Recovery potential dims at WPP

To an extent, the rising influence of social media can be blamed for the challenges. Facebook and Google make it easy for companies to create targeted campaigns or to advertise their brands to enormous numbers of consumers. This reduces the value offered by advertising agencies. The dwindling importance of creative advertising was highlighted in June when media group Publicis announced it was pulling out of the Cannes Lions Festival of Creativity – the world’s largest marketing event. WPP also said it is considering reducing its number of Cannes delegates.

The result is that brand owners are less willing to spend big money on marketing. For example, Unilever – which analysts reckon might contribute 5 or 6 per cent of WPP's total revenue – recently announced it would reduce its adverts by 30 per cent and halve the number of agencies it uses. The problem has been compounded by intense merger activity - fewer companies means less marketing expenditure.

Given these trends, it is hardly surprising that competition has escalated in the past few years. WPP’s chief executive, Sir Martin Sorrell, says that this has given rise to some agencies offering fat discounts or extended payment terms in order to win contracts. Sir Martin expects to grow WPP's profit margins by 0.3 percentage points annually, but big fee cutting from competitors is likely to make that very hard without hurting revenues. In the first half of 2017, WPP’s operating margins rose by just 0.1 percentage points but revenue dropped by 2 per cent. 

To WPP’s credit it has managed to adapt to the new characteristics of the industry. Forty per cent of its income now comes from online advertising and 13 of the 25 acquisitions it made in 2017 were for digital companies. But increasing digital exposure through acquisitions has meant rising net debt, which stood at 4.6 times adjusted cash profits at the half year point. As interest rates rise, acquiring digital companies may become especially tough because of the high premiums that the best early-stage tech companies can command.

Sentiment has continued to wane in the financially more important second half of the year. The group’s market analysis company, Kantar Media, recently lost its big Dentsu Aegis Network audience-understanding contract to YouGov, which has a more advanced system of algorithms and backlog of data for analysing market trends. In early October, US private equity firm Bain Capital made a $1.3bn offer for WPP’s Japanese partner Asatu-DK (ADK) – which is important to WPP’s operations in Japan. With only a 24.7 per cent holding in ADK, WPP is unlikely to have the power to block the deal. Meanwhile, WPP’s stake in the flailing Weinstein Company has been losing value and poor financial updates from peer Publicis and Unilever have done nothing to help sentiment.