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MATT SCHECKNER: I'm Matt Scheckner.
It's my great treat to serve as Executive Director of
Advertising Week.
We've been doing this since Roosevelt was president.
That was a test. No?
Since--
seven years.
It's our seventh year.
And the overall grounding principle of the thought
leadership program is to put folks on stage who are leading
the way forward.
So whether it's in the white hot areas of the business,
like social media, or mobile, or gaming, or anything
digital, or just overall leadership in plotting the
course for the future, that's the core strand of DNA that we
seek to find.
And we see many familiar faces here.
The thought leadership program is reinvented
completely every year.
And we are over the moon to have not one, not two, but
three bites this year of the apple, with MDC partners.
Which when you think about who is leading the way forward in
our industry on the whole, they are certainly right at
the very, very top, if not the top of the list.
So we are thrilled to have MDC.
This is the first of three MDC seminars.
We are just over the moon to have Miles and such a great
group here.
So without further ado, let's welcome our dear friends at
MDC partners.
Thanks, everyone.
[APPLAUSE]
MILES NADAL: Good afternoon, ladies and gentlemen.
It's a pleasure to be here.
And thank you for the opportunity to present what we
think is an interesting topic that I have felt for a long
period of time was noteworthy and worthy of dialogue.
My fundamental belief has been that marketing has changed
very radically, and that the level of accountability of
corporations toward driving return on marketing investment
was going to change.
Because ultimately the pressure on companies to
produce tangible measurable financial performance and
drive return on marketing investment would be greater
and greater especially in a low growth economy.
I was privileged to assemble three distinguished colleagues
who come from little bit different areas, but all have
great understanding expertise and insights.
To my far left is David Kirchhoff.
David is the President and Chief Executive Officer of
Weight Watchers.
David has had a distinguished career, first at Boston
Consulting, but second of all, in different areas of
responsibility, in growing areas of importance in
management in the Weight Watchers organization.
And most recently he is the President and CEO overseeing a
network of over 19,000 service providers in just about almost
every community around the world.
David has done some transformational things about
utilization of marketing and the
building of Weight Watchers.
To his right, or my left, is Lee Cooperman.
Lee is a person who I've gotten to
know exceedingly well.
He comes from the most humble of beginnings in the Bronx.
He went to Columbia University,
where he got an MBA.
And he spent 25 years at Goldman Sachs.
And for 15 years he ran research.
Subsequently, he started in 1989 a firm
called Omega Advisers.
And Omega is one of the most successful money
managers in the world.
Today, the firm runs about $5 billion.
He's had a compounded annual return of 16% pre-fees, or you
make 900% on your money, of which 20% is his money.
He is an extraordinary person in many ways and last week, at
a dinner with Warren Buffett and Bill Gates and Melinda
Gates and Michael Bloomberg, decided to join an illustrious
group where he would pledge over 50% of his net worth to
charity and over $1 billion over the
course of his lifetime.
Russ Klein is someone who's obviously quite well
known to all of us.
Russ is probably one of the most prolific Chief Marketing
Officers in the history of advertising.
He won numerous awards and great acclaim for his
leadership as the CMO of Burger King during the
transformational period when it was sold by Diageo to
Goldman Sachs, Texas Pacific, and Bain Capital and then
subsequently went public.
What's extraordinary is the innovation
that they put forth.
Some of this is not objective because of my association with
Crispin Porter.
Bless you.
But as Bill Parcells once said, "You are what your
record says you are." During that period of time, over $2
billion of shareholder value was created.
Shareholders, after the sale, will have made
12 times their money.
And the growth in same store sales, and the market
penetration and all financial comps are without compare.
So I thought I'd put together a panel that I thought could
give different perspectives on the basic premise about
accountability of shareholder value, about driving return on
marketing investment.
And I thought I'd start off by asking Lee Cooperman just to
give a backdrop of what's happening in the economy, what
he sees at this point in time, and the kind of investments
he's looking at in the world, in the backdrop of what has
been some of the most difficult economic conditions
America's ever faced.
LEE COOPERMAN: Thanks, Miles.
I don't want to portray myself as small minded.
But I'm taking the approach that we're going through a
somewhat classical cycle, albeit each cycle has its own
little nuances.
So to take you back, and maybe to show you that the stock
market is not as irrational as some people will portray it to
be, in the period ended March of '09, from its peak to its
trough, the market dropped about 58%.
That happens to be about twice as severe as the average bear
market historically.
The typical bear market has been about 25% decline.
So twice as severe as the average.
The National Bureau of Economic Research, last week,
finally dated the end of the recession.
