What the latest quarterly earnings tell us about holding companies in 2023

How can we tell? Every three months, the six largest advertising firms – all public companies – release trading updates reporting on their financial performance. The ‘big six’ account for some 396,000 workers across the world, and when ‘challenger networks’ and consultancies such as Media.Monks, MSQ Partners, Plus Company, Stagwell, Accenture Song, Capgemini and Deloitte Digital are included, we’re talking about a huge proportion of the people working in this business.

Those quarterly reports are a vital window into the fortunes of the greater part of the ad industry. And as the calendar year closes, the latest round of updates – for the third quarter – offer a crucial window on investment trends active across the industry.

Better growth than expected

At the end of 2021 and the beginning of 2022, the largest ad groups expected growth to slow down. The post-pandemic rush of client activity had refilled their coffers after the tough months of 2020 and driven a wave of digital marketing spend; Dentsu and Publicis both posted new company records for revenue. That couldn’t last forever, though, and when a recession appeared on the horizon, expectations were cut even further.

Back in July, Publicis chief executive officer Arthur Sadoun was cautious about his company’s prospects for the coming year, even as he sought to reassure about Publicis’s readiness for a choppy climate. “It is true that clouds are gathering above the economy,” he said. “But my job is not to predict the weather. It is to make sure that as a group we are ready to face any uncertainties. And in this case, we definitely are. We have all the tech and data assets fully integrated with our creative and media expertise to help our clients drive growth and generate efficiencies, whatever the scenario.”

It appears he didn’t need to be as cautious. Publicis has upgraded its guidance (the percentage of organic growth it publicly says it expects to manage) for 2022 twice this year, from 4-5% organic growth to 8.5%. WPP and IPG also updated their guidance twice, from 5.5% to 7% and 6% to 7% respectively, while Omnicom revised its expectations upwards to 7%.

Holding company organic growth % in 2022

On a quarter-by-quarter basis, the rate of growth has certainly slowed – albeit more for some companies (namely Dentsu and IPG, which both posted Q3 organic growth 5.9% lower than Q1) than others. But compared with other knowledge industries, the titans of advertising aren’t doing too badly. Revenue growth has slowed for the big tech platforms such as Meta and Snap, while Google’s ad business saw just 2.5% growth in the third quarter.

Furthermore, while those tech businesses have reacted to the chance of a recession by laying off thousands of staff, none of the six holding companies have announced redundancy schemes (despite recent job cuts at R/GA and redundancy consultations at The Brooklyn Brothers, an IPG spokesperson confirmed to The Drum that it has no plans for further job cuts). Taken together with the revised targets, that suggests the holding companies have performed better than they expected.

New sectors, new products

So, which client categories are investing the most? And which areas of the holding companies are seeing the best performance?

Across the board, we’ve seen significant organic growth at network PR agencies and specialist shops in the healthcare, pharmaceutical and experiential sectors. That continues a longer-term trend. Since 2018, Omnicom has taken a bigger chunk of its revenue (now 16%) from pharma and healthcare clients than it has from food and beverage brands (14%) or car makers (10%).

At WPP, public relations and specialist agencies posted 14.1% and 13% like-for-like organic growth in Q1, and 10.5% and 11.9% growth in Q2. Though growth was slowing in the third quarter, public relations still grew 5.8%. If you take a longer view, specialist agencies have increased net revenue by 17.1%, compared with the third quarter of 2019. Even as media and data spending began to cool at IPG over the last three months (it pulled in $38.5m less in the most recent third quarter than it did in the same period for 2021), its creative and specialist agencies are still increasing their EBITA.

There’s been plenty of investment in these areas. In just the last two months Havas acquired Aussie health agency Bastion while WPP bought JeffreyGroup and merged FGH with Sard Verbinnen.

That doesn’t mean holding companies are leaving their traditional consumer clients behind. They’re just offering them a different product.

Greg Paull, co-founder and principal at R3, recently wrote that “creative advertising is no longer a growth center for holding companies”. Instead, “diversified offerings” that bring together data, creativity and media services that address “goals across the business” will keep clients spending.

As such, we’ll see the businesses underpinning those offers grow the most within holding companies and networks. It’s why Publicis Sapient and Merkle are the strongest performers within Publicis and Dentsu, and why Sadoun has repeatedly emphasized the importance of digital transformation packages on investment calls this year.

“We are absolutely convinced that our clients, as we see every day, will continue to invest in their transformation, whether it be marketing or digital,” he said recently.

At WPP, ‘experience, commerce and technology’ services offered by agencies such as Ogilvy and VMLY&R accounted for 39% of first-half net revenue. While the bulk of Omnicom’s revenue comes from classic advertising and media dollars, commerce, experiential, healthcare and PR are all growing faster – should that continue, the firm will likely have a much more diverse set of revenue streams.

These services tend towards longer-term relationships with clients, Paull writes, giving agencies more certainty in rocky times. “First-party data services, commerce and public relations have helped them win long-term partnerships with large clients; therefore buying them a degree of stability,” he says.

That approach isn’t reserved for holding companies. Media.Monks has a long-term target of booking 20 ‘whopper’ accounts, aiming ultimately for a dense client roster that it can do business with for years and years. Parent S4’s fastest-growing segment in its most recent set of figures was, accordingly, tech services – not creative or media.

Dept, MSQ and the consultancies each also like to present themselves as data-directed problem solvers, rather than mere ad agencies – often using the same language as Sadoun and his fellow holdco chiefs, too.

In 2023, with the impact of the pandemic era farther behind us, we’ll get a clear indication of how the investments behind these changes pay off. But if the client demand and spend we’ve seen this year is any clue, then the biggest firms in advertising will likely continue to diversify their income streams, continue to compete to buy up specialist indie shops and continue to prioritize large integrated accounts.