Ruling the world: Adland's super six
Last year saw some dramatic shifts in the share of profits earned by the six biggest global groups. WPP was the outright winner. Bob Willott explains how.
Last year, the six biggest marketing groups in the world are estimated to have shared remuneration between them that accounted for more than 3 per cent of a $900 billion global marketing spend. WPP collected the biggest slice of that revenue and in doing so chalked up a post-tax profit for its shareholders of £586 million. Not only was that the biggest profit reported by any group in the entire sector, but it represented a spectacular 33 per cent improvement on the previous year.
For the first time, WPP can claim unambiguously to have become the industry's financial top dog. And that progress was achieved during a period of recession and significant change in the shape of the industry itself.
Alongside WPP, the main beneficiary of shifting profits last year was Publicis. Both companies made impressive progress, primarily at the expense of Omnicom. Behind them, Interpublic and Dentsu also enjoyed much improved profits, but their starting points were very low indeed.
So what has prompted this re-ordering of the profit leaderboard?
Inevitably, the story reflects a mixture of luck and judgment - good and bad. But four favourable factors dominate. First, for some years, the winners have been able to use their scale and media buying power to win market share from minnows in competitive pitches. Second, they have made successful step change acquisitions - often in new markets. Third, they have purposefully bought more volume - particularly by expanding into growth territories. And fourth, some have been lucky enough to benefit from favourable exchange-rate movements.
Evidence of the influence of WPP's media buying power is provided in its latest annual report. Not only did the media buying and advertising segment show the most growth (media revenues alone jumped by 13 per cent), but also it accounted for 40 per cent of the group's revenues. Most significantly, it contributed 46.4 per cent of group operating profit. Hence the biggest and fastest-growing source of WPP's revenue was also the most profitable.
WPP's advance last year was not due to exceptional revenue growth, but to where its revenue came from and how efficiently it was converted into profit. Even the revenue of smaller groups such as Interpublic and Havas grew a little faster than WPP's 7.4 per cent. None of them could match the acquisition-fuelled 19.8 per cent growth of Publicis (see chart, page 28).
WPP has improved the mix of business activities to enhance the overall profit margin earned on its revenues - something that is particularly difficult to achieve during or immediately after a recession. Indeed, although margin improvement had been a declared objective of WPP for many years, until now it had been more honoured in the breach than in the observance.
In 2010, £142 million (or 75 per cent) of WPP's pre-tax profit improvement arose from better operating profit margins. In other words, the mix of revenue growth was such that it could be handled without a matching increase in overall operating costs. Staff numbers may have increased to cope with the growth in business, but fixed costs like accommodation probably did not.
WPP was not alone in improving its operating efficiency last year. Publicis added £70 million to its profits by improving its operating margins, but a bigger contribution came from the substantial revenue growth achieved by acquiring companies such as Digitas and Razorfish. Publicis also claims to have boosted efficiency by centralising support functions.
The recent performance of the global groups is, in part the product of strategic decisions stretching back over many years, as those with the biggest financial muscle sought to acquire further profit-earning assets. As long ago as 2002, Publicis paid about $3 billion to acquire Leo Burnett, D'Arcy Masius and various other businesses that were packaged up in the holding company BCom3. It gave the group a massive US presence, albeit still much smaller than WPP had achieved. It also created links with Dentsu as an investor and trading partner, although that relationship appears not to have blossomed as might have been expected.
Publicis spent more than $1.8 billion on buying the digital businesses of Digitas in 2006 and Razorfish in 2009. The implication was clear: the group needed to secure both the digital technical expertise and the critical mass to expand its business, and that appears to have been successful.
WPP had been equally acquisitive before the recession arrived and it, too, focused on digital technology, buying 24/7 Real Media for about $700 million in 2007. Then, in 2008, it ventured further into market research, buying Taylor Nelson Sofres for the best part of $2 billion. Self-evidently, market research generates a much lower profit margin than other marketing disciplines, but the scale of the TNS acquisition still gave a big boost to profits.
The successful growth strategies at WPP and Publicis appear to have blended large-scale investments in new market specialisations with further expansion in fast-growth territories. Those decisions, more than any other, have been responsible for soaking up an increasing share of global marketing budgets so that probably more than 15 per cent of the global spend now flows through or is influenced by the Super Six. The strong are getting stronger.
