What we can learn from Toyota’s withdrawal from the Olympics

After 18 months of “Will-it? Won’t-it?”, the rescheduled Tokyo Olympics finally burst into life at the end of July. This was despite a new wave of Covid in Japan and widespread opposition among the Japanese public for the Games taking place at all, even behind closed doors.

More than 60 Japanese corporations collectively invested more than $3bn in sponsorship rights for Tokyo 2020/1. Yet even the commercial side of the Games has not escaped controversy. Just before the opening ceremony, Toyota announced it was cancelling all Japanese TV adverts promoting itself as a major sponsor, a commitment estimated at more than $1bn a year over the eight years to 2024.

Toyota’s eleventh-hour decision to scrap its support for the Olympics highlights the complex and volatile environment in which advertisers find themselves today, trying to make the right decisions under pandemic. For the Japanese car manufacturer, it was a bold business decision.

The company had clearly weighed up the potential commercial rewards from promoting their involvement against the long-term reputational risks to the brand from the expected backlash from the Japanese public. For Toyota’s media agency partner, Dentsu, its client’s decision to pull back from the Olympics represents yet another significant blow to its revenues in an already troubled year.

From the perspective of marketing contract compliance, the question is: who bears the cost? Japanese business culture continues to be based heavily on trust and long-standing relationships, meaning many significant commercial deals in Japan are still held together by a handshake. Many are not underpinned by contracts that are regularly reviewed, updated, or even signed, a situation that is at odds with much of the rest of the world. Sometimes, even the terms of a contract can be over-ridden by a verbal agreement.

While big-spending global advertisers operating in Japan are slowly bringing their relationships in the country into line with other markets, the reality is that most advertisers in Japan still operate using outdated and unsigned agency contracts – or even no contract at all.

From our perspective as marketing contract compliance specialists, Toyota’s recent actions once again highlight the critical importance of up-to-date and fit-for-purpose marketing agency contracts. Toyota will doubtless be doubly aware of how much this matters, given the war wounds they picked up back in 2016 from the digital overcharging scandal in Japan.

Why Contracts Matter

In its simplest form, a marketing agency contract is the most effective risk management tool in any advertiser’s armoury, fairly assigning responsibilities and risk exposures between them and their agency partners, financial and otherwise. At a time of ongoing uncertainty, advertisers would be well-advised to address the following four issues in their agency contracts and so avoid costly disputes.

1. Agency cancellation fees

Although significant planning and workload is often undertaken upfront on cancelled campaigns and projects, best-practice contracts specify that agency cancellation fees should only be charged for the scope of work delivered. For many – particularly those on a commission model – this may mean a proportionate adjustment or credit for any part of the services not delivered at time of cancellation.

2. Media cancellation costs

It is reasonable that advertisers are obligated to reimburse its agency partners for any actual third-party costs or other expenses incurred by the agency for cancelled media placements or content production.

The agency should be expected to make all reasonable efforts to mitigate these costs by: (i) prompt cancellation with the media vendor, (ii) negotiation of credits on account or re-booking future campaigns with the media vendor, and (iii) onward sale of the cancelled media placements to other advertisers. Any benefits of cost avoidance or re-sale should be passed back to the advertiser and not retained by the agency.

3. Notice and disclosure

Full transparency over cancellation terms is key. The contract should specify that all cancellation deadlines and cancellation costs imposed by media vendors are explicitly disclosed to advertisers while seeking approval to book media placements.

This allows the advertiser a fair opportunity to make an informed decision and to assess all financial exposure risks when committing marketing dollars to any campaign. The contract should also detail how notice of cancellation is to be given by advertisers and to whom this notice should be delivered at their agency.

4. The right to audit

Including a ‘right to audit’ all agency cancellation charges and transactions not only provides a healthy level of transparency and accountability; it is also good housekeeping. Given the significant amounts involved in campaign cancellations and the complexities in final reconciliation of actual cancellation charges and credits held on account, advertisers would be wise to run an audit to validate all final costs passed on by agency partners and third parties.

Summing up

By addressing these issues, advertisers can be certain that transparent, flexible, and equitable commercial terms are applied to any cancellations and suspensions brought about by external events.

Toyota’s commercial boycott of the Olympics reminds us of the importance of a well-constructed, regularly updated, signed contract. The same is true for many Asian and global brands sponsoring the IPL which was suspended by Covid in May of this year, and there may well be more.

Featured in Branding in Asia.