WPP is expecting flat revenue growth of between 0% and 1% in 2017, stating that "growth has become even more difficult to find" in the last year.
This can not only be attributed to increasing social, political and economic volatility, but also fierce competition in the market, according to WPP's latest results. All regions, except the United Kingdom, Latin America and Central & Eastern Europe, showed less revenue than the prior year, with advertising and media investment management and data investment management the most affected.
The effects of reduced client spending, negligible inflation and anaemic top line growth, have been intensified by the recent development of three "significant forces", WPP said. These forces were identified as digital disruption, cheap money driving asset purchases, and zero-based budgeting, said the company.
Despite the rise of the consultants and digital disruption, WPP remains bullish on the fact that consultancies are not a threat. Digital currently makes up 41% of WPP’s revenues and while digital disruption has demanded that legacy businesses "reboot" their structures and target consumers in new, primarily digital driven methods, “there is little evidence” so far of significant threat from consultancies such as Accenture and Deloitte, Martin Sorrell, CEO of WPP said.
“Much has been made about the potential negative impact of the growth of digital marketing on our business model and the move by consultants, principally Accenture and Deloitte (our current auditors), into our industrial spaces. […]," he said, adding:
The consultants have certainly been mopping up some small, fragmented digital agencies but there is little evidence so far of significant competitive penetration.
For WPP, Google and Facebook are still two of its largest spenders, with Google topping the chart and Facebook likely to become its second largest this year. Moreover, combined with the increasing penetration of digital media and e-commerce, in markets such as the BRICs, Next 11, CIVETS and MIST, digital will be an area the group will continue banking on.
Pressures from FMCG
Following the pressure on client spending in the second quarter, particularly in the fast moving consumer goods (FMCG) or packaged goods sector, the second quarter full year revised forecast has been revised down further.
One area that WPP is heavily hit in is consumer packaged goods (CPG), which accounts for approximately one-third of WPP's revenue. WPP describes the sector as facing "consistent pressure", resulting in spending cuts that produced "little if any volume gains". WPP's two major CPG clients - P&G and Unilever - have also embarked on cost-cutting drives in recent times.
Earlier this year, P&G revealed that it intends to reduce its marketing spend by US$2 billion in the next five years. This is part of a broader US$10 billion cost reduction plan it launched one year ago, according to several media reports. Unilever stated it is looking to double savings in overheads and advertising before 2020. It plans to reduce the number of advertisements it commissions by 30% as part of a cost-cutting drive.
WPP added that investment groups practicing the art of zero-based budgeting also puts pressure on marketing costs, at least in the short-term. Unilever is one of the few clients leading in this space.
“For the short-term, therefore, we have to weather the storm, focusing even more on our four core strategic objectives,” said Sorrell.
These four pillars are of horizontality (or providing clients with a seamlessly integrated effective and efficient marketing offer); on fast growth markets, where the new middle-class consumers will flourish; on digital as it becomes even more pervasive; and on technology, data and content, as they become even more integral to clients’ marketing success.
Constant change of guard and undercutting
Looking at its top 20 or so clients over the last two to three quarters, top line growth has been in the 2-3% range, with most if not all of it coming from pricing increases usually in Asia Pacific or Latin America, the company said. However, the average life of C-Suites dropping globally is also creating a problem for the ad industry.
Currently, the CEO role lasts approximately six to seven years while the CMO role lasts two to three. For the CFOs, this number averages four to five years. This is not helping companies focus on the long term, said WPP.
According to WPP, the fierce competition within the advertising and marketing industry has seen major networks being prepared to offer clients up-front discounts as an incentive to renew contracts, and other practices such as drastically reduced creative and media fees and extended payment terms. According to the statement, such practices "cannot last and will only result eventually in poor financial performance and further consolidation". Sorrell said:
Once you accept benchmarking as a means of evaluation you become a cost and are viewed as a source of funding or insurance, rather than an investment or value added and recent industry results have reflected this increased pressure and inconsistencies.
Overall WPP's advertising and media investment management revenue grew by 5.2% in the second quarter, with a like-for-like growth of -0.2%, a dip compared to the first quarter. Its branding and identity, healthcare and specialist communications businesses including digital, e-commerce and shopper marketing, saw a like-for-like net sales growth of 0.1% compared with 2.2% in the first quarter.
Revenue for its PR and public affairs, which according to the statement was the strongest performing sector, saw a like-for-like revenue increase of 0.6% compared with 4.4% in the first quarter. Lastly, data investment management revenue dropped 4.6%, with Asia Pacific, Africa and the Middle East and Western Continental Europe seeing slower growth.
What is next for 2018?
2017 saw a considerable amount of structural changes within WPP agencies, beyond the creation of Teams and appointment of Country and Sub-Regional managers. This includes One Ogilvy; the merger of MEC/Maxus to NewCo; Essence expansion; Kantar First; WPP Health & Wellness; B to D Group; Wunderman and POSSIBLE; Wunderman and Salmon.
Nonetheless, WPP's operating companies are still hiring "cautiously" and responding to regional, functional and client changes in revenue, as client spending seems to be less predictable.
“Not surprising then that your company's top line revenue and net sales organic growth continues to be under pressure,” Sorrell added. WPP added that next year, it predicts it will be tough to find stronger growth outside the US due to continued political uncertainties in regions such as China, the Korean Peninsula and Europe, which focus on qualitative growth.
2018 will be stimulated by events such as the Russian World Cup, PyeongChang Winter Olympics and the midterm Congressional elections. Hence, nominal GDP growth is expected to continue to grow in the 3.0 to 4.0% range, with advertising remaining constant overall.