Adidas is requiring some ad agencies to pay back more than 10% of their earnings, squeezing small firms

Adidas is requiring some ad agencies to pay back more than 10% of their earnings, squeezing small firms

05/03/2021
  • Adidas has toughened its payment terms for some ad agencies.
  • It’s calling for some agencies to pay back more than 10% of the money they make from Adidas.
  • Some agency execs said the practice is unusual and puts financial pressure on small and midsize firms.
  • See more stories on Insider’s business page.

Adidas has been seeking new payment terms that are putting the squeeze on small and midsize firms already strained by the pandemic.

In terms that agency execs called unusual, Adidas has called for rebates that increase based on total fees and contract length — so the more an agency makes or the longer its contract, the greater the percentage it has to repay each year. The rebates can top 10% of an agency’s fees.

The terms were in an agency contract viewed by Insider and confirmed by execs at a second agency.

Advertisers have been demanding tougher terms of their agencies for years. General Mills’ CMO Ivan Pollard got flak from agencies in 2019 for calling for 120 day payment terms and requiring they give up ownership of all the ideas they pitch.

But the execs said Adidas’ new terms were particularly challenging for small, less financially secure agencies during the pandemic, when the contracts were last updated. Like many marketers, Adidas has been looking to cut costs — it cut its sales and marketing budget 13% in the last quarter of 2020, to $885 million.

While legal, rebates are more common for bulk goods vendors than service providers like ad agencies. Such rebates let companies reduce their expenses for tax purposes. They could also be a powerful incentive for a marketer to award more work to an agency that underprices its rivals, said Jeffrey Greenbaum, managing partner at law firm Frankfurt Kurnit Klein & Selz, who specializes in negotiating contracts between advertisers and vendors.

But the agency execs Insider spoke to said the Adidas rebates are unusual for their size and because they increase as agencies earn more. The execs said the contracts do not guarantee future work, as some marketers do, making it hard to predict their revenue and turn a profit. The Adidas contract reviewed by Insider also said the company won’t pay hard costs, such as commercial production fees, that agencies often bill clients for, although Greenbaum said marketers increasingly won’t cover these sorts of expenses.

Two of the execs said they urged agency leadership to reject Adidas’ terms, and one said they quit their job in protest after the contract was signed.

The rebates aren’t universal. Two people at bigger agencies that work with Adidas said their contracts didn’t include the same demands.

Greg Paull, CEO of R3, one of the most active agency search consultants, said demands for significant volume discounts are rare outside large, long-term contracts.

“These kinds of discounts exist, and agencies can often be their own worst enemies for reducing the value of their services,” he said.

Adidas declined multiple requests to comment for this story.

A picture of a switch and lightbulb
Source: Read Full Article