WPP restructure drives 30% profit drop as client attrition threatens 2019 margins
WPP has incurred significant costs in restructuring its business into a "simplified, client-centric" offering which has eroded its bottom line, chief executive Mark Read announced on the group's quarterly earnings call on Friday (1 March).
Restructuring and client attrition smother WPP profit 30%
Read also warned that headwinds from client losses at the end of 2018 would make for a "challenging" first half of 2019.
Pre-tax profit dropped 30.6% year-on-year to £1.46bn; marking a severe dip since revenue was down just 2.6% to £12.82bn over the same time period. Overall, the holding group's operating margin decreased by 1.1% to 15.3%.
Read explained that WPP's transformative efforts were largely responsible for biting into its profit. However, he said the business had made "good progress" in starting its three-year turnaround plan, which is focused on delivering a "renewed commitment to creativity" and funneling investment into talent in order to kickstart growth.
Progress so far has been illustrated by the consolidation of legacy agency brands to form VMLY&R and Wunderman Thompson. Over the past 12 months, the network has also integrated its healthcare agencies and continues to court buyers for data wing Kantar.
As looks to reposition its current holdings, WPP's M&A activity halved in 2018. Client losses were also reported with American Express' media business, PepsiCo and Ford's creative business all jumping ship in the final quarter of the year. It did somewhat plug the gap with the win of VW in the region.
WPP warned that client losses at the end of 2018 would continue to cause challenges through 2019.
"As we have said previously, 2019 will be challenging – particularly in the first half – due to headwinds from client losses in 2018. However, we start the year with fewer clients under review than we did in 2018, and investments in creativity and technology will further improve the competitiveness of our offer," he said.
“We are at the beginning of a three-year turnaround plan, but WPP’s new positioning as a creative transformation company with stronger, more integrated, more tech-enabled agencies is already proving effective, having driven several of our recent new business successes. As we implement our strategy in 2019 we will continue to put creativity, technology and great work for clients at the heart of our own transformation.”
Western Continental Europe, Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe were identified as areas where the business was performing strongly. Like French rival Publicis Groupe, there were some concerns about performance in the United States; though the region continues to deliver the highest margins for the business.
Read revealed that newly-formed VMLY&R "has enjoyed a strong start, with client wins totaling $25m in its first 90 days". Pointing to the creative, he outlined that the group ran six spots at the Super Bowl including Grey's ‘The Best Men Can Be’ for Gillette (which proved divisive but certainly sparked global conversations).
Wunderman Thomson's chief executive Mel Edwards and incoming chairman Tamara Ingram recently talked The Drum through how the new group is going to cultivate and balance the strong creative cultures of bothfounding agencies, developing four new behaviours for staff to follow. This attempt at integration will be key across WPP's consolidated entities.
Back in December, WPP staff told The Drum what they think of Read's turnaround plan and how in reality it was being implemented. Particularly in the face of 3,500 job loses.
One staffer explained: "There’s a general sense – [because of] the hiring freeze and no pay rises – that people aren’t being put first and we’re expected to go with it, but no one is feeling incentivised. On the other hand, there is a complete understanding things need to change to ensure our survival and that a shakeup is needed."
Michael Frohlich, the Ogilvy UK's chief, however, described the mood as an“exciting new energy”.
You can see WPP r's 2018 results laid out in the table below.