Where does that place Omnicom, Interpublic, Havas and Dentsu?
Until the recession, Omnicom had become predictably consistent in reporting year-on-year improvements to profit. The growth was solid, based on exploiting the potential of its existing networks and on building additional revenues streams by regular, relatively modest acquisitions. But at no time in the past decade has the group seen fit to take a big investment risk in the form of a major transformational acquisition.
It is possible that past experience prompted a more cautious attitude. The group invested in several new digital businesses at an early stage, but they turned sour and Omnicom offloaded most of them to keep its profit record and balance sheet intact. The manner of the offload prompted an attack in the US financial press and threats of shareholder litigation.
At the same time, Omnicom watched its main US rival Interpublic getting into greater and greater difficulty after an ambitious and not always well judged acquisition programme put it under serious financial stress. Interpublic swallowed up Shandwick, Brands Hatch Leisure and True North. It invested in digital via MarchFIRST and IconMedialab (now LBi International). It also struggled to implement a costly merger of Lowe with Ammirati Puris Lintas.
Pressure on Interpublic executives to deliver profits must also have contributed to the lax management practices that, among other things, caused inter-office charges within McCann Erickson not to be recovered from clients and media credits to be retained by the agency without clients' consent. By 2005, Interpublic had written off well over $3 billion in asset write-downs, restructuring costs, litigation and accounting errors.
After watching the chaotic unravelling of Interpublic and the disruptive merger of Euro and RSCG that became Havas, Omnicom could be forgiven for becoming more conservative. In the aftermath, neither Interpublic nor Havas had much of a choice other than to be cautious. Their balance sheets were strained and newly installed management teams have been battling to get to grips with what they have to manage.
Interpublic now seems to be getting off the back foot with a healthy improvement in financial performance last year. Revenue was up by 8.4 per cent (7.3 per cent on a constant currency basis) and its £166 million profit was the best for at least ten years. The share of revenue derived from Europe remained fairly weak and that no doubt helps explain why the group took steps to strengthen its Lowe network agency in the UK by acquiring DLKW. Interpublic still has a long way to go to achieve the profit margins recorded by WPP, Publicis or Omnicom.
Havas remains under the Bollore family since it acquired a strategic stake in 2005.
The group's continental roots are reflected in the dominant 54 per cent share of revenues derived from that region. Attempts to conquer North America or the fast-growing regions of the world have been underwhelming, as have been the group's growth and profits. If ever there was a case for a strategic realignment, Havas is it and - with a strategic 29.6 per cent stake in Aegis - Bollore probably realises this better than most.
Over in Japan, Dentsu enjoyed a strong balance sheet, but not much global coverage. The deal between BCom3 and Publicis had weakened its participation in the enlarged group financially and strategically. So while it has worked hard in its home territory to embed digital expertise throughout its business and to tidy up the overseas investments that it already owned, it is only now taking further steps to build a stronger geographical spread. Even one of its digital adventures came a cropper in 2009 when it wrote down its investment in digital media buying agency Cyber Communications by $98 million. In the same year, it incurred a $500 million revaluation loss on investments.
What next? The danger for any major player is that it becomes a mature business in a mature market, struggling to satisfy the desires of shareholders by acquiring more revenue as earlier profit-earning components begin to wear out. That's the trouble with acquiring single generation businesses built by entrepreneurs whose loyalty can be bought for only a limited period by earn-outs and other financial means.
In any case, the supply of quality new generation agencies available for purchase is not inexhaustible, although Publicis would doubtless challenge that assertion after engaging recently in a spate of modest acquisitions in the UK that included Chemistry, Holler and Airlock - all with a digital dimension - while expanding its healthcare presence in France. There must also be a question-mark over how much more of the global market the Super Six can realistically expect to acquire organically at the expense of smaller players.
Growth is going to get more difficult and more consolidation seems inevitable. Those who can afford it will prioritise growth markets such as China, India and Latin America, and also look to make sizeable acquisitions that will accelerate penetration of existing specialisations. Some may seek to extend the range of business services beyond what we currently perceive as marketing's natural bedfellows.
