WPP’s shares took a powder yesterday as analysts digested the unwelcome news that it had not achieved the margins desired (a 0.3 increase against the hoped-for 0.5) although the company increased both revenue and profits.
In other words it’s becoming bigger but not more profitable at the same rate. Boss Sir Martin Sorrell (left) blamed this on currency movements (his cherished emerging markets like Brazil and India have seen their currencies devalue so earnings from there are lower) and discounting due to client pressure.
The latter is hardly new of course; clients have been trying to reduce what they pay their agencies for what seems like ever but, for the most part, the big marcoms companies have managed to maintain their margin impetus. Some might say by pulling the wool over their clients’ eyes.
Certainly the fees paid to creative agencies have dropped in real terms over the past 20 years; a process which started when creative and media separated and creative agencies could no longer charge on the basis of media commission (between ten and 15 per cent, more for outdoor). But the newly independent media agencies did prosper, partly because, even as clients cut their commission, they happily trousered volume discounts from media owners. As these usually covered a spread of clients they took the view that it was theirs.
Now, of course, most media agencies are owned by the marcoms gang but they have remained, for the most part, surprisingly profitable. WPP in particular has a powerful line-up with Maxus (the newest kid on the block), MEC (which was once Chris Ingram’s business), MediaCom and Mindshare operating under media negotiating company GroupM in most markets.
This ought to be a licence to print money but, recently, it seems that it hasn’t – for WPP anyway.
There could be a number of reasons for this. Maybe clients and their media auditors are getting smarter and tracking more of the money on its path from media owner to media agency. Maybe the growth in programme trading in online is having an effect: these new trading desks are all very groovy but they work on miniscule margins. Maybe WPP’s giant out of home specialist agency Kinetic, with global billings of over $4bn, is finding life tougher after the departure of CEO Eric Newnham to form rival Talon and hook up with Omnicom.
Interestingly WPP has not slashed its staff (about 120,000 in all) as the pressure on its margins increased. Historically this would have been Sorrell’s usual response but he’s rather keen to show to staff fearful of the their jobs when the Omnicom/Publicis merger closes that WPP is a good place to bring their careers and their client business.
And the two main focuses of recent WPP acquisition activity – emerging markets and digital are both suffering somewhat. Emerging markets for the currency reasons outlined above but also because their improbable rates of growth in recent years (around ten per cent in China, a bit less in India) have proved unsustainable.
Digital, which may be the way the world is turning, is also becoming an increasingly low margin business. Most of it is project-based and so a lot of effort goes into things that may never see the light of day or turn out to be on a smaller scale than expected. Rather like design.
Digital agencies in emerging markets – which WPP has been busily buying in recent years – look especially vulnerable.
This doesn’t mean that Sorrell’s long-term strategy is wrong. But it certainly isn’t the one-way bet it looked like a couple of years ago.