And they say the recession ended in June of '09 and that
the decline from peak to trough in GDP was about 4.1%.
So guess what?
The average economic contraction in 10 or 11
previous recessions, GDP on average contracted about 2%.
So we wound up with a contraction GDP a touch over
twice the average, and we had a bear market twice as severe
as the average.
In March of '09, at the bottom, we then saw a
tremendous amount of fiscal monetary stimulus entering
into the economy.
My good friend Jimmy Cramer was screaming, they know
nothing, they know nothing, at CNBC.
And then Geithner, by the way, to Jimmy Cramer's credit and
to Geithner's credit, said he was right.
We were behind the eight ball.
We didn't know what was going on.
We didn't fully appreciate it.
We brought out all sorts of monetary and fiscal stimulus,
and that has been instrumental in
starting to turn the economy.
I think the difference in this business cycle versus a
typical business cycle is we're going to come out of
this much more slowly because of the need to de-lever the
economy, to reverse a lot of the shenanigans of the last
decade that ended around 2007.
But I think we will grow.
I think that economic policy, whether it be monetary or
fiscal policy, will be tilted towards
promoting economic growth.
And we live in a democracy, and they don't want
instability.
And so, when you think about it and step back, the labor
force in the United States grows about 1% per annum.
Productivity grows about 2% per annum.
So unless you get around 3% in real growth, the unemployment
rate stays high.
And growth of less than 3%, the unemployment
rate will inch up.
And that's socially unacceptable, given that we're
starting from a 9.5%, 10% level of existing
unemployment.
So I'm playing it like the Federal Reserve Board, the
administration, Congress will ultimately get their way.
They'll figure out the right combination of things to get
the economy growing in a more substantive way.
And that's the way I'm playing it.
And I think we should not lose sight of the fact, when guys
like me talk about the economy growing more slowly than
historically has been the case, stock
markets figure that out.
Because today, 35% of the companies in the S&P 500 yield
more than bonds.
It's an unusual condition that has not existed
really since 1958.
1958 was a famous year in the equity market.
That was the year of the yield reversal.
Prior to 1958, stocks used to regularly
yield more than bonds.
And really, now the fact that 35% of the S&P yield more than
bonds is a highly unusual condition
in the last 50 years.
I'll shut up here because I'd rather hear-- maybe you have
the formula for me losing some weight because you're in
charge of weight loss.
I think the economy's slowly getting better.
Stock market outlook, in my opinion, is fine.
And I guess one last statement.
I'm like you.
I have to decide what to do with money.
I may have an extra zero relative to you, but the
bottom line, I have the same problem to figure out.
And I can keep my money in cash, which is earning zero.
I don't know about you, but my bank is paying me five basis
points, which I round off to zero, my cash.
I can go out and buy a ten year government bond yielding
2.5% or 2.6%, which I think is [UNINTELLIGIBLE] looking for
occurrence.
I wouldn't want to do that.
I could buy some of the higher yielding paper, so-called junk
bonds, yielding about 8%.
They're OK.
Or I could buy my favorite common stock, which yields
anywhere from zero to 4%, depending upon the dividend
policy, but selling at 9, 10, 11, 12 times earnings, growing
at some rate.
And to me, hands down, a well selected portfolio of common
stocks is the best alternative amongst financial assets at
this time giving evaluation.
MILES NADAL: That's helpful.
David, give us a perspective.
We've talked about shareholder demands have increased, in
terms of accountability.
In light of a slow growth economy, there are more
activist shareholders than ever before.
Nelson Peltz, Carl Ichan, Bill Ackman, the list is long and
distinguished.
You run both a public company, you run a company where
marketing is really important.
And you also have a significant shareholder as a
private equity firm.
So you're in as good a position as any to talk about
level of accountability of management in general, but
also accountability of return on marketing investment and
tangible financial performance, in terms of
driving marketing accountability.
DAVID KIRCHHOFF: So that question would seem to require
a treatise.
I think in some respects, working at Weight Watchers, I
frankly don't recall life not being under a situation where
I'd have a private equity owner that wasn't a majority
shareholder.
So in some respects I feel like I've been working for,
and now CEO of, a company where I've always felt
shareholder accountability.
I've never known otherwise.
I think if you look at shareholder activism, I think
a lot of it was happening, frankly, prior to the issues
with the economy and growth.
And I think fundamentally, it was a reflection of the fact
that there were a lot of investors out there that
didn't believe that the CEO of the company felt any
accountability truly to his shareholders above and beyond
what was baked into that person's performance package.
And, from my point of view, I've been at a company that
has always kept the separation between chairman and CEO.
