An Explanation for J&J's Ad Agency Switch: It's Not About the Creativity

(MoneyWatch)  Johnson & Johnson's decision to consolidate its $110 million drug advertising business at two agency holding companies, WPP and InterPublic, raises an interesting question: If it's supposed to be a consolidation, why two and not one? Here's one possible answer: The companies are being pitted against each other in an efficiency race.

Large drug marketers have always operated with more than one agency. The pattern has been one agency to one brand, never mind the conflicts. But when it comes to overall measures of the effectiveness of J&J's marketing dollars, the company is slightly behind its competitors. For every dollar J&J spends on sales and marketing, it gets $3.06 back in revenues, according to its Q3 results. That's up a little bit over last quarter but down from a recent high of $3.16.

This is significant only when you compare J&J's results to some of its rivals. Using the same measure, Pfizer currently gets $3.40, GlaxoSmithKline gets $3.54, Wyeth gets $3.24, Abbott Labs gets $3.63 and Merck gets $3.44.

Put another way, J&J's marketing dollars overall are as much as 15 percent less effective than its competitors. Not all of this is fixable by adjusting your agencies, of course. J&J is a large, diversified company with OTC products that are unaffected by the change. But I'm going to take wild guess and say that somewhere inside J&J's corporate finance office there's a bean counter who would really like to know why it is that J&J's sales and marketing investments generate lower revenues per dollar than some of the company's competition.

Here's what J&J spokesperson Marc Monseau said about the choice:

We're excited about this choice and we feel that both organizations have the creative skills, expertise and breadth to help us accomplish our mission to provide innovative approaches to reach and engage our customers.

Sure. All of that sounds true enough. But if I was working on the new J&J businesses at WPP or InterPublic, I wouldn't spend too much time basking in J&J's praise for my creativity. I'd want to make sure that J&J's pass-through costs were as low as possible and its sales as high as possible, because if one agency gets better results there's going to be a temptation to ax the laggard in order to goose that expense-to-revenue ratio.