Media WPP Financial Results

WPP: 'Our industry may be in danger of losing the plot' as like-for-like sales and revenues fall


By Charlotte McEleny | Asia Editor

August 23, 2017 | 6 min read

WPP has called the first half of 2017 “much tougher” than anticipated, reporting a drop in like-for-like revenue and sales.


WPP revenues and sales miss expectations

The company blamed slower client spending and short term investment strategies, as well as calling out the industry for unsustainable new business practices. In an emotive call, WPP said in its statement: “our industry may be in danger of losing the plot.”

For the first half and Q2 highlights, it reported like-for-like revenues down 0.3% and like-for-like sales down 0.5%, which it said was slower than the first quarter.

The holding company's share price fell by 11% in early trading on Wednesday.


Addressing investors, chief executive Sir Martin Sorrell said the cyber attack the group suffered towards the end of June had "no significant" impact on its revenue, and could not be blamed for a weaker performance in June and July, despite causing “significant disruption” at some agencies including GroupM and the Y&R Group.

Furthermore, Sorrell said that the issues surrounding the digital duopoly - including their part in exacerbating a fake news crisis and holes in their measurement practices - have not stopped the growth of Google and Facebook in WPP's media investment.

"Despite all those uncertainties it doesn't seem to have checked," he said. In fact, he said Facebook could move up to become its second largest media investment this year, replacing News Corp, with Google remaining at number one.

"Google ranks number one in terms of the destinations of our media investments. Facebook ranks third (but) may this year actually become second," he said.

Looking to macro trends, WPP painted a grim picture in which many Fortune 500 businesses outside the tech and healthcare sectors were unlikely to make any significant growth in the coming years. It even went as far as calling top line growth for large corporations to be “anaemic”.

“In a slower growth world, both more recently and post-Lehman, inflation has been negligible, perhaps also suppressed by digital deflation. As a result, clients have markedly less pricing power and finance and procurement departments are very focused on cost," it said.

"In this world, it is, perhaps, not surprising that clients have reduced spending. If you look at the S&P 500 for example, significant like-for-like top line growth seems confined to the technology sector and ten or so HMOs in the pharmaceutical sector. Beyond these, top line growth is anaemic."

It also added that growth would have to come from innovation and brand as volume cannot be relied on, something that could eventually trigger more spending: “Looking at our top 20 or so clients over the last two or three quarters, top line growth has been in the 2-3% range, with most if not all of it coming from pricing increases usually in Asia Pacific or Latin America.”

However, such investment from brands would take longer-term strategies, which WPP said was not happening.

“Not helping either in focusing on the long-term, is the average term life of S&P 500 and FTSE 100 CEOs at 6-7 years, CFOs at 4-5 years and CMOs at 2-3 years. As a result, it is not surprising that since Lehman at the end of 2008, the combined level of dividend payments and share buy-backs as a proportion of retained earnings at the S&P 500 has steadily risen from around 60% of retained earnings to over 100%. In effect, managements are abrogating responsibility for reinvesting retained profits to their institutional investors.”

WPP said the effect of this on the advertising agency business had been heightened by “three significant forces”; digital disruption, “cheap money generated by central bank interest rate policy” and the introduction of zero-based budgeting.

The trend towards undercutting to gain new business and the threat from non-agency business, particularly in digital, has proven to be an additional issue for the group.

On new business practices, WPP said competition was "fierce" and that "as image in trade magazines, in particular, is crucial to many, account wins at any cost are paramount."

"There have been several examples recently of major groups being prepared to offer clients up-front discounts as an inducement to renew contracts, heavily reduced creative and media fees, extended payment terms (which are starting to show up on agency balance sheets), unlimited indirect liability for intellectual property liability and cash or pricing guarantees for media purchasing commitments, even though the latter are difficult for procurement departments to measure and monitor.

"As some say, you are only as strong as your weakest competitor. These practices cannot last and will only result eventually in poor financial performance and further consolidation, the premium being on long-term profitable growth. Our industry may be in danger of losing the plot.”

It also referenced the increased pressure on media and advertising investment businesses from the consultancies but played down the impact it was having in the short term.

“Much has been made about the potential negative impact of the growth of digital marketing on our business model and the move by consultants, principally Accenture and Deloitte (our current auditors), into our industrial spaces. The consultants have certainly been mopping up some small, fragmented digital agencies, but there is little evidence so far of significant competitive penetration.”

In the analyst presentation, Sorrell elaborated: "Consultancies have had no impact on our business. The question is how much market penetration they have achieved? I don't think it has been significant in our space yet. Whether that changes in the future we dont know."

Airbnb CMO Jonathan Mildenhall recently played down the impact that the consultancies will have, telling The Drum that they may not succeed in retaining creative talent.

“The most significant pressures on client spending seems to be the impact of low growth and cheap money driving asset purchases, consolidation and zero-based budgeting,” WPP concluded.

Additional reporting by Jessica Goodfellow

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