So to be clear, I may be the CEO of Weight Watchers, but I
have a boss.
And the boss is the Chairman of the Board of Directors.
And so I've always known life where there was very direct
accountability and responsibility for the
performance of my business.
And I've just never known anything else.
I suspect what I take as normal in my job is going to
become the increasing normal in a lot of other companies.
I think where I feel fortunate is that not to say that
activist shareholders are necessarily clamoring for
something that's going to drive shareholder value for
the next six months, but I'm very fortunate in that I have
a private equity holder that's been the majority holder for
now over 10 years.
They want me to do the right things to
drive long term growth.
That's where they see shareholder value
accumulating.
Any study that's worth its salt would say that it's
almost impossible to save your way to long term sustainable
shareholder gains.
And in fact, if you can't grow your business, you're stuck.
And so I have a shareholder that's very focused on making
sure that I grow my business.
But they obviously want me to do it profitably, and they
want me to do it in a way that I'm going to maintain my
margin structure and all that other kind of good stuff.
And so in that sense, marketing has to be
accountable.
But at the same time, it has to drive growth.
MILES NADAL: Russ, obviously you've gone through a similar
kind of dynamic.
But you actually increased spend during your tenure.
But you also got much greater returns on your marketing
investment.
What was your philosophy then?
But you've also experienced that we had
a pretty good economy.
And if you could project forward in a difficult
economic environment, what are marketers doing?
And what should they be doing when you have low growth but
you need to drive higher profitability growth than 1%
to 2% growth of GDP?
So comment on what did transpire and project forward
what you think the right solution is going forward.
RUSS KLEIN: Sure.
Well, like David, I think I feel like I've lived my whole
life subject to the rigors of a private equity owner going
back to 1987.
Some of you may know Tom Hicks, who has got an empire
of his own now.
But Hicks and Haas, which was his original partner, did an
LBO with Dr. Pepper, 7 Up back in 1987.
And I was the CMO at that point.
And I think, like David, when recessionary periods come
along, we are already braced for a lot of the emotional
things that a manager needs to be thinking about in terms of
your discipline, your rigor, your efficiencies, your
productivity.
And so maybe we have a little bit of a tip in on how
these things go.
At BK, they say the two most important days for a private
equity company are the day they buy and
they day they sell.
And there's a third most important day, which is the
management team that they hire.
And I think all three things went right for BK, in that
they purchased it at a great price.
There was a billion dollar write
down during due diligence.
So it was basically a purchase price of $2.4 billion that was
written down to $1.4 billion.
And that allows you to immediately have some head
room, some breathing room in terms of the financial
performance that is required from you.
I think you have to define activist shareholders too.
You've named some individuals, but I think private equity
companies are generally activists as well.
And the big difference there versus maybe a normal
composition of a board is that in a more normal composition
of a board, where you don't either have an individual who
owns a big chunk of stock or you don't have private equity
companies that own it, you're spending other people's money
in that traditional model.
You're spending their money when you're in a private
equity ownership, or you have an activist on your board who
has a giant chunk of shares.
So the intensity changes in terms of performance.
As I look to some of the slower growth, I'm actually
very heartened to hear what Lee had to say because he
knows a lot more about futures around the
marketplace than I do.
I personally am feeling like we're in for an economic ice
age, as it pertains to marketers because I think it's
going to be slow growth for a long time.
And I think you're going to see, yes, more requirements
around return on investment, which is tricky when you're
trying to run a business day to day on that basis.
But I think you'll start to see some of the old tried and
true strategies, people line extending off of existing
trademarks.
Look at the mergers and acquisition activity that's
growing like crazy now again.
So I think you'll see people opt for things that appear to
be more efficient ways to get growth, either buying it or
trading on existing equity trademark through line
extensions and those sorts of things in order to, if you
will, get a better return on marketing investment.
MILES NADAL: Did you want to comment at all about that?
LEE COOPERMAN: Well, I think the activism acceleration is
really the result of the change in the character of the
market, basically.
The S&P 500, which we'll use as a proxy for the level of
market, in March of 2000 peaked at 1527.
Seven a half years later, October of 2007, was 1565.
So in seven and a half years, it went up 2.5%.
And today the S&P is struggling
to stay around 1150.
So it's materially below where it was a decade ago.
In that period, the hedge funds generally returned a
superior return.
And generally speaking, money goes where money's treated
best. And so the hedge funds have grown relative to
conventional money managers and, we'll say, mutual funds.
And the hedge funds have the chutzpah, or the audacity, to
charge Two and Twenty versus a conventional fee of 1%.
