Loss of $20M HHGregg account leads to big cuts at Pearson

May 7, 2007

Hhgregg's decision to take its $20-million-plus advertising account out of state is sending shock waves through the local creative community.

The Indianapolis-based electronics and appliance retailer's longtime agency of record, Pearson McMahon Fletcher England, will lose a third of its staff as a result, including three of five active partners. But the damage doesn't end there. Several local shops that supported Pearson's work on the account will see up to 25 percent of their revenue evaporate overnight.

All the firms affected vowed to survive, but their ability to follow through on that promise will be tested if the Gregg work isn't somehow recouped.

Gregg officials announced April 30 that Florida-based Zimmerman Advertising would become the retailer's agency of record in early July.

"It's difficult to quantify the effect when a company like [Hhgregg] takes its work out of town," said Bruce Bryant, president of locally based Promotus Advertising and past president of Indianapolis AdClub. "There are lots of moving parts in this kind of deal. It really hurts the entire local advertising industry."

Pearson officials declined to divulge what percentage of revenue the Gregg work accounted for, but said it was the agency's largest client.

A number of account subcontractors working in audio and video production, graphics and other areas find themselves in a similar situation.

"It's a big hit, no doubt," said Brice Bowman, co-owner of Indianapolis-based Earshot Audio-Post, which did radio and television audio work on the Gregg account for Pearson the last five years. "You come to expect this sort of thing in the industry. But until it happens, you can't be totally prepared."

In addition to the five-man Earshot shop, Dean Crow Productions, which has seven employees and works with numerous free-lance performers, and Scofield Editorial, which has 10 employees, are among the well-known firms taking major hits with the southerly migration of the Gregg account.

Printers, materials suppliers and other local firms will also feel the pain of Gregg's departure, industry experts said. Crow, who worked on the account for 13 years, said he employed more than 30 free-lance artists in addition to his staffers on some Gregg productions.

Gregg has an annual advertising budget of almost $42 million. About half of that is handled in-house. People in the industry said there were local suppliers and service providers who benefited from every Gregg marketing venture whether done in-house or through Pearson. But industry observers expect more of the ad work to shift to Zimmerman, an Omnicom Group company, which is currently the 15th-largest advertising agency in the United States. Few, if any, crumbs are expected for local shops.

Deja vu

This is not the first time the local advertising industry has seen a major setback. The sellout or folding of retailers and service firms such as L.S. Ayres, Galyan's, Mayflower and numerous local banks all took their toll.

Earshot's Bowman said the loss of the Gregg account is similar to Michigan-based Meijer grocery chain's decision in 2003 to take its ad work out of town. Meijer pulled its account from Meyer & Wallis, leaving a number of firms scrambling to recover a big chunk of work. Meyer & Wallis, which has offices in Milwaukee and Indianapolis, rebounded that same year by nabbing the Marsh Supermarkets account.

"When these types of accounts go up for bid, there are a lot of suppliers rooting for the big local agencies," Bowman said.

Despite national-level talent in this market, Bowman said many smaller firms still count on large agencies to bring in big accounts they can feed on.

Pearson principal Ron Pearson said 15 of the agency's 44 employees will depart in the wake of the loss.

Three of those departures will be partners. Larry Fletcher, 61, who was the point man on the account for more than 24 of his 28 years with the firm, departs at the end of June.

Cynthia England, the agency's lead media buyer since 1982, also is exiting at the end of June. Chief Financial Officer Terri Brown has already departed. That leaves Pearson, who founded the firm in 1977, and Devra Callaghan, senior vice president and director of account services, as the remaining active partners.

In terms of buyout compensation, Fletcher said there was an exit strategy in place for partners long before the issue of the Hhgregg account surfaced. He declined to elaborate.

In spite of the partners' exodus, Callaghan said there would be no rush to rename the agency or add new partners, though she said the next line of leaders "is already being groomed."

Publicis was last local hope

Pearson decided not to pursue the Gregg account in March, after the retailer said in January it would put the job out for bid. That left the local office of Publicis as the only Indianapolis area agency among the five finalists.

"You can bet there were a lot of people within this industry pulling for Publicis," said Bob Gustafson, Ball State University advertising professor.

Publicis officials said if they had won the account, they likely would have used many of the subcontractors Pearson employed over the last 24 years.

"If [the work] could have stayed in town, that could have saved a lot of firms here a lot of business," Bowman said. "This was a one-of-a-kind account."

Zimmerman had an inside track all along, and that might have led to Pearson's decision not to pursue the work, industry sources said.

Zimmerman is a retail advertising giant with a client list that includes Value City, AutoNation, Six Flags, Office Depot and the National Football League's Miami Dolphins.

Gregg received a $111 million cash infusion in 2005 from Freeman Spogli & Co., the same Los Angeles-based private equity firm that poured cash into and spurred rapid growth in the former Galyan's Trading Co.

Freeman Spogli now owns 80 percent of Gregg, and the change in ownership and pressure to grow likely prompted the agency review.

The Gregg advertising account could double in size in the next three to five years, industry observers said. Pearson officials said those projections figured in their decision not to rebid. Instead, company officials said they will focus on diversifying their client list. One new client has already been added--Moyer Fine Jewelers.

Industry scare, seven years ago

Since starting its relationship with Pearson, Gregg has grown from five to 77 stores.

Only once previously in their 24-year relationship did Gregg put the work up for rebid. That was seven years ago, and when it happened, it awakened--and frightened--a lot of people in the local ad industry, Earshot's Bowman said.

"That last agency review was a very scary thing," said Bowman, who at the time worked for Caboose Productions, which has since folded. "There was lots of hand-wringing. It showed us the value of diversification."

Since that time, Bowman's firm started scouring the East Coast and other regions for work. Scofield diversified into three-dimensional modeling and animation work. Still, Scofield said, "You just don't replace a piece of business like this."

Pearson and Fletcher said it was a gut-wrenching decision not to pursue the Gregg account. But in the end, the preparation for the bid would simply be too expensive, Pearson said, and the profit margin on the account had become too thin.

"Would I have loved to ride that pony a little longer? Yes," Fletcher said. "But it was a great ride."

Fletcher, who has 35 years in the advertising agency business, said he will take several weeks off to visit out-of-town family before deciding his next career move. There's only one thing for sure.

"I won't be going back into agency work," he said. "But my wife said I won't be sitting at home on my butt, either. I have time to start another career."

Fletcher, who said he was contemplating leaving the firm long before the Gregg account came up for rebid, now is focused on transitioning the account over to Zimmerman.

"I want to make sure we remain as professional for the next two months as we have been the last 24 years," he said.

Since he would have likely left the firm this year whether the Gregg account was retained or not, Fletcher said he left the decision on rebidding up to those who would remain.

Despite another downer on the roller-coaster ride that is the advertising industry, all the affected shops promised to carry on.

"This may be painful, but it's not new," Crow said. "I believe Pearson--and everyone else who worked on this account over the years--did great work.

"But we realized long ago, we're just a production company, and essentially we're fired every time we finish a job."

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