Ad world’s bling days may be over

Tuesday, 19 September 2017 00:00 - - {{hitsCtrl.values.hits}}

London (Reuters Breakingviews): The advertising world’s bling days may be over. Revenues are stagnant and could stay that way given agencies’ over-exposure to slow-growing developed economies. That would force ad executives to wear the same hair shirts as their consumer-goods clients.

Revenues at the six big agencies – WPP, Omnicom , Publicis, Dentsu, Interpublic and Havas – on average fell 0.3% during the second quarter of 2017 from a year earlier, figures compiled by WPP show. The chief culprit was budget cuts at big advertisers such as Unilever, which spent less on marketing soap, deodorants and the like.

But the problem is bigger than a spending squeeze at consumer-goods giants. A “new normal” of slower growth and lower inflation in major developed economies bodes ill for ad agencies, whose revenues typically fluctuate with the economic cycle. Annual GDP growth in the European Union and North America averaged 3% in the decade to 2006 but was roughly half that in 2016. And wage growth remains sluggish in North America and Western Europe, which accounted for more than three-quarters of the four biggest agencies’ combined 2016 revenue.

Bleak prospects in the West are pushing ad groups into faster-growing emerging economies. Britain’s WPP, which is ahead of peers on this front, wants to make nearly half its revenue from these markets in the next three to four years. That may be a tall order. WPP boss Martin Sorrell has failed to push the share up from around 30% since 2011, partly because the weakness of local currencies has depressed the sterling value of receipts. Worse still, rapidly growing economies will not necessarily spend as much on advertising relative to GDP as richer peers like Britain and the United States. For example, ad spending in India and China is broadly unchanged in the past decade as a proportion of output, according to Deutsche Bank analysts.

If revenues remain stagnant, agencies will be forced to boost margins to maintain earnings growth. Most have made scores of niche acquisitions over the past decade and have scope to slash costs and boost productivity by pruning their sprawling structures. They can also cut out ostentation, as France’s Publicis has done by skipping costly awards shows like Cannes for the time being. After all, their clients and consumers have embraced far harsher austerity.