So they've got to find ways of
generating incremental returns.
And so they're not nearly as patient.
They're impatient capital.
And they try to go into under-performing companies and
rattle their cage.
So Carl Icahn would be the first to sit
here and just say--
and I'm not endorsing what he's saying, but what he says,
since I had dinner with him Wednesday night--
corporate America is incompetent.
They're overpaid.
They're under-performing.
And we've got to teach them a lesson.
And we've got to rattle the cage.
So I think we've gone from, I don't know, 2,000, 3,000 hedge
funds a decade ago to 10,000 today.
And they all are attempting to achieve above average returns,
which means they have to make their own luck.
I think that logic explains it.
You typically don't see, with the exception of say Michael
Price at Mutual Shares when he was doing his gig, you don't
see tick-boom mutual funds, bank trust departments, taking
an activist approach.
It really more rests with the hedge funds.
RUSS KLEIN: There is one thing, just to insert on that.
David, Weight Watchers is a spin off, right?
From somebody?
DAVID KIRCHHOFF: HJ Heinz.
RUSS KLEIN: Heinz.
DAVID KIRCHHOFF: Yup.
RUSS KLEIN: And so I think there's another common theme
which you see, which is above market returns on spin-offs.
And Lee would know a statistic around that.
But my last statistic on that was somewhere between 18% and
20% superior returns, versus the S&P, on spin-off deals
because people are able to unlock value in a Weight
Watchers brand that was maybe being smothered by HJ Heinz or
being smothered by Diageo.
And so I think after this M&A period we're going to see for
the next few years, it invariably will lead to more
spin-offs at some point, because people are going to
buy some things that didn't work out.
MILES NADAL: On the balance sheets of corporate America,
we have about $1.8 trillion of excess cash.
People predicted going into 2010 that you would have very
modest increases in ad spending.
But in fact, the results have shown to be much more
buoyant than that.
There's been mid to high single digit growths in ad
spending, although ad spending usually is a leading indicator
of growth of GDP.
But we've only had 1% to 2% growth of GDP.
And it looks like ad spending will continue robustly in the
second half of the year.
David, tell me your point of view about why are marketers
spending more money?
And how have you dealt with it at your own company?
And what's your philosophy going into '11?
DAVID KIRCHHOFF: Well, it gets back to what
I was saying before.
It's very difficult to drive shareholder value growth if
you can't grow your business.
It's just very simple math.
And so I think that it is a natural instinct of management
to say, if we could spend more money on marketing, then
hopefully that could be enough to drive growth at the top
line and do so reasonably efficiently.
And sometimes that works and sometimes it doesn't.
Certainly from a marketing budgeting point of view, last
year advertising rates for prices were down.
This year, it looks like they're going to be up a bit.
So that obviously factors as well, the supply and demand
aspect of this.
But from my point of view, I've always taken a very
simple or simplistic view of how much money to spend.
And I don't like operating via a budget.
The budget is sort of a placeholder and it gives you
sort of a sense of absolute measure.
But frankly, my perspective is that I am in a business that
is, on some level or on many levels, a direct response
business and that as people engage with us and as they
become members and subscribers,
that's revenue in.
And so therefore, it's a very simple equation as to what is
the cost per enrollment or cost per acquisition.
And I was raised on cost per acquisition.
And so my view is that the marketing mix is, within a
certain marginal cost, acquisition cost, you spend as
much money as you possibly can.
Because if you can find a way to do that then you can grow
as fast as you want.
But I think, if you're going to do that, you also have to
be disciplined to say, if something's not
performing you stop it.
And so I'm not a big believer in advertising or marketing
that builds the brand if that doesn't result in increased
engagement.
If nothing's happening then it's not working
is my point of view.
But on the other hand, if you're seeing increased
engagement, I have an infinite appetite to spend more.
And so I think that maybe that's easier for my business
because it's kind of a retail business and it
lends itself to that.
I think it's probably a very different proposition for CPGs
when sometimes they don't feel like they see as much of a
direct connection between the money they spend and the sales
that come in.
MILES NADAL: How do you view the cost per acquisition
versus the cost of increasing the lifetime
value of the customer?
DAVID KIRCHHOFF: Unlike, say, a traditional retailer, where
you say, if I could just get into the door of
Bloomingdale's and I could get you to become a high spending
person and I'm going to do all sorts of net present value
analysis by customer segment and everything else, our
business has tended to be a little bit less
complicated than them.
Simply getting people in the door, we know that if you
enroll in Weight Watchers that there's a very high likelihood
you're going to re-enroll in Weight Watchers.
And so we factor that in, but it's not an
incredibly dynamic measure.