One of the more unsettling features about the future prospects of the Super Six is management succession. Sir Martin Sorrell is aged 66. Maurice Levy is 69. Michael Roth is 65. Omnicom's John Wren is a mere 60. Apart from Roth they all have been deeply immersed in the management of their companies for many years. Doubtless each will say that their company is suitably structured to continue successfully irrespective of who is in the driving seat. Whether that will prove to be the case remains to be seen.
Without outstanding management it is almost inevitable that weak companies will get weaker and probably they will be swallowed up by their betters or start to break up. That's why innovation and risk-taking remain important, however counter-culture that may be. And its why the pursuit of quality must remain the precursor to the pursuit of profit.
Bob Willott is the editor of Marketing Services Financial Intelligence (www.fintellect.com)
SIR MARTIN SORRELL, CHIEF EXECUTIVE, WPP
Operating profit: £973m
Post-tax profit for shareholders: £586m
Main trading brands: Grey, JWT, Ogilvy & Mather, United Network and Y&R,
MediaCom, MEC, Mindshare, Maxus, TNS, Millward Brown, The Futures
Company, Burson-Marsteller, Cohn & Wolfe, Hill & Knowlton, Ogilvy Public
Relations Worldwide, Addison, The Brand Union, Fitch, Lambie-Nairn,
Landor Associates, The Partners, G2, OgilvyOne, OgilvyAction, RTCRM,
VML, Wunderman, Ogilvy CommonHealth Worldwide, GCI Health, ghg, Sudler &
Hennessey, 24/7 Real Media, Blue State Digital, Schematic, BLUE
Biggest Clients: Colgate Palmolive, Glaxo SmithKline, Nestle, Procter &
JOHN WREN, CHIEF EXECUTIVE, OMNICOM
Operating profit: £930.1m
Post-tax profit for shareholders: £527.2m
Main trading brands: BBDO Worldwide, DDB Worldwide, TBWA\Worldwide, OMD,
PHD, Prometheus, Diversified Agency Services
Biggest Clients: Procter & Gamble, AT&T, McDonald's, Adidas, Visa
MAURICE LEVY, CHIEF EXECUTIVE, PUBLICIS
Operating profit: £720.6m
Post-tax profit for shareholders: £461.7m
Main trading brands: Publicis, Leo Burnett, Saatchi & Saatchi, Burrell,
Fallon, Kaplan Thaler Group, Bromley, Bartle Bogle Hegarty,
ZenithOptimedia, Starcom MediaVest, Digitas, Razorfish, Medias & Regis
Europe, MSLGroup, Publicis Healthcare Communications Group, WAM, Market
Biggest Clients: Procter & Gamble, L'Oreal, Renault, Kellogg, Toyota
MICHAEL ROTH, CHAIRMAN AND CHIEF EXECUTIVE, INTERPUBLIC
Operating profit: £349.5m
Post-tax profit for shareholders: £166.3m
Main trading brands: McCann Erickson, DraftFCB, Lowe & Partners,
Campbell-Ewald, Hill Holliday, Mullen, Mediabrands, WeberShandwick,
FutureBrand, DeVries, GolinHarris, Jack Morton, Octagon Worldwide
Biggest Clients: General Motors, Johnson & Johnson, Microsoft, Unilever,
TATSUYOSHI TAKASHIMA, PRESIDENT, DENTSU
Operating profit: £268.5m
Post-tax profit for shareholders: £224.0m
Main trading brands: Dentsu, Dentsu Young & Rubicam, Cyber
Communications, DA Search & Link, Dentsu Digital Fund, Dentsu Creative
X, Dentsu Casting & Entertainment, Information Services
International-Dentsu, Dentsu McGarry Bowen, Beijing Dentsu Advertising
Biggest Clients: Sony, Honda, Toyota, Nippon, Hitachi
VINCENT BOLLORE, CHAIRMAN, HAVAS
Operating profit: £159.7m
Post-tax profit for shareholders: £96.5m
Main trading brands: Havas Worldwide, Euro RSCG, Arnold, H, W & Cie,
Havas Media, Havas Digital, Arena Media, Havas Sports & Entertainment,
MPG, Archibald Ingall Stretton, One to One, Lattitud, iGlue, Mobext
Biggest Clients: Reckitt Benckiser, Sanofi-aventis, PSA Peugeot Citroen,
This article was first published on campaignlive.co.uk
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