Shortly after the first Olympic campaigns finally began to appear in Japanese prime-time TV slots in early summer, advertising giant Dentsu told investors it expected a huge windfall of $ 800 million.
Unfortunately for the company – historically considered to be one of 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. centrally involved.
Instead, the profits came from the $ 3 billion sale of Dentsu’s Tokyo headquarters: a 48-story teardrop-shaped architectural icon that suits the company’s outsized share. Japan’s $ 55 billion advertising market.
According to analysts, bankers and long-term clients of Dentsu, the sale of the skyscraper could be the biggest deal ever in Japan. But it also masks the internal turmoil of a company whose problems may have finally outgrown its swagger..
âAs with the sale of its headquarters, the company is in a phase where it is shamelessly reducing its balance sheet to generate cash to invest in its future growth,â said Hiroki Kondo, analyst at Citigroup. âThere is a real sense of crisis at Dentsu.
According to a former Dentsu executive, this powerful but conservative group is struggling to adapt to changing times, the digital advertising revolution and a domestic market where they still have a 28% stake but which is more and more different from the one he has. dominated for over a century.
At the same time, the Tokyo Olympics, which were supposed to generate income to give the company time to address its shortcomings, became a heavy burden on management resources.
Sponsors signed by Dentsu even brought in outside expertise to assess the potential damage of continuing to trust the company with their campaigns and remaining closely associated with an event that experts believe could cause a shock. medical disaster.
“Dentsu takes refuge in the Asia region [as management diverts to the Olympics], and over the past six months he has lost both old clients and arguments for new business. Customers need advertisers to be transparent and innovative, and when they look at Dentsu they don’t see that, they see a business behind the curve, âsaid a former executive.
Dentsu responded that it was “strongly positioned,” noting that its overseas media advertising costs in the first quarter had doubled from a year earlier due to higher fees 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 caught overcharging customers, including Toyota, for online advertising. Later that year, the suicide of a graduate recruit was officially labeled “death from overwork” and forced the resignation of the company’s president.
French investigators have, for six years, investigated the background to Tokyo’s successful bid to host the Olympics in 2020. Their allegations include that significant funds were funneled from the bid committee to people deemed capable of influencing the bidding process. result of voting through companies and individuals. who had historical contact with Dentsu. A former senior Dentsu executive, who denied inappropriate behavior, told Reuters he distributed gifts and helped gain support from a former Olympic broker suspected by French prosecutors of accepting bribes. Dentsu has denied any involvement in the matters under the French investigation.
But the Olympics have also been a key source of profit for the world’s fifth largest advertising agency and a symbol of its continued dominance in the country. Dentsu was recruited soon after Tokyo won the Olympic bid and was able to convince more than 40 Japanese companies to become sponsors and thus fulfill a ânational dutyâ. The result was the most sponsored event in history, a record $ 3.1 billion funded primarily by Japanese companies paying, in some cases, $ 100 million each.
But if it was good for Dentsu, the real prize would have come before and during the games, in the form of campaigns by the various sponsors and what should have been a fierce competition for the best TV advertising boxes, most of which Dentsu controls. Citigroup analysts estimated that all of this contributed about 10 billion yen ($ 90 million), or 9%, to the group’s annual operating profits.
But that rosy scenario has now faded, as corporate sponsors have refrained from running Olympic TV commercials over fears of damaging their reputation by partnering with an event that faces public opposition.
“The real danger of course lies in the perception of the Olympics – at the moment there is an idea that maybe this could happen without a catastrophe, but the risks are extremely high,” said a company close to Dentsu.
If the Olympics end without a peak in Covid-19 infections, Dentsu may be able to recoup some income from ads capturing post-game euphoria. But even then, Kondo believes that the company will best derive no benefit from an event with which it has had a four-decade relationship and which a former executive says is part of the “raison d’Ãªtre” of the company. ‘business.
Analysts and industry executives say the longer-term fallout could be that Dentsu would be forced to reconnect with companies unhappy with the meager marketing benefits of their Olympic sponsorship by offering discounts on advertising slots.
“This is going to hurt Dentsu a lot, because they had banked on all the campaigns and TV advertising that were going to come out of the Olympics – not the original sponsorship deals but all the hard work that those deals would ultimately secure for them,” said the person close to Dentsu.
Gaming aside, the pandemic has also caused some big problems. The decline in global ad spend resulted in a sharp depreciation of goodwill resulting from its Â£ 3.2bn takeover of Britain’s Aegis in 2013 and the rampant buyout of nearly 200 companies since then, resulting in a loss record $ 1.4 billion last year.
âThere has been a wave of acquisitions by Dentsu. . . The problem was they couldn’t fit them in, âsaid the former Dentsu executive.
The group is also aggressively cutting costs, particularly in Japan, to try to make itself more agile and better suited to the digital age. While it now generates more than half of its gross profits from digital ads and associated consulting services, industry executives say its dominance of traditional media has resulted in a slower digital transition compared to its rivals. not Japanese.
The sale of the head office, people familiar with the details of the deal said, is a sign of the turmoil at the top.
Potential buyers said they quickly decided against doing so, in part because making room for new tenants would be costly because the building was custom-designed for Dentsu.
A section of Dentsu management has had 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, people familiar with the deal say. .
A second group decided to block this, inviting another national real estate giant Hulic to bid. Hulic was successful, people familiar with the deal said, largely because he was offered cheap funding by Dentsu’s main bank, Mizuho.
The company declined to comment on the buyer of the building, but said the sale was part of its long-standing efforts to implement remote working and other flexible working practices, and not the result of its financial performance.
Dentsu executives say they will use the newly acquired cash from asset sales for acquisitions, but analysts remain skeptical of the company’s growth potential, both at home and abroad, beyond the immediate increase in profit margins resulting from cost reductions.
“We believe that the restructuring could have a negative impact in the short term, including a decrease in acquisitions of new projects, and we believe that it will take time for these initiatives to contribute to the growth in turnover,” said Haruka Mori, analyst at JPMorgan.