But of course, when we think of whatever it is, which is
our estimate for revenue or contribution per acquisition,
we then compare that against the acquisition cost. And if
the economics and margins and everything else hold up, and
are cash flow positive, then we spend.
MILES NADAL: Russ, in 2004, one of the transformational
events that you guys implemented was the
utilization of viral marketing and digital marketing and
Subservient Chicken probably being one
of the seminal events.
You tried a lot of things differently than most of your
competitors.
What was it that you saw as an opportunity to redistribute
your marketing dollars?
And actually, how did you change the marketing plan for
what had transpired historically going forward for
that next five years?
And what things did you try that worked?
And what things would you have done differently?
RUSS KLEIN: Well, because it was a turnaround, there's a
whole spectrum of things that are responsible for the
success of Burger King.
So as I answer that question and talk about marketing
components, I have to pay due to a lot of the other
contributors to that.
Certainly one of the key decisions that I made was
hiring Crispin Porter + Bogusky, which made me look
real smart for the following seven, eight years.
And in partnership with CP+B, we did an assessment around
the state of the Burger King brand.
And there were certain unique needs to the brand that we
felt we had.
And our mantra was that Burger King was a brand that people
knew more than loved.
And we said, in response to that, we have to set about
surprising people, we have to set about getting a social
currency out there for the brand.
And we saw collectively, our team and CP+B, saw the
emergence of social media, the emergence of digital media
strategies through various platforms, as a
hyper-connectivity that was taking place.
And even before there were research tools out there
measuring all the eyeballs that were moving, we knew that
the eyeballs were moving from traditional media into some of
these new spaces.
And part of how we used the Burger King brand to surprise
people was through things like the Subservient Chicken.
What better way to introduce a new chicken that you can have
your way than to have a chicken on a website that you
can boss around?
And, God, I think it's got well over 1 billion hits and I
don't know how many tens of millions of unique users.
But fundamentally, it just became the way people started
to communicate and connect.
And we didn't wait around for all of the metrics and
syndicated research tools that are coming into focus now
before we made that move.
And we felt it gave us a leg up, while some other folks
were more flat footed in our space.
MILES NADAL: When you have a low growth economy, when you
have competitors who have an economic advantage by a better
balance sheet to be able to invest in your business, what
recommendations do you have where you're trying to
stimulate growth beyond the growth of GDP, still keep
shareholders happy by driving incremental profitability?
What do you do when you have those challenges in this kind
of environment?
RUSS KLEIN: Well, so competing against a well-heeled
competitor in an environment like this is
particularly difficult.
Our view at BK was that smart dimes beat dumb dollars.
And I think sometimes ROI, while it's very fashionable to
talk about ROI, one has to be careful that it doesn't get
substituted for the importance of big ideas.
What good does it do to have money driving behind a
mediocre idea?
And conversely, if you've got superior talent on your teams
and superior thought leadership, superior operating
savvy, sometimes you can make those dimes work more smartly
and more powerfully than the dollars of your competitor.
And we felt fortunate in being able to do that.
Although I have to say McDonald's and Burger King
really both together prospered and grew.
We were the two fastest growers over
that seven year period.
So I'm not sure it really came at their expense, perhaps more
so with some of the other players in the space.
MILES NADAL: David, a number of the people in the audience
are from the advertising agency industry.
And if you go to most 4As conferences, ANA conferences,
or whatever, there's always a feeling that
agencies feel beaten up.
That God gave the right for agencies to be able to
increase their fees an ongoing basis, but that right was
taken away probably several years ago, because the reality
was there wasn't any growth.
In fact you had negative GDP growth in 2009 of 3.8%, and ad
spending was down 14%.
There seems to be a different paradigm.
So I think all of us in the advertising agency industry
are trying to deal with the new paradigm and say, how do
we get growth?
What can we do differently to change the relationship with
our client?
And how do we get paid for that?
So what advice do you have for all of the minions of us that
are in the industry trying to generate growth at a time when
every single piece of business changes hand at a lower fee?
DAVID KIRCHHOFF: You probably don't want me
to say toughen up?
MILES NADAL: No, say anything.
I want you to say whatever you want to say.
DAVID KIRCHHOFF: No.
No, you know, I think what is exciting for the agency world
is what also probably makes it a little bit terrifying, which
is that it's in a period of rapid flux and change.
And I think any time you have an industry or a space that's
in a time of rapid flux and change, it means that the one
thing you know is at the end of it, there's going to be
some winners.
And it's not necessarily who you think
are going to be winners.
And there's going to be some losers.
