Activists or programmers?
WPP stock fell the most in almost 20 years on Wednesday after it said like-for-like net sales would not grow this year, or at best rise just 1%, compared to 2% previously expected. It follows a 0.8% slip in key sales in the first seven months of the year.
The biggest ad group in the world by revenues has a history of being forthcoming on its bouts of underperformance—to a point. For the current one, it cited pressure on client spending “particularly in the fast moving consumer goods or packaged goods sector”. Advertising world dominus Martin Sorrell, CEO, steered attention to slashed spending by giant multinational consumer groups that are traditional WPP clients. Revenues fell in all regions, though Sorrell told Reuters that “the weakest part was the U.S. (And in terms of categories), we have activist investors in consumer goods groups putting pressure on companies to perform".
What Sorrell’s frequently frank comments tend to skim over is the inexorable threat from fast-growing digital operators, chiefly Google and Facebook. True, as a traditional agency, WPP still earns a hefty margin for providing a finely tuned conduit between large companies and all sorts of platforms, including global internet companies. But the ‘old boys’ are increasingly shut out of one of the fastest-growing advertising markets – so-called ‘programmatic’. That’s the catch-all term used to describe high-speed, increasingly algorithm-driven auctions of online slots. Programmatic is the service that companies are most likely to expropriate from the agency-corporation relationship and buy from tech platforms directly instead. The fastest growing medium in 2016, in terms of global ad spend, was the internet, says IPG-owned Magna. 2016 was also the first year digital sales beat TV sales in the U.S., and Magna expects digital to surpass TV globally this year.
This doesn’t necessarily mean it’s time to write-off traditional agencies. After all, they are the biggest ad world players not because they started from scratch, but because they built from scratch. Sorrell is probably the most feted deal-maker of them all. He also revealed on Wednesday that WPP is poised to increase investment in Facebook to "well over" $2bn this year, making FB WPP’s biggest media holding. Facebook growth is one way WPP could buy more time to get better positioned for the digital pie. Nor is WPP facing anything like hard times. Here is WPP’s 2011-2016 operating margin growth.
Source: Thomson Reuters
Operating income and revenues have followed a similar path for a similar length of time, whilst dividends have risen 128%. And after a bumper 2016 underpinned by the Rio Olympics and U.S. elections, 2017 was always going to struggle. Furthermore, WPP has still reiterated its modest target for a 0.3 point improvement in operating margin this year, having narrowed its cost base. There is almost certainly room to do more of the same.
It’s too early to get worried about WPP growth, though there’s a clear message for Sorrell & Co. in WPP’s Wednesday sell-off and 22% fall this year: get with the programmatic.