The annual gathering of the Incorporated Society of British Advertisers (ISBA) provided the stage for Marc Pritchard – chief brand officer at Procter & Gamble (US: PG) – to send the global advertising industry into a spin. Mr Pritchard, who oversees marketing at one of the world’s biggest advertisers, has promised to “take back control” of P&G’s spending by bringing more of its marketing operations in house. Shares in ad agency WPP (WPP) plummeted 4 per cent in one day in response, while funds including Marshall Wace and Lone Pine have upped their short positions in the group’s global peers Publicis (EPA:PUB), Omnicom (US:OMC) and Interpublic (US:IPG).
P&G has already cut its agency and commercial production spending by $750m (£537m) in the past three years by driving down media rates, reducing agency fees and advertising production costs, as well as improving the efficiency of marketing programmes. By 2021, the group plans to increase its savings by a further $450m by cutting the number of agencies it uses in half.
And the consumer goods giant is not alone in its quest to strip down marketing investment. At Unilever (ULVR), brand and marketing investment as a percentage of turnover was down by 0.6 percentage points in 2017. It reckons its 17 branding 'U-Studios' can create content faster and around 30 per cent cheaper than external agencies.The automotive industry is also cutting back: selling and general administration costs fell €1.2bn (£1.06bn) to €7.1bn at Volkswagen last year, while General Motors (US:GM) reduced its advertising costs by $0.4bn.
The damage from this global reduction in marketing spend is clear in annual numbers from the world’s biggest advertising agencies. Earlier in March, WPP reported a 5.4 per cent fall in comparable billings to £55.6bn in 2017. Net sales were nearly flat at constant currencies at £13bn and the group’s founder and chief executive, Sir Martin Sorrell, warned that both revenue and profits would continue to tread water this year.
It’s a similar story at Publicis (EPA:PUB), Omnicom (US:OMC) and Interpublic (US:IPG) where organic revenues grew at just 0.8 per cent, 3 per cent and 1.8 per cent, respectively, during 2017.
There was a time when Sir Martin blamed poor economic metrics for dwindling demand at his company. But in recent years, as global markets have recovered, advertising spending has remained weak and it has become clear that there is more to the industry’s woes than feeble fiscal growth. Instead, WPP’s enigmatic boss has pointed to the low inflation and subsequent focus on costs at some of the world’s biggest corporations as the reason for his industry’s troubles. He thinks the short-term focus of zero-based budgeters will come back to bite sales prospects in consumer goods companies, which rely on brand power. He has therefore forecast a recovery in demand for traditional ad agencies in the long term.
But Sir Martin has dismissed another very prominent threat: digitisation. Companies such as L’Oreal, which have increased their advertising spending in recent years are increasingly ploughing their investment into online channels, which now account for 40 per cent of the total marketing industry. The problem this trend holds for agencies is that the bigger the slice of marketing budgets absorbed by platforms such as Facebook (US:FB) and Google, the greater the likelihood that companies and brands will deal directly with the tech giants. Advertisers might still need creative minds to design the brands for them, but they may not need agencies to secure ad space.