And it's not like you're selling commodity steel, where
you can't quite find a way to differentiate yourself.
I think there's an infinite number of ways to
differentiate yourself.
And so I think that it's up to everybody here to figure those
things out.
Now, I think we're always looking for creativity and new
ideas and compelling ideas and all of that.
And I think our view on agency fees is that, maybe one way to
think about is that what you're experiencing as a
supplier is what every supplier is experiencing,
which is there is not an industry on earth
that I can think of--
I guess maybe except Google--
where you can pretty much expect that there's always
going to be pressure in your business, that you're in a
deflationary environment, where you have people that
source a wide range of products and services, and
they expect greater efficiency each year.
And so I think there's an expectation that agencies are
going to get better and better at what they do, that they're
going to become more efficient at what they do, that they are
going to become increasingly nimble, that they are going to
find ways of reducing overhead in the account,
and everything else.
But that said, I also feel very strongly that, I kind of
go back to Russ's point in the first place is that, let me be
clear, if you are getting fantastic, brilliant, big idea
creative that's driving your business, you will not find a
lot of marketing teams beating up on fees.
And so if there's any way to really put a nice warm blanket
around yourself, it's simply to do great work.
Because I sit in a lot of meetings where I hear about a
lot vendors being beaten up.
But when we're really psyched about how our campaigns are
going, which we are right now, this isn't coming up as target
number one, for whatever that's worth.
RUSS KLEIN: I may get in trouble for saying this, but
not every agency changeover results in a negotiated fee
that's lower than the previous.
In fact, I believe, the relationship we had, we had
just about doubled compensation.
MILES NADAL: That's correct.
RUSS KLEIN: And I'm a student of David Ogilvy, who felt that
pay your agencies well, handsomely.
And try to become the favorite client, try to become the
demand client internally, so that the most talented people
want to work on the business.
And even with the doubling of the compensation, Burger King
got its money's worth out of that because it grew over 30%
over that period of time.
MILES NADAL: I'd be misleading if I didn't articulate my own
point of view, which reiterates both of it.
It's called the theory of compensation irrelevance.
It doesn't really matter what you pay people or firms. It
matters the value added that they bring.
If they bring great value added,
they do so in a multiple.
And if they're bad, you should pay them to stay home.
They'll save you money.
But I think we, as an industry, are not used to the
notion of accountability.
We're used to be paid for the time, or full time equivalents
that we put in.
But at the end of the day, clients really should not or
do not or will not care in the future.
They will care about, as Bill Parcells says, "You are what
your record says you are."
So if you're more nimble, more agile, and able to deliver
more tangible financial performance, which ultimately
has to show up in shareholder value--
and that's why we implemented at MDC this idea that says get
every employee to own stock with
every one of your clients--
then you have true alignment.
But if you can actually deliver that performance, I
think people will pay you for the value you create.
But paying you for the time you put in is no longer
acceptable because that's not how they get rewarded.
There's a whole movement--
I mean Lee, you know this better than any--
that there's been a big backlash in among shareholders
about accountability of management to get paid in
proportion to--
LEE COOPERMAN: I don't know what it's accomplished yet.
30 years ago, the factory floor worker made about 1/30
of what the CEO made.
And today the differential approaches 500 times.
Corporate America is extraordinarily
over-compensated.
I'm a fan, like most people are, of Warren Buffett.
The problem with corporate compensation is the boards go
out and they hire consultants and compensation for a cover.
And the consultant's name would be Ratchet,
Ratchet, and Ratchet.
And so I think we're moving towards more accountability.
As I listen to my two panelists speak, companies
want a tangible benefit for what they are paying for.
If they can't get a tangible benefit, they just don't want
to pay for everyday service.
MILES NADAL: Last, because I want to open it up for
questions because I think that's high value added, Lee,
tell us your view of today, '11, if you had a crystal ball
and you looked at where we are today, 1% to 2% GDP growth,
where do you think that goes?
And I guess the two key drivers of a real healthy
economy are housing and employment.
Do you think we'll start to see more positive housing
environment and more positive predisposition of companies to
hire people on a permanent basis?
LEE COOPERMAN: I think we have to get away from the fed
carrying the entire load.
I think Congress has to get involved.
You mentioned this $1.8 trillion on
corporate balance sheets.
Well, a big chunk of that is money
outside the United States.
And I think Congress should come up with a program, led by
the president, to encourage corporations to bring back
that money overseas, give them a tax holiday of some kind
contingent upon them hiring workers, maybe even giving
them the opportunity to put more of that money into their
pension plans, which are becoming increasingly
underfunded, given the very low rates of return that are
available in the marketplace.
