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St. Louis and the Consequences of Consolidation

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St. Louis and the Consequences of Consolidation

NewGeography December 7, 2017
Urban PolicyTax & Budget

Brian Feldman’s piece about how consolidation killed St. Louis got a lot of attention when it came out last year. He argues that a rollback of anti-trust regulations that allowed industrial consolidation was the silent killer of what were once key regional business capitals like St. Louis.

Interestingly, his focus was on something you may not know ever existed in St. Louis, major advertising agencies.

"If there is a living embodiment of the St. Louis advertising industry, it’s Charles Claggett Jr. The former creative director at D’Arcy, long one of the city’s largest agencies, he retired in 2000, two years before the French firm Publicis acquired the agency. One of his many claims to fame is that in 1979, he and his team penned “This Bud’s for You”—the slogan widely credited for helping St. Louis-based brewing staple Anheuser-Busch eclipse Miller during the 1980s beer wars….Another claim to Claggett’s fame is his father, Charles Claggett Sr., who led the city’s oldest and largest agency, Gardner, in the late 1950s and the 1960s. During his tenure, the elder Claggett oversaw accounts such as John Deere, Ralston Purina, and Jack Daniel’s.

And it wasn’t just Gardner and D’Arcy—whose twelve offices now fanned out across North America, as far as Havana—that flourished in mid-century St. Louis. With its ample supply of locally owned businesses as potential clients, the city supported a vibrant start-up ad agency scene. These new firms trained up-and-coming talent, developed cutting-edge campaigns, and often grew to become regional or national in scope, enriching the metro area by bringing in revenue from outside of it.

By the 1960s, St. Louis’s advertising industry had effectively developed into what economists call an “industry cluster.” Though the city’s agencies competed with each other, their sheer number created citywide competitive advantages: a deep bench of talent that moved in and out of agencies, spreading ideas and transferring know-how; a network of experienced, low-cost suppliers (printers, recording studios); and a reputation for quality that attracted national and international clients. All of it was built on the foundation of locally owned companies. These firms provided a steady supply of commissions facilitated by personal connections: account executives at the agencies and the senior executives at the corporations knew each other—from charitable events, from rounds of golf, or from attending the same high school.

D’Arcy followed a similar trajectory. In 1985, it merged with NYC-based Benton & Bowles to become DMB&B, a deal that saw the headquarters and executive decision-making shift to New York. The St. Louis office still handled long-standing accounts like Mars/M&M and Anheuser-Busch, but NYC now made “above-the-rim” decisions. As Claggett put it, “The agency slowly became just a branch office competing for accounts.”

The turning point came one day in 1994, when, unbeknown to the St. Louis office, the agency’s NYC-based media-buying unit signed a $25 million deal with Anheuser-Busch’s archrival, Miller, then lied about it. Anheuser-Busch’s volatile owner, August Busch III, immediately cut ties with D’Arcy, costing the agency $422 million in billings. One D’Arcy copywriter quipped, “When you lose Bud, you’ve lost it all.” Two years later, the office lost its $140 million Blockbuster account to New York. The agency closed its St. Louis doors in 2002.

In the years since the St. Louis advertising cluster disintegrated, the entire industry has taken a major hit as the Internet has disrupted its traditional business model. U.S. ad agencies today have fewer employees than they did in 2000.

One of the companies that got bought out in St. Louis was Anheuser-Busch itself, a company so synonymous with the city that its name might as well be “Anheuser-Busch, St. Louis, Missouri.” The buyer was Belgium-based InBev, which was controlled (and still is I believe) by a group of Brazilian investors. Three years after the 2008 deal, the St. Louis Post-Dispatch looked back at the consequences for the company and the city.

"They still make big decisions here, the kind of big-spending, imaginative deals that made this place so envied. But now executives in New York City sometimes sign off on them, too….Three years out, some things are clear. A-B is a diminished but still huge, powerful presence. The worst of the cost-cutting appears over. The brewery and some executive functions have remained in St. Louis. But the corporate culture of the old A-B — tradition-bound, perfectionist, focused more on dominating the beer market than making money — has given way to an aggressive austerity.

The extensive cost-cutting has squeezed more profits out of A-B, but questions remain over whether the company’s new bosses can grow brands and sell more beer. And St. Louis is no longer the center of the company universe. A-B is now the U.S. subsidiary of A-B InBev. With that, old assumptions — and wistful illusions — about the relationship between the company and the city have changed, too.

This is pretty well known, I believe. What’s less known, perhaps outside of St. Louis, is that in 2014 Anheuser-Busch announced it would be moving brand management and other functions from St. Louis to New York City, opening what it termed its “commercial strategy office.”

Today the A-B commercial strategy office employs about 400 people in a very cool modern office in Chelsea. While the firm is still technically based in St. Louis and employs a lot of people there, including a lot of management people such its supply chain leadership, this represents a significant loss of high talent positions for that city.

Why did A-B open an NYC? Well, InBev was already there. Chicago, the most logical place for a consumer business like A-B, had already landed the Miller-Coors HQ. I don’t have any insights on that, but would speculate it played a role in the choice of New York.

But what’s most troubling for St. Louis and many other similar cities is that A-B’s main reason for staffing up in New York was to be closer to its ad agency partners. In other words, we are seeing knock on effects from previous consolidations and the rise of global cities as key financial and producer services nodes.

First consolidation wiped out St. Louis’ national scale ad agencies. Then the loss of those agencies make it hard to keep ahold of corporate marketing and other functions.

This was one of the key things I honed in on back in 2008 when I first wrote about the trend of HQs moving back to the global city. Saskia Sassen’s work on the revival of the global city noted the growth in specialized financial and producer services (like advertising). The rebirth of the global city was not built on traditional corporate HQ growth.

But then down the road, corporations started to restructure their HQs into what I term “executive headquarters”, with only top executive functions – generally only 500 at most – now part of the HQ. And that the HQ was now being drawn back to the global city in order to take advantage of the services infrastructure there. I noted how Mead-Johnson Nutritionals (makers of Enfamil baby formula) had followed this formula when it moved from Evansville, Indiana to Chicago. Here’s what the media said at the time:

Working in a large city will make it easier to conduct business throughout the world. Mead Johnson makes Enfamil and similar products and about half of its sales come from overseas. Having offices near Chicago, for instance, will place executives in close proximity to global-business consultants, leaders in the field of nutrition and an international airport.

Today we see that proximity to services providers, international airports, and the ability to recruit top global talent are all drivers of this. To date I’ve mostly noticed that the losing locations were clearly subscale cities like Evansville or Peoria. Now with Connecticut losing GE, it’s affecting larger business markets as well.

A-B’s New York office isn’t technically an executive headquarters, but it has some of the same characteristics. This isn’t about anything nefarious. It’s about companies doing what they think they need to do to address market realities. Mass market beer brands like Bud Light are in decline industry-wide. These kinds of moves are part of trying to stay market relevant. (A-B also just changed CEOs in response).

This is definitely a trend to keep an eye on since it will have a big effect on whether or not legacy business cities like St. Louis in the 1-3 million metro area range will be able to continue conducting business as the same level they’ve been used to doing. I think there is a ton of risk here in many cities, especially in the Midwest.

This piece appeared on NewGeography (originally at Urbanophile)

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Aaron M. Renn is a senior fellow at the Manhattan Institute and contributing editor at City Journal. Follow him on Twitter here.

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