powerful Dentsu publicist struggles with Olympic-sized issues

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Soon after the first Olympic connection campaigns, at the beginning of the summer, they began to appear in the TV slots of Japan, the advertising giant Dentsu told investors to expect a huge profit of $ 800 million.

Unfortunately for the company – historically considered among the most powerful in Japan – the good news had nothing to do with its core business, its growth prospects, or the delayed Tokyo 2020 games in which it has been so central.

Instead, the profits came from the $ 3 billion sale of Dentsu’s Tokyo headquarters: a 48-story, tear-shaped architectural icon that suits the company’s oversupply. Japan’s $ 55 billion advertising market.

The sale of the skyscraper can be ranked as the largest transaction in the world in Japan, according to analysts, bankers and long-term Dentsu customers. But it also masks the internal torment of a society whose problems have finally overcome its fate..

“As with the sale of its headquarters, the company is in a phase where it shamelessly reduces its balance sheet to generate money to invest in future growth,” said Citigroup analyst Hiroki Kondo. “There’s a real sense of crisis in Dentsu.”

According to a former Dentsu executive, this powerful but conservative group is struggling to adapt to changing times, the digital revolution in advertising and a national market where it still has a 28% share but which is increasingly different from the one it has dominated. for more than a century.

At the same time, the Tokyo Olympics, which were supposed to earn revenue to buy time for society to address its shortcomings, have become a heavy burden for management resources.

Sponsors registered by Dentsu also have brought in expertise outside to assess the potential harms of continuing to trust society with its campaigns and of remaining prominently associated with an event that experts warn could potentially produce a medical disaster.

“Dentsu is found in the Asian region [as management diverts to the Olympics], and for the past six months has lost both old customers and pitches for a new business. Customers need advertisers to be transparent and innovative, and when they look at Dentsu, they don’t see it, they see a company behind the curve, ”said a former executive.

Dentsu responded that it was “firmly positioned,” noting that its advertising spending in the first-quarter average had doubled from a year earlier due to the expansion of rights from existing customers and the acquisition of new ones.

Before the pandemic and before the postponement of the Olympics, Dentsu’s problems seemed serious, but more solvable. In 2016, the company was taken over overwhelming customers, including Toyota, for online advertising. Later that year, the suicide of a graduate recruit was officially designated as “Death from overwork” and forced the resignation of the president of the company.

French investigators have for six years been studying the background of Tokyo’s successful bid to host the 2020 Olympics. Their allegations include that the important funds were channeled by the bid committee to the detainees. able to influence the outcome of voting through businesses and individuals. who had historical contacts with Dentsu. A former Dentsu senior executive, who denied inappropriate behavior, he told Reuters he distributed gifts and helped secure the support of a powerful Olympian veteran suspected by French prosecutors of taking corruption. Dentsu denied any involvement in the affairs subject to the French probe.

The stock price line and index lowered to Jan 2020 showing Dentsu’s performance

But the Olympics have also been a critical source of profit for the world’s fifth-largest advertising agency and a symbol of its permanent dominance at home. Dentsu was brought in soon after Tokyo won the Olympic bid and was able to talk to more than 40 Japanese companies to become sponsors and run a “national duty” doing so. The result was the most sustained event in history, a record $ 3.1 billion funded primarily by Japanese corporations that paid, in some cases, $ 100 million each.

But while this was beneficial for Dentsu, the real prize would come in preparation and during the games, in the form of campaigns run by various sponsors and what should be a frantic competition for the best TV advertising slots, most of which Dentsu check out. Citigroup analysts estimated that all of this would have contributed about ¥ 10 billion ($ 90 million), or 9 percent, to the group’s annual operating profits.

But this rosy scenario has now vanished, as corporate sponsors have withdrawn from Olympic television commercials fearing damage to the association’s reputation with an event facing public opposition.

“The real danger is of course in what perception the Olympics get – at the moment there is an idea that it could possibly happen without a disaster, but the risks are extremely high,” said a company close to Dentsu.

If the Olympics end without a spike in Covid-19 infections, Dentsu may be able to recover some revenue through advertisements that capture post-game euphoria. But even then, Kondo estimates that the company, at best, will not generate any profit from an event that has a four-decade relationship and that a former executive says is part of the company’s “raison d’être”.

Analysts and industry leaders say the longer-term repercussions could be that Dentsu is being forced to repair ties with companies dissatisfied with the meager marketing benefits of its Olympic sponsorship by offering discounts on advertisements.

“This was going to hurt Dentsu a little bit, because they had to bank on all the campaigns and TV advertising that was going to come out of the Olympics – not the original sponsorship business, but all the work that the business was doing in definitely, ”said the person close to Dentsu.

Chart Salees bar, 2020 ($ billion) showing the largest advertising agencies listed worldwide by revenue

Games aside, the pandemic has also caused major problems. The drop in global advertising spending has led to a sharp drop in goodwill since its acquisition of £ 3.2 billion from Aegis in the UK in 2013 and the frantic purchase of almost 200 companies since then, which has resulting in a record loss of $ 1.4 billion last year.

“There has been a lot of acquisitions from Dentsu. . . The problem was that they couldn’t integrate them, ”the former Dentsu executive said.

The group is also aggressively reducing costs, particularly in Japan, to try to make itself more agile and better adaptable to the digital age. While it now generates more than half of its gross profits from digital ads and related consulting services, industry leaders say its dominance in traditional media has led to a slower digital transition compared to non-Japanese rivals. .

The sale of the seat, he said, said people who knew the details of the deal were a sign of turmoil at the top.

Potential buyers said they had decided quickly against it, in part because making room for new tenants would be costly since the building was made to measure for Dentsu.

Part of Dentsu’s management has led discussions with a financial group that was not the company’s main bank over the sale of the building to Japanese real estate group Kenedix, according to people familiar with the deal.

A second group moved in to block this, inviting another domestic property giant Hulic to present. Hulic was successful, he said, adding that people are familiar with the business, especially since it has been offered cheap deals by Dentsu’s main bank, Mizuho.

The company declined to comment on the building’s buyer, but said the sale was part of its effort over the years to implement remote work and other flexible work practices, not the result of its financial benefits.

Dentsu executives say they will use the newly acquired number of asset sales for acquisitions, but analysts remain skeptical about the company’s growth potential both at home and overseas. the immediate boost of profit margins from cost reductions.

“We think the restructuring could have a negative impact in the near future, including a new acquisition of lower-end projects, and we expect that it will take time for these initiatives to contribute to front-line growth,” said JPMorgan analyst Haruka Mori.


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