But I would go on the assumption that the economy
will continue to expand at a sluggish pace but that
ultimately Congress and the administration and the fed
will come up with the formula necessary to stimulate growth,
that three years, we'll be sitting in chairs like this
wondering about inflation and how high
interest rates could go.
That's the history of cycles.
Every recession sows the seeds for the
next business recovery.
And every business expansion sows the seeds
for the next recession.
So we had a crazy environment where companies levered up.
It's no secret.
The reason all these LBOs were taking place is the private
equity guys had an extraordinarily lower cost of
capital than corporate America.
Why?
Because corporate America was running a conventional balance
sheet of 30%, or whatever it is, debt to capital.
But the private equity guys were leveraging up eight,
nine, 10 times debt to EBITDA.
And they were able to get away with it because the providers
of credit in the economy were very undisciplined.
They weren't worrying about risk.
Now that risk has returned to the forefront and they have to
pay a lot more for capital, all of a sudden the strategic
buyers of businesses are much more at an advantage relative
to the financial buyers.
So it's a cycle.
But I would assume, God help us if we don't
get the economy growing.
Because like I said earlier, if you've got the labor force
growing 1% and you've got productivity growing trend
line at 2%, if you don't get 3% growth, you start to get
increasing unemployment, a percentage point a year.
And you're going to get lots of social unrest and
unhappiness.
You're going to get a message in November.
Right now I think the message clearly favors Republicans.
Out of chaos comes a new order, and who knows what the
new order is?
We have to tilt policy towards getting growth.
And I would be optimistic you'll get it less than you
would've normally gotten.
Let's face it.
If we injected the amount of stimulus we've injected into a
dead person's body, that person would be dancing now as
opposed to growing at a slow rate of growth.
There's enormous stimulus.
I've been in the business now for 43 years.
I've ever seen zero interest rates.
Sitting on there, getting paid zero for my savings.
I haven't seen a ten year government of 260.
These are just numbers you've never seen.
So we're at unusual times.
And hopefully we'll get the formula.
I'm betting that we will get the right formula.
MILES NADAL: We have about four and a
half minutes for questions.
So any questions that anyone has--
ma'am?
AUDIENCE: I'd like to know [INAUDIBLE]
MILES NADAL: Russ, do you want to take that first, and maybe
David you'll--
RUSS KLEIN: The question is the idea of whether a client
has multiple agencies or consolidate.
Well, I think there are two ways to look at that.
I think some clients actually cut their mainstream business
by segments and have multiple agencies.
And sometimes, for instance, a McDonald's,
that can make sense.
The other way you can cut it is should a client have the
same holding company with Crispin Porter + Bogusky and
every other allied marketing service company that they may
own servicing a Burger King in one consolidated
sense in that way?
My experience is that the latter example generally
doesn't work real well.
And having been on the agency side trying to sell that, I
favor individual shops that are killer shops at what they
do, whether it be promotions, merchandising, PR, or broad
gauge advertising like CP+B. So I'm not a big fan of just
turning everything over to one holding company or one
integrated service.
DAVID KIRCHHOFF: I couldn't agree more.
Right now, I feel like we have the benefit of we've got a
great agency that's doing our above the line.
We have an absolutely fantastic CRM shop.
We've got a digital agency that--
aQuantive or Avenue A or whatever their
name is these days.
They've been with us for 10 years.
And they all do a fantastic job at what they do.
And I wouldn't trade that in the hope of getting so-called
synergies, which sometimes they're there and sometimes
they're not.
And so give me best in class.
If you're an agency that can give best in class truly
across the board, then that's an opportunity.
But go for the best first.
LEE COOPERMAN: As a shareholder in MDC partners, I
would definitely encourage you to concentrate on MDC.
AUDIENCE: Well thanks.
David, I think early on, you mentioned about some of the
innovative things that were going on at Weight Watchers.
I wonder if you might take a minute or so and
just comment on that.
DAVID KIRCHHOFF: Gosh.
I mean, we have a lot going on.
Weight Watchers, what we have is a brand that is very highly
regarded by people that use it and know it.
And they know that it works.
But we have a brand where I think that, frankly, we had
forgotten how to talk, at least from a marketing
department perspective.
I think we had lost sight of where the voice of our brand
really was, which was not at 11 Madison Avenue, which is
where our corporate office is, but, frankly, it's out in the
world in our meetings.
I think that I'm very proud of the way that our team has been
embracing digital for the past decade.
And they didn't make a side project.
They made it a full commitment.
