On Wednesday, the world’s largest ad agency holding company, WPP, spooked investors by warning about a slowdown that it projects will result in dismal sales growth of 1% or less.
Shares of the firm plummeted the most in a single day since 2000 and are now down by more than 20% this year.
WPP CEO Martin Sorrell blamed his firm’s woes on a “trifecta” of factors:
- Digital disruption. While Sorrell says that the “duopoly” of Google and Facebook isn’t hurting WPP, the ways in which consumers are engaging with brands through digital channels are changing rapidly. A WPP investor document noted “content competition from Apple, Microsoft, Google, Facebook, Alibaba and Tencent.” There’s also Amazon. As CNBC’s Patti Domm observed, “Price wars and changing consumer tastes have turned some of the once mainstay brands into virtual commodities, with less supermarket shelf space and now less marketing clout.”
- Zero-based budgeting. More and more companies are engaging in this practice, which essentially requires that every expense be justified. This generally encourages companies to lower costs, resulting in lower budgets for ads and agencies.
- Activist investors. The trend towards zero-based budgeting is in many cases being pushed by investors who want the companies they invest in to increase profits. To maximize their returns, some of these investors have pushed share buybacks and dividends over innovation and core business investments, which can obviously have an impact on ad budgets.
By far, WPP has been most hurt by its CPG clients.
As AdAge’s Laurel Wentz pointed out, WPP’s two largest clients, Procter & Gamble and Unilever, are on a mission to cut their agency costs by half a billion dollars over the next five years.
Unilever announced earlier this year that it was cutting its ad output by 30% and Procter & Gamble made headlines recently when it revealed that it reduced spending on digital ads by more than $100m last quarter without impact on its growth rate. According to P&G CFO Jon Moeller, the reduced spend “reflected…a choice to cut spending from a digital standpoint where it was ineffective, where either we were serving bots as opposed to human beings or where the placement of ads was not facilitating the equity of our brands.”
So is WPP sounding a warning to agencies or the entire ad industry?
Brian Wieser, a senior research analyst at Pivotal Research Group, told AdAge that “the thematic elements WPP is talking about are already of concern to every holding company.” In other words, this isn’t just about what’s happening at WPP and its clients specifically.
As Ian Leadbetter, co-founder Ruler Analytics, detailed earlier this week, talk of the death of agencies is on the rise. But is the agency really on its death bed?
As Leadbetter sees it, “there remains a need for experts—trusted sources to provide advice, guidance, assistance, and reassurance,” but the agency model will have to change. For example, he argues that agencies will have to get smaller and more specialized and focused. He also suggests that agency compensation will be tied to revenue generation.
Others have made similar suggestions.
But it would be a mistake to assume that what ails WPP is exclusive to the agency world. Beyond the desire to cut agency costs and the cyclical ups and downs of ad spend, 2017 has seen important developments in the way advertisers are making decisions, particularly around their digital ad spend.
As the digital ad market has matured, advertisers have become more savvy and now that they’re intently focused on topics like brand safety, relevance, viewability and attribution, players in the global ad business would be wise to expect that agencies won’t be the only ones vulnerable to advertiser pushes for accountability and efficiency.