Dentsu’s transformation business grows – but can it keep momentum as US spending dips?
The latest data for Japanese holding company shows the group is on track to expand CT&T business, but analysts suggest it needs to refine its offering further.
Dentsu released its first quarter results this week / The Drum
Reduced tech spending in the US and client caution on digital transformation investment weighed down on the performance of Dentsu in the first quarter of the financial year, new figures show.
The company, which owns Dentsu Creative and Merkle, is the third-largest advertising group in the world by headcount, and the largest in its home market of Japan.
Dentsu’s goal of deriving at least 50% of its income from digital transformation services, rather than advertising or media, edged closer. In the last three months, it took 35% of its revenue from that segment. The acquisition of Tag earlier this year will likely push that percentage further, once the deal is fully complete.
But organic revenue for the group as a whole declined 1.6% in the first quarter, in part due to an organic revenue decline of 4.9% in the Americas region and a slight decline (0.2%) in Japan – markets which provide the lion’s share of Dentsu’s income.
The holding group needs to sharpen its edge if it’s to maintain positive momentum toward that digital transformation goal.
According to Greg Paull, co-founder and principal at R3: “Looking past the obvious that revenue is down, what deserves attention is how Dentsu is trying to shape itself into a contender in the battle of integrated holding companies.
“The approach has worked really well for Publicis Groupe, and to some extent WPP, but without first mover advantage Dentsu is playing a huge game of catch up.”
Two key factors were behind the quarterly dip, according to Hiroshi Igarashi, Dentsu’s president and chief exec. First, the widely reported tech slowdown in the US came into play. Turnover from the tech sector was down 31.9% overall, due particularly to lower media spending in the US.
The same cloud has hung over most agency groups in recent months. Sir Martin Sorrell blamed stalling revenues in last week’s S4 Capital results on its overexposure to US tech, as did Stagwell Group’s Mark Penn in its quarterly release.
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A “lengthening of the sales cycle” (that is, the company’s customers putting off spending) among digital transformation and technology clients, especially in the US and Asia Pacific, was the second. Those services are expensive, long-term investments – the kind of decision that tends to get put off when belts are being tightened. Igarashi is confident this will turn around, noting that “a growing pipeline and increase in new business wins in the first quarter provides greater visibility for an improvement in second-half growth.”
In contrast, Dentsu’s transformation operations in Europe, the Middle East, Africa and Japan grew. Demand is higher in those markets because fewer businesses have begun digitizing their operations, relative to the mature situation in the US. Furthermore, almost 50% of Dentsu’s stateside revenue comes from its digital transformation business – meaning a downturn in that area has had an outsized impact.
Dentsu, which employs around 69,000 people, spent 6.9% more on wages compared with the same period last year, but The Drum understands that the company has not put in place specific cost controls or slowed down hiring, as competitors such as S4 Capital have done.
Paull suggests the group hasn’t yet done enough to highlight the strength of the talent within its business, though.
“The acquisition of Tag and a growing CT&T [Dentsu’s term for digital transformation] offering points to movement in the right direction,” he says, “but Dentsu needs to show a stronger value proposition, increase awareness around quality of the work, and prove that their talent strategy is paying off.”