WPP: caught between cyclical and structural shifts
Following a downgraded growth forecast, Dominic Mills wonders whether WPP is undergoing a temporary shift, or a more profound structural change that threatens the ad industry as we know it
The splash on section one of the FT is normally reserved for big political or macro-economic stories. At a push, it’ll do a corporate if, say, it is of some strategic significance to the economy, like a bank or aerospace manufacturer.
But that was where WPP found itself last week on news of a (mere) 1.7 per cent drop on net like-for-like sales. Hardly a ‘hold the front page’ moment.
I suppose that’s the sort of thing that happens when, as Sir Martin Sorrell has skilfully done, you a) paint WPP as a bellwether for the global economy and b) deliver consistent, and sometimes stellar, stock-market performances. At the first sign of a stumble, the world cries: ‘Is this the canary in the mine?’.
Certainly investors took fright, WPP shares dropping 10 per cent on the day, before a small bounce back. All told, its shares are down just under 20 per cent so far this year.
The big question is whether this represents a cyclical – and therefore temporary (although of uncertain duration) – shift, or a more profound structural one that threatens both the ad industry as we currently know it and thus the holding companies?
Citing a ‘trifecta’ (his word) of causes, Sir Martin would have us believe it is the former.
Effectively granted a sopabox by Radio 4’s Today programme (at about 8.45am), he summarised WPP’s woes thus: digital disruption; cheap money fuelling venture capital attacks on the likes of Unilever, thus causing them to cut spend; and the rise of zero-based budgeting by clients, thus further squeezing marketing spend. Tough questions came there none. He probably couldn’t believe his luck.
In fact, if you look at the WPP interim statement, lack of general economic growth is blamed on a long list of additional factors, including: populism, fake news, Amazon, digital deflation, Trump’s stand-off with Congress, and a sales tax in India.
I’m exhausted just thinking about them. In the ongoing list of excuses – more than 20 by some count – did I imagine one citing the knock-on effects on consumer spending of a delayed infrastructure investment programme in Outer Mongolia?
Most of the pain seems to be in North America, where the giant packaged goods companies most at risk from cheap money are based and digital disruption is high.
Somewhat bizarrely in the UK, the birthplace of contemporary populism and, you might imagine, a concentration of economic uncertainty, WPP recorded a doom-defying revenue increase of 5.8 per cent – the strongest performance of any market.
But not everyone thinks this is just about macro economics and political uncertainty. For some of those who read the tea leaves as opposed to just the financial charts, a more profound structural shift is underway.
Ad Age, for example, blamed transparency (or, to be clear, opacity) for WPP’s woes, claiming that a year on, the ANA/K2 report into agency media practices is finally beginning to bite.
The evidence: US GDP growth and media spending are holding up, respectively, 2.6 and 3.4 per cent, the latter according to Zenith, yet US revenues of the holding companies are flat/falling. Ergo, clients are taking their money elsewhere.
Brian Wieser of Pivotal, aka the oracle of Wall Street, put it this way: “There is at minimum a coincidence between the timing of the release of the K2 report and the sudden deceleration in U.S./North America organic revenue growth for the holding companies, which began in the third quarter of last year.”
And if you follow the logic of other analysts, you would also conclude that something bigger than the ups and downs of the economic cycle are afflicting, not just WPP, but also its peers.
The causes: the rise of the duopoly, lack of transparency and trust, new players moving into data, and the ongoing attack from consultancies like Accenture and Deloitte, the latter of which bought itself another agency this month and raided Havas for a top-drawer creative boss. You could group all this under the heading ‘disintermediation’. And all of this is before we even get to the disruptive threat posed by Amazon (see next story).
I shy away from forecasts, but here’s one: all talk about Sir Martin’s possible retirement – around on and off for the last three years – will be shelved for the time being.
Voluntarily at least, he will not want to go so long as this shadow hangs over what, in reality, is still very much his baby. WPP’s share price and situation – it’s personal – is his legacy and he will not want to leave so long as it is tarnished.
Amazon: not just supermarkets in its sights, but cars, FMCG and search
Yesterday (Bank Holiday Monday), Amazon effectively took control of its new $13bn toy, Whole Foods, ushering in a round of price cuts (at, IMHO, the world’s most egregiously overpriced food retailer).
Those cuts, announced at the tail end of last week, must feel like a punch in the stomach to the hard-pressed supermarket sector. Certainly investors in M&S, Sainsbury’s and Tesco believe so, marking down share prices.
But that is nothing compared to the panic sweeping through the US food retail sector. Collectively, the value of listed US food retailers declined $19bn in June when Amazon announced its planned takeover, and then $12bn when it announced the price cuts.
As yet, we are still to see the effect on FMCG manufacturers play out, but you can bet the big hit is coming. Whether supplying Amazon/Whole Foods, or existing bricks-and-clicks retailers competing with Amazon, prices will be squeezed. It ain’t going to be pretty.
Of course, it isn’t just food retailers Amazon has in its sights as, for example, it lines up an assault on car dealers here and in Europe.
And one of the fascinating ways this expansion of activities plays out in Amazon’s favour is in its growing share of search. In certain product categories Amazon heavily outscores Google, as this US survey by UPS in July also shows – Amazon’s share of shopping-linked search is 38 per cent – twice Google’s.
If you control search then, to borrow some US folk wisdom, you’re sitting in the catbird seat.
Oh, and by the way, none of this is good news for FMCG companies, retailers and car manufacturers. Ergo, it isn’t good news either for WPP, Omnicom et al.