WPP not sitting that pretty, either cyclically or structurally
Comment Martin Flanagan
Down the years Sir Martin Sorrell’s views have become something of a reference point for the state of the macro-economy and its prospects. Partly it is due to the business doyen not hiding his light under a bushel, but also because, in WPP, he is boss of the world’s largest advertising agency. From America to Europe and Asia, WPP has a wide footprint. And advertising, by the nature of the beast, is a good touchstone for judging general economic health.
In looming tough times, it is one of the first things businesses cut back on. But the marketing sector is also a harbinger of recovery, with corporates often anticipating the green shoots with increased advertising spend.
So perhaps we should be concerned that WPP has just posted its worst results since the financial crisis of 2008/09. Net revenues fell just under 1 per cent in 2017 and WPP has forecast them to remain under pressure in 2018.
We should remember also that this is a football World Cup and Winter Olympics year, and Sorrell would have made his forecasts for the road ahead well aware that major sporting events are traditionally booster rockets for corporate advertising given the vast television audiences they attract.
Instead, WPP’S sales and profit margins are lacklustre, with the group laying some of the blame on overly cautious corporate budgets, activist investors seeking improved financial returns and private equity owners doing what private equity owners do: seek efficiencies and get out at a profit.
Sorrell sees these as the baddies rather than the industry’s kneejerk whipping boys these days of Facebook and Google. Even so, unimpressive results from the likes of Publicis and Omnicom in the sector does make one wonder whether it is a cyclical story or the dynamics have changed structurally, or a mixture of the two.
Silicon Valley is already feeding ravenously on journalism, with social media riding shotgun for the carnivores. Maybe we are now seeing the digital giants looking for a more varied diet (and richer profit margins) by moving onto the middle men of the marketing industry.
If so, the WPPS of this world have their own bespoke challenge to face rather than just being proxies for the wider economy.