B.E. 100s The Battle for Urban Markets.

Black ad agencies surrender partial ownership to compete for their ethnic share

LIKE THEIR BIGGER COUSINS IN THE ADVERTISING BUSINESS, black-owned ad agencies, for the most part, reaped the rewards of a sizzling economy. Some agencies adjusted to new marriages while others pondered such unions. All, it seems, are prepping themselves for the impact that a more multicultural society will have on their business.

J. Melvin Muse, chairman and team leader of Muse Creative Holdings L.L.C. in Los Angeles, has plans to take his company public. "We want to have the paperwork for the IPO completed by the end of May, but we'll most likely delay the actual public offering until the third or fourth quarter [of 2001]," says Muse, noting, however, that he will retain majority ownership.

Muse Creative Holdings (No. 6 on the BE ADVERTISING AGENCY list) is composed of a research company, a brand consultancy, and Muse Cordero Chen & Partners Inc., the full-service advertising agency. The holding company pursues business that offers higher margins, like strategic consulting, creative production services, research, and focus groups. "We're following the money," says Muse. "I think the future is in having a fully diversified firm to perform the integrated marketing services that clients want."

"Because the independents lack the ability to provide additional services, such as event and database marketing, promotions, and research," says Muse, "they will find themselves out in the cold. The days of just doing ads with black people in them are over.... The need is much wider and [more] vast." Muse Creative posted billings of $76 million in 2000.

That the advertising industry experienced a record year is borne out by the $236 billion that Universal McCann, the media arm of McCann-Erickson Worldwide, says advertisers spent in 2000, a nearly 11% increase over 1999.

"The year 2000 was a banner year for advertising agencies," notes Michael Donahue, executive vice president of member services at the American Association of Advertising Agencies in New York. He attributes the good year to the presence of "dotcom money, the Olympics, and the elections."

"Despite the economy having done so well, black agencies probably didn't have enough in the way of gains," says Ken Smikle, president of Chicago-based Target Market News, a marketing research firm that tracks the trends of black consumers. "There should have been more companies coming on line and making use of black agencies, particularly since the economy is good, [and the] African American market is skyrocketing in all segments."

Why were the big opportunities so few for black agencies? "White agencies have become more competitive on accounts targeted to African Americans or the so-called urban consumer," responds Smilde.

That sentiment was echoed by Byron E. Lewis Sr., chairman and CEO of New York City-based UniWorld Group Inc. (BE'S 2000 Advertising Agency of the Year) with billings of $245.8 million in 2000, in answer to why he sold 49% of his 31-year-old company last June to WPP Group Plc., a London-based communications giant, and according to Lewis, "one of the largest agency networks in the world."

Selling nearly half of UniWorld was "a matter of survival," says Lewis. "The general business conditions that we experienced leading up to that decision [were] the result of dramatically increased competition from the mainstream advertising agencies."

The irony, Lewis adds, is that "this competitive environment comes as a result of long-neglected recognition of the importance of black consumers. The emergence of rap and hip-hop, whose influence has crossed over to white America, has only heightened mainstream competition."

Last year, UniWorld created Urban Force, an in-house youth marketing division that is working on accounts for AT&T, Ford Motor Co., Burger King, and Pepsi-Cola. Home Depot and Motorola are corporate clients that also came on board at UniWorld in 2000.

Chicago-based Burrell Communications Group L.L.C. (No. 3 on the BE ADVERTISING AGENCY list) went after general market business from Verizon, the telecommunications company, and got it, indicating, says one observer, that advertisers are finally beginning to look beyond an agency's hue to award assignments.

Heide L. Gardner, vice president of diversity and strategic programs at the American Advertising Federation, a national trade organization based in Washington, D.C., believes that Burrel's acquisition of the Verizon account bodes well for all black ad agencies. "With an assignment at that level, it represents a landmark in the industry," says Gardner. "They actually competed for the general market assignment. They did not go in competing for the ethnic component. Hopefully, that'll set some sort of a precedent."

"They chose us because we came up with the best idea," says Thomas J. Burrell, chairman and CEO, about the Verizon branding assignment. The deal came after the merger with Publicis, a giant French agency, but Burrell says there was no cause and effect because his company has had a long-term relationship with Verizon's predecessor, NYNEX.

