Monday 21 January 2019

John McGee: Advertising prepares for a year of mass disruption

Chief executive officer of WPP Sir Martin Sorrell (Jonathan Brady/PA)
Chief executive officer of WPP Sir Martin Sorrell (Jonathan Brady/PA)

John McGee

Martin Sorrell's apparent infallibility was severely tested last week when WPP, the largest marketing communications company in the world, of which he is its CEO, shocked the investment community with a set of results that wiped as much as 12pc, or £2bn, off its market capitalisation in one fell swoop.

The bellwether of the global marketing communications industry for the last 20 years, WPP reported a 0.9pc fall in revenues to £15.2bn in 2017, making it the group's worst year since 2009 when the marketing world hurtled off a cliff. Normally cock-sure of himself, and fortified by a faint whiff of blue-blooded arrogance, Sorrell fessed up by admitting that he was "embarrassed" by the results and that 2017 was "not a pretty year".

Not surprisingly, the investment community interpreted this embarrassment as a chink in Sorrell's once impenetrable armour.

Others suggest that the group - and indeed Sorrell himself - could be guilty of a folie de grandeur that can be traced back to his once-annual spats with shareholder activists over his gargantuan pay-packet several years ago.

In 2015, for example, his remuneration package - including cash, shares and bonuses - amounted to a staggering £70.4m, making it one of the biggest pay deals in UK corporate history.

While this dropped to around £48m in 2016 and to under £20m in 2017, he will have pocketed more than £250m over the last five years.

Despite its 2017 blip, WPP is still the bellwether for the industry and to his credit, Sorrell has built a formidable global marketing communications empire that employs over 200,000 people in over 400 separate companies around the world. Leading brands within the group include the likes of Ogilvy & Mather, Grey, Cohn & Wolfe, Kantar, JWT, Mindshare, Akqa, MediaCom, Wavemaker, RMG and Wunderman.

In Ireland, WPP is represented by no fewer than 14 companies, operating in areas such as advertising, media buying, market research, outdoor advertising and public relations.

Between them, they employ several hundred staff and, if they were combined, would make for Ireland's largest marketing communications group in terms of turnover.

But they are not and therein lies one of several problems which has beset WPP and indeed other global agency groups. Managing such a huge stable of different businesses, many of which offer overlapping services, will continue to present significant challenges to these holding companies in the future.

Most agency holding groups can surround its clients with more marketing services than they could shake a stick at. "You want creative and media? We've got you covered. Oh, we also have consumer research, shopper marketing, PR, digital and loyalty and analytics covered too."

In other words, things became very complex and cluttered. Too many independent P&Ls to service, too many silos and, yes, too many clients wondering if they were actually getting the best value, the best work and the best return on investment they could for their companies.

Speaking at an advertising industry conference in the US last week, Marc Pritchard, chief brand officer at P&G (a big client of WPP), told his audience that "it's time to disrupt this archaic Mad Men model, eliminating the silos between creatives, clients and consumers, and stripping away anything that doesn't add to creative output".

He went on to say: "If 2017 was the year of the wake-up call, 2018 is the year we take back control to transform the industry through mass disruption." He pointed out that P&G had become too dependent on the agencies it works with and was slashing them by 60pc while saving as much as $750m.

It would be wrong to suggest that the international agency groups like WPP have ignored the writing on the wall: they haven't.

Indeed many of them, including the likes of Publicis, have responded by merging some of the many standalone subsidiaries to create a more streamlined approach to their clients marketing challenges while at the same time protecting their margins.

But some media analysts feel that it still might not be enough and, perhaps, a tad too late. Inevitably, they point to the likes of Facebook and Google which are hoovering in the cash, often bypassing agencies in the process.

If you were to combine the market capitalisation of all the five global agency groups, for example, they would still fall spectacularly short of Facebook's $524bn valuation.

It would also be wrong to suggest that they don't have a future. While the agency business model is possibly no longer fit for purpose, the industry does possess the skills, knowledge and creativity needed to make a difference for their clients. It's just going to be a lot harder and a lot more competitive as they face up to the challenge from the parvenu consultants like Accenture, Deloitte and IBM as well as the so-called "frenemies" of Google and Facebook.

But if Sorrell can rise to this challenge, then he is probably worth every penny of his massive salary.

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