Powerful advertiser Dentsu strives to solve the problem of the scale of the Olympic Games

Soon after the first batch of Olympic partner activities finally began to appear in Japan’s prime time TV time in early summer, Dentsu Tell investors that huge profits of US$800 million are expected.

Unfortunately, the company — historically considered to be one of Japan’s strongest companies — good news is related to its core business, growth prospects or Postponed 2020 Tokyo Olympics It participates so intensively.

Instead, the profit came from Dentsu’s sale of the Tokyo headquarters building for US$3 billion: a 48-story teardrop-shaped architectural logo suitable for the company’s Japan’s $55 billion advertising market.

Analysts, bankers, and Dentsu’s long-term customers say that the sale of skyscrapers may be the largest single-building transaction in Japan’s history. But it also conceals the internal torture of a company whose problems may eventually outweigh its swagger..

“Like the sale of its headquarters, the company is at a stage where it shamelessly shrinks its balance sheet to generate cash to invest in future growth,” said Hiroki Kondo, an analyst at Citigroup. “Dentsu has a real sense of crisis.”

A former Dentsu executive said that this powerful but conservative group is struggling to adapt to changing times, the digital revolution in advertising, and the domestic market. It still has a 28% share, but it is increasingly different from its current market share. Ruled for more than a century.

At the same time, the Tokyo Olympics, which was supposed to generate revenue for the company to buy time to solve its shortcomings, has become a heavy drag on management resources.

Dentsu’s contracted sponsors even Introduce external expertise Assess the continued trust in the company’s activities and the potential damage that remains significantly associated with events that experts warn of that could lead to medical disasters.

“Dentsu is laying off employees in Asia [as management diverts to the Olympics], And in the past six months, it has been losing old customers and new business. Customers need advertisers to be transparent and innovative. When they saw Dentsu, they didn’t see this. What they saw was a company that was behind the curve,” said a former executive.

Dentsu responded that it was “strongly positioned” and pointed out that its overseas media advertising expenses doubled in the first quarter compared to the same period last year because of expanding the expenses of existing customers and acquiring new customers.

Before the epidemic and the postponement of the Olympic Games, Dentsu’s problems seemed serious, but they were easier to solve. In 2016, the company was arrested Overcharging customers, Including Toyota, for online advertising.Later that year, the suicide of a recent graduate was officially designated as “Overworked” And forced the company’s president to resign.

For six years, French investigators have been exploring the background of Tokyo’s successful bid to host the 2020 Olympic Games. Their allegations include that the bid committee provided a large amount of funds to people who are believed to be able to influence the results of the voting through companies and individuals and have historical connections with Dentsu. A former Dentsu executive who denied wrongdoing, Tell Reuters He distributed gifts and helped gain the support of a former Olympic power broker, and French prosecutors suspected him of taking bribes. Dentsu denied participating in matters related to the French investigation.

January 2020 stock price and index line chart showing Dentsu's stock performance

But the Olympics is also an important source of profits for the world’s fifth largest advertising company, and a symbol of its continued dominance in the country.Dentsu was introduced shortly after Tokyo’s Olympic bid, and negotiated with more than 40 Japanese companies to become sponsors and performances “State Responsibility” By doing this. The result was the most sponsored event in history, with a record $3.1 billion in funding from Japanese companies, and in some cases, each company paid $100 million.

However, although this is beneficial to Dentsu, the real prize should be in the form of activities carried out by various sponsors on the eve of the game and during the game, and in the form of crazy competition that should be the best TV advertising space, which Dentsu controls. Citigroup analysts estimate that all this will contribute about 10 billion yen (US$90 million), or 9%, to the group’s annual operating profit.

However, this optimism has now subsided, because corporate sponsors have reservations about Olympic TV commercials because they fear that being associated with events facing public opposition will damage their reputation.

A company closely related to Dentsu said: “The real danger is of course the perception of the Olympics-there is currently an idea that it may happen without a disaster, but the risk is very high.”

If the Covid-19 infection does not surge by the end of the Olympics, Dentsu may be able to recoup some of its revenue by capturing the excitement after the game through advertising. But even so, Kondo estimates that the company won’t get any benefits from events that have a relationship with it for four years at most, and a former executive called this part of the company’s “reason for existence.”

Analysts and industry executives said that the long-term impact may be that Dentsu is forced to repair relations with companies that are dissatisfied with the meager marketing benefits of Olympic sponsorship by offering discounts on advertising time.

“This will cause considerable harm to Dentsu because they have been relying on all Olympic events and TV commercials-not the initial sponsorship agreement, but these agreements will ultimately guarantee all their work,” said a person close to Dentsu.

Salees’ bar chart, 2020 (billion dollars) showing the world’s largest publicly traded advertising agency by revenue

In addition to games, the pandemic has also caused big problems. The decline in global advertising spending led to a significant write-down of its goodwill in its acquisition of British Aegis for £3.2 billion in 2013 and subsequent frantic acquisitions of nearly 200 companies, resulting in a record loss of US$1.4 billion last year.

“Dentsu has made a lot of acquisitions… The problem is that they can’t integrate them,” said the former Dentsu executive.

The group is also actively cutting costs, especially in Japan, in an attempt to make itself more flexible and more suitable for the digital age. Although it now has more than half of its gross profit from digital advertising and related consulting services, industry executives said that its dominance in traditional media has led to a slower pace of digital transformation compared with non-Japanese competitors.

People familiar with the details of the transaction said that the sale of the headquarters is a sign of high-level turmoil.

Potential buyers said that they quickly decided to object, partly because of the high cost of freeing up space for new tenants, because the building is tailor-made for electrical flux.

According to people familiar with the matter, a department of Dentsu’s management and a financial group that is not the company’s main bank discussed the sale of the building to the Japanese real estate group Kenedix.

The second group took action to prevent this, inviting another domestic real estate giant Hulic to bid. People familiar with the matter said Hulic’s success was mainly due to the cheap financing provided 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 years of efforts to implement remote work and other flexible work practices, rather than the result of its financial performance.

Dentsu executives said that they will use the newly acquired cash from the asset sale for acquisitions, but analysts remain skeptical about the company’s growth potential at home and abroad, in addition to the direct increase in profit margins brought about by cost reductions.

Haruka Mori, an analyst at JPMorgan Chase, said: “We believe that the restructuring may have a negative impact in the short term, including a reduction in new project acquisitions, and it is expected that these measures will take time to contribute to revenue growth.”

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