The marriage with Publicis has worked out well, too. "That's because we still maintain the autonomy that we had before, but we also have access to much broader resources. They've been very good at referring new business to us and, in turn, we've been able to call on them for new business efforts that go beyond the boundaries of the United States," Burrell says.

Last year's new client list also included the Illinois Department of Public Health, Charles Schwab, Nestle, and Western Union, helping to account for the $179.4 million in billings.

Former President Bill Clinton signed an executive order last October that should be a bonanza for those agencies seeking government contracts. Gardner, at AAF, says that Clinton, with his signature, mandated that the federal government offer more procurement opportunities for minority businesses and do a better job of tracking those relationships. That executive order reflected a set of principles that AAF helped formulate, and which are guidelines to help companies "establish a framework for reaching multicultural consumers, and also for implementing strategies and processes that will help them do that." Rep. Carolyn Cheeks Kilpatrick (D.-Mich.) and Rep. Robert Menedez (D-N.J.) were instrumental in having the special section on advertising including in the executive order.

"In his statement he made reference to the principles," says Gardner. "For us, it was a wonderful example of a chief executive officer sending the signal from the top down." The executive order should mean more business for black ad agencies while setting an example for corporate America.

Ray A. Sykes III, founder of Houston, Texas-based Sykes Communications Inc., (No. 12 on the BE ADVERTISING AGENCY list), says 2000 was a down year for his company and that this year might see him following through on one of the two acquisition offers he has received. The suitors have combined billings of approximately $850 million.

Forty percent of Sykes Communications' business is in federal government contracts. Enough of those ran their course that Sykes had to close the Washington, D.C., office and endure a 7% drop in the billings his firm drew in 2000, down to $22.7 million from $25 million in 1999. But the expiration of the contracts was only partly to blame.

"In the past," Sykes explains, "there weren't very many agencies interested in doing government contracting because of all the red tape, lower profit margins, and the work wasn't as glamorous as it is in the retail section. However, now you find that those same agencies are competing with other, smaller agencies for those federal government contracts."

But if Sykes sounds worried, he isn't. In December 1999, his company completed a rigorous federal government certification process that made it eligible for multimillion-dollar contracts. Among others, the agency has secured business with the Department of Housing and Urban Development. "It takes us out of the embryonic stages and brings us up to the graduate level. We've got some pretty big opportunities." In consideration of those prospects, Sykes says, "My main concern is to make sure that the people that helped make this agency successful are taken care of and their futures are protected."

Don A. Coleman, founder and president of Don Coleman Advertising Inc. (DCA), No. 1 on the BE ADVERTISING AGENCY list, headquartered in Southfield, Michigan, followed an excellent year by joining a holding company, New American Strategies Group (NASG), the foundation of a multicultural entity that includes Montemayor & Associates, an Hispanic firm out of San Antonio, Texas, and plans for another Hispanic agency and an Asian shop by the middle of 2001. Coleman owns 51% of NASG and serves as its chairman. "That's going to give us a full multicultural arsenal in terms of agencies," says Coleman.

In March, Coleman launched New Perspectives Media, a multicultural media buying company in Miami. A research unit is also in the works.

How is he financing these initiatives? "Actually, it's a combination of our own resources as well as capitalization from True North Communications, who purchased 49% of DCA in 1999. Coleman credits that relationship with helping him to land the American Airlines and Verizon Wireless accounts in 2000. "When you're a partner, you're a partner, right?" says Coleman.

Don Coleman Advertising also picked up business from Salomon Smith Barney and Hilton Hotels. And although DaimlerChrysler, an existing DCA client, had a rough year in 2000, its budget with the agency increased slightly for 2001. DCA ended the year with $270 million in billings.

In light of the recent acquisition of True North Communications by the New York-based Interpublic Group of Cos., a large holding conglomerate, Coleman says, "In general, the advertising business is going to consolidate more. I think we're going to end up with four major holding companies, when it's all said and done. The acquisition could only help us."

I'm a believer," adds Coleman, "that if you're not on one of the major teams, you're not going to be able to play in the big league. I think the day of the big viable independent is rapidly coming to a close. You're probably going to have to be part of a major agency network in order to get at some of these big clients."

