In theory, market research firms should be good investments. With the exception of the unusual shock of the Global Financial Crisis and its immediate aftermath, the industry has seen consistent growth over the decades. More importantly, there continues to be remarkable growth in emerging markets as multinational corporations (MNCs) seek new opportunities, and local corporations become more sophisticated in their marketing and strategic planning.
Secondly, research is an industry where there are numerous opportunities to sell on added value. Unlike other sectors, such as airlines, financial services, PCs, and consumer goods to name a few, research firms can really differentiate themselves based on the quality of the product, i.e. the research and consulting, and leverage of a range of innovative research techniques. Contrary to what some in the supply side of the industry say, clients are generally less likely to buy purely on price.
And finally, research is a service that clients keep coming back for time and again: according to the 2013 Singapore Research Buyer Survey, about half of clients procure at least five research projects a year. Assuming clients are well served and the product is good, repeat business should provide sustainable, profitable revenue for companies.
But are things changing?
The research industry has certainly seen its golden age. The 1990s and the pre-financial-crisis years of the last decade saw many research entrepreneurs and their loyal servants cashing out during a market research bonanza. In Asia particularly, the attraction for investors was more about buying into networks of research firms who could provide a regional infrastructure for data collection, and accessing research buyers in multiple emerging markets. Branding and product innovation had some role in building value for these firms, but essentially those cashing out were giving their new investors access to Asia’s fast-growing consumer markets.
So what are the prospects for research entrepreneurs today? Certainly there is no shortage of people wanting to start their own businesses, but a lot of this trend is driven by the low entry costs of the industry and, to an extent, disenchantment with working for the bigger agencies.
With the proliferation of consumer access panels, it is now a lot easier to undertake data collection across the region. Outsourcing and offshoring options allow smaller research firms to tap into the resources of coders, analysts, and chartists in low-cost countries such as India, the Philippines, and Indonesia, letting these boutique firms concentrate on the value-added parts of the research.
But here lies the problem: the 2013 research buyer survey shows a very significant fragmentation of the industry, even over the past year alone. The larger research firms are losing share to the range of boutique buy yasmin products consultancies who are implementing these kinds of business models.
While the larger firms try to emulate these business models (e.g. offshoring), contrary to popular belief, they are unable to achieve the same efficiencies and react as quickly to market changes as the smaller firms. The response has been for the larger firms to merge, as markets are no longer able to sustain so many of them, and this is demonstrated by mergers of companies such as NFO, Research International, and Synovate into competitor organisations.
Many of these mergers were a way for these firms to ‘buy growth’ in markets where larger agencies are progressively losing share. For certain, there will need to be at least one more ‘mega merger’ within the next five years, but the question is how much appetite investors have for buying more growth in an industry that is undergoing fundamental structural change?
Prospects for independent firms
Many of those in independent firms recognise that the golden days of handsome buy outs could be over, and are happy to continue operating in their niches as fairly profitable firms with no interference from outside investors. Indeed, the ‘pain’ of earn outs can put many off. But ultimately, owners of independent research firms will look for some form of exit, but the lofty financial expectations of some could make these exit plans unrealistic.
The fragmentation of the industry demonstrates that clients are increasingly choosing firms (and specifically individuals within these firms) who have the research skills and sector expertise that is really valued by the client, and these are not easily ‘sold on’ to an acquiring company.
Even mid-sized research firms, some of whom claim to be ‘all things to all people’, will not attract investors if their value is dependent on client relationships sustained with a relatively small number of senior staff. With more of the data collection being undertaken through online panels, their data collection infrastructure and networks will also lose value.
So how can research firms realise their value going forward?
One can look towards other types of business information service providers for guidance. Bloomberg and Thomson Reuters provide highly valued branded business information services to corporate investors, services which hold value regardless of the level of churn of analysts and editors within these organisations.
What these companies provide is reliable, timely information backed by a reputation of industry expertise and delivered in user-friendly formats. These firms also operate in a less contested space.
Probably the nearest equivalent in the research world is retail audit and, to a degree, customer satisfaction; and also brand trackers, which tend to generate continuous, guaranteed income. But what value for ad-hoc research?