And there's a lot of those things which is allowing us to
once and for all modernize who we are and what we represent
but doing it in a way that's fully compatible with
everything we believe in, which is trying to have an
impact on this significant health issue of obesity.
MILES NADAL: Yes sir.
AUDIENCE: From a holding company perspective, what
would be the ideal integration model for digital,
traditional, and media agencies, a working model from
an ROI perspective?
MILES NADAL: Well, first of all, we believe that what's
most critical is what's good for the client.
So when a client speaks, I think ultimately form should
follow function.
And what follows most effective function is when
there is a lead agency who hopefully has an integrated
capability.
We have spent some $25 million a year for the last five years
on building integrated expertise within each of our
companies so that they are all media agnostic, that they do
have the capabilities.
Where they don't have that expertise resident, we really
promote partnership where they work in tandem and truly in
partnership where there's a lead agency relationship.
But they are the coordinator of the other
disciplines of marketing.
Financial success is really simple in this business.
It's a byproduct of excellence.
If you provide services that make brands famous and drive
financial performance for your client, you'll ultimately get
growth and spend and ultimately greater return on
investment for the holding company.
Where I think the holding companies have got it
backwards is they drive financial objectives first and
then figure out what services they can
provide and what people.
We've gone the exact opposite.
We say, what's the best way to provide the optimum?
And I believe what David Kirchhoff said.
Clients are very smart, and they're very numerate.
If you can show people why an incremental dollar of
investment will drive a superior return on investment
beyond their cost of capital, they should keep spending
indefinitely.
Warren Buffett is the world's smartest guy.
And if you look at what he did with Geico, it's all about
direct response.
And basically all he says is, as long as my return on growth
is greater than my cost of growth, I
will continue to spend.
So I think I have seen this as an opportunity where I think
investing in talent who understands how consumers
consume influence in a digital economy and investing in those
talents and aligning their interests to drive performance
for clients will ultimately drive performance for us as a
shareholder.
Any last question?
AUDIENCE: Yeah, I have one question.
MILES NADAL: Sure.
AUDIENCE: Do you think, Miles, and for the panel, is the
industry doing a sufficient enough job to design the
perfect return on marketing investment?
We hear a lot of--
we're strangled by growth, low GDP.
We're struggling to prove a return on investment.
The machine is not [UNINTELLIGIBLE].
Do we need to do a better job?
MILES NADAL: Well, I think the answer, I would say, everybody
would say is nobody is doing a perfect job.
There's no such thing as a perfect job.
I think we as an industry have to accept the fact that we are
in a new reality paradigm, that
there is greater scrutiny.
And I think, instead of complaining, we should ask the
question, what can we do differently to drive better
results for our clients?
And ultimately then, how do we get compensated?
It's a lot easier having a conversation with a client
about compensation when you have positive comps that are
way better than your competitors' and you have a
trend line that's exceedingly positive.
So I think the most important thing is continuously come up
with innovative ideas by which make brands
famous and drive return.
And then I think it makes the conversation of compensation a
lot easier to have. I think it just reiterates
what David had said.
AUDIENCE: One more, if there is.
MILES NADAL: OK, there's a gentleman up there.
AUDIENCE: [INAUDIBLE].
DAVID KIRCHHOFF: Oh, on the digital side?
I don't know.
We would never do ourselves effectively digital planning,
which is what Razorfish does for us.
I think our view is that for digital creative, our bias is
that that's better housed in agencies that are going to
bring fresh thinking to it.
But we're also maybe a little bit different as an
organization because we have a 200 person software
development company that does nothing but do this kind of
stuff that lives internally.
And we have another 100 offshore in
the country of Jordan.
And so when it comes to actually building and
developing software, that's a line of business for us.
And so that's something we don't contract out.
And so we don't determine that on an ROI.
We determine it more by
competencies and go from there.
MILES NADAL: Russ, do you have--
RUSS KLEIN: I would just say the marketplace is moving too
fast around digital to try to build a cathedral inside your
company that you're going to have to tear down in a year
because the challenges are different.
So I think with an agency you have more latitude.
You can be more nimble as a client to either change
agencies or change people in agencies or just the very idea
that agencies themselves are more plugged into to change in
the fluidity of the digital space.
So unless you're a CRM driven company that's built on--
I don't know what an example would be.
Like, a financial services company might want to build up
a bigger capability internally than most of the rest of
consumer packaged goods or services companies.
MILES NADAL: We've run out of time.
So I'd like to thank Russ Klein, and Lee Cooperman, and
David Kirchhoff for their outstanding insights,
innovation, and their perspective.
[APPLAUSE]
Terrific.
And thank you very much for your time and your patience
and your inquiries.