Al Anderson, founder and chairman of Atlanta-based Anderson Communications (No. 14 on the BE ADVERTISING AGENCY list), says that the black leaders of the industry's largest agencies are aging.

"We're all getting older-- myself at 59--with the exception of Don Coleman, who's a young man, but this business will make him old soon.

"There have been attempts by all of the agency principals to develop people and they have not worked," says Anderson, who found Virgil Scott, the company's president and CEO, and the one who will take the reins when he steps aside. "I'm blessed to have found [Virgil Scott]."

Anderson Communications, whose billings totaled $17.5 million in 2000, says that the firm had both an interesting and a tough year. "What made 2000 difficult was the number of false starts with clients. We won pieces of business that never got started," says Anderson. "There were a couple of accounts that we won where we never received a dollar--because so much of this business revolves around an in-house champion--and if that cheerleader leaves the client's company, then so does the business."

Nevertheless, the diversity of Anderson Communications continues to grow. It now offers product sampling, a broader skill set, and "the largest, single black media operation under one roof," says Anderson. The agency produces and owns four radio shows.

When asked what he thinks of the trend toward mergers arising in the industry, Anderson notes, "It's too early to issue a verdict on all of the mixed marriages taking place, but if you look ahead five years from now and Burrell is a billion-dollar agency, it works. The alliance with these white agencies allowed them to fuel significant growth in revenues.... If, on the other hand, you look five years down the road and Burrell's billings have only increased 17% to 18%, all that has happened is that Publicis has come in and taken 49% of the profits that Burrell has already generated."

Proclaiming that Anderson "will have to speak for himself" when it comes to age and succession, UniWorld's Lewis maintains that his company is well prepared for the future, although he agrees with Anderson that the number of blacks entering the field is declining. Lewis pointed to UniWorld president Gregory Walker and senior vice presidents Chuck Morrison and Valerie Graves as the company's mainstays and representatives of the next generation.

"Contrary to the graying concept, I'll be here for a while," says Lewis.

Muse doesn't foresee an increase in the number of black ad agencies either. "The evidence is crystal clear.... There will be fewer African American firms, not more. The consolidations will mean very few independents."

In order for Muse Creative Holdings to grow, the company will have to find outside resources, but Muse isn't going to put the company on the block. "The logical question would be: Would I be interested in selling? The fact that I haven't done it yet, and I've talked to everybody, pretty much gives you your answer."

Whichever way the wind blows in the future, those in the industry are generally optimistic.

"I'm seeing some signs that there is some progress," says Gardner." I think ultimately the marketplace is going to drive the change that we're all hoping for."

Top 20 Billings & Employees

BLACK-OWNED                                     %
ADVERTISING AGENCIES       1999        2000   CHANGE

NUMBER OF EMPLOYEES         811         933   15.04%

BILLINGS(*)           $1,075.61   $1,244.75   15.73%

(*) In million of dollars, to the nearest thousand. As December
31, 2000. Prepared by B.E. Research. Reviewed by Mitchell
& Titus, L.L.P.

How We Selected the Top Agencies

We canvassed the Standard Directory of Advertising Agencies, combed industry publications, and made inquiries in the field to compile a list of full-service advertising agencies in the U.S. that are 51% black owned. Surveys were sent to these agencies. Those that responded and met the criteria were placed into our ranking.

To qualify as a full-service advertising agency, the company has to make media placements--that is, purchase time and/or space for its clients' advertising. Companies that only provide consulting services, or only create or produce advertising, or only do media placements do not qualify as full-service agencies.

We elected to list only the 20 highest-ranking agencies, based on 2000 performance, on the assumption that these firms were most likely to have at least one national account and a minimum of $7.2 million in billings.

An agency's financial status is measured in terms of billings, monies allocated by an advertiser to its agency to buy time on television and/or radio, or space in publications and other print media. These media outlets then pay a commission back to the agency in the form of a discount in the 15% to 22% range, which the agency counts as revenue. Other sources of revenue for an agency include production fees that the agency charges the client to produce the advertising and fees for adjunct services such as public relations, consulting, and promotional work.

Our ranking is based on a combined total of actualized billings plus capitalized billings (where commissions have not yet been paid, but the media buys were completed) and other agency fees reported as revenues, an accepted industry practice for reporting earnings status. In most all cases, this accounts for the differences between Red Book figures and agency-reported figures.