Print Published 12th Sep 2017, 08:05

Whither WPP or will it wither?

WPP’s shares have lost a modest 1.49% of their value since the company announced its half year results a fortnight ago and issued a gloomy downgrade of its revenue growth expectations for 2017 to somewhere between zero and 0.2% on a like-for-like basis (see WPP downgrades revenue predictions: currencies help first half).

But since the start of the year WPP’s share price has declined by 23%, suggesting that investors have been more eager to sell shares in the company than to buy them.

WPP share price to 11 Sep 17

Perhaps more significant is the fact that the most recent price decline has occurred despite WPP making daily purchases of its own shares in the market. Since announcing the revenue downgrade on 24 August the company has been buying about 350,000 shares each day at a cumulative cost of around £60 million, and rising.

Even more significant may be the arrival of Harris Associates on the WPP share register, with its track record of agitating for a better return for shareholders (see Agitating fund manager stalks WPP but lowers stake in Interpublic).  WPP had already shown signs of a desire to rationalise some of its media buying businesses by merging Maxus with MEC, and there may be more rationalisation to come – particularly among business units that are showing little growth or even losing sizeable clients.

Media buying and planning contributed almost half of WPP’s revenue in the six months to 30 June and registered a 15.2% increase in the latest quarter, albeit most of that growth came from currency movements that disguise the underlying trend.

However, most media agencies are feeling the pinch from clients seeking a better, more transparent, deal since the US Association of National Advertisers (ANA) published a comprehensive report on past practices and encouraged advertisers to take a more demanding stance (see Transparency report may put pressure on agency margins).  WPP’s media agencies will not be exempt from those demands.

Indeed its half year statement bemoaned the fact that major groups were prepared to offer clients “up-front discounts as an inducement to renew contracts, heavily reduced creative and media fees, extended payment terms (which are starting to show up on agency balance sheets), unlimited indirect liability for intellectual property liability and cash or pricing guarantees for media purchasing commitments, even though the latter are difficult for procurement departments to measure and monitor”.  That’s not an encouraging tone of voice and it almost certainly signals further margin pressures ahead and/or moves towards further industry consolidation.

With Harris snapping at its heels, it seems almost inevitable that WPP will pay more attention to reforming under-performing parts of its business.  In that regard, research and data management must be high on the priority list for attention.  Revenue from this division grew by only 2.7% in the first half of 2017, and would have declined materially without the aid of favourable currency movements.

Marketing groups’ love affair with market research businesses began to wane a long time ago, not least because researchers seem to have an excessive enthusiasm for analysing and reanalysing their findings without necessarily being adequately rewarded for their efforts (or without controlling the time spent to fit the agreed fee). At the same time quantitative research has become a commodity product with tighter profit margins.

Research is a valuable component of agencies’ offer, but not a very profitable one, as Aegis Group discovered before selling its Synovate business to Ipsos.  And there’s no prize for guessing whether Harris Associates had previously held shares in Aegis or why break-up specialist John Napier was hired to act as executive chairman other than to oversee that process (see Napier’s game plan for Aegis becomes clearer).

WPP paid a lot of money to buy the erratically performing research company Taylor Nelson Sofres in 2008, hoping for £52 million of synergistic gains (see Taylor Nelson: Researching the researcher).  But whether it managed to hoist the TNS operating profit margin up above its historically dull 10% mark remains unknown.

WPP also has to cope with the potential damage emerging from its 19.5% investment in the US audience measurement company comScore. The recent further delay in producing revised financial statements covering the best part of four years is cause for concern enough (see ComScore CFO replaced, SEC filings delayed further, $100m litigation settlement).  The departure of the chief financial officer and a proposed $100 million settlement of legal actions does not help.  Yet so far WPP has declined to make any further write-off of its investment.

In the longer term the threat to marketing groups from management consultancies like Accenture cannot be too easily dismissed, as WPP was inclined to do in its interim report with the comment: “The consultants have certainly been mopping up some small, fragmented digital agencies, but there is little evidence so far of significant competitive penetration”.  While it is possible to argue that high-level strategic consultancy has little in common with sharp end promotional activities, other than in the broadest possible sense that both can contribute to the process of developing and selling their clients’ products, the intervention of management consultancies will at the very least disrupt the marketing playing field and probably upset profit margins.

Traditionally, most agencies have delivered a “bottom up” approach to marketing.  They have made their money from promoting their clients’ wares in one way or another – by sales promotion, by creating and placing advertisements, by influencing public perceptions, and by designing packaging and corporate identities.  Agencies have had to contribute to strategic thinking insofar as it relates to how products and services are presented, but rarely to question whether a product or service is actually suited to any particular market.   The latter has been regarded as a pure cerebral function, whether provided by in-house management or external consultancies.

Today the management consultancies are attempting to turn the process upside down.  They apparently believe that, if they can deliver high level cerebral marketing advice, they can broaden out that offer and augment the profit stream by owning the promotional services as well.  It’s the sort of thinking that looks good on paper (and in consultancies’ PowerPoint presentations), but involves combining very different cultural characteristics.

In due time the management consultancies may turn tail in much the same way as the financial institutions that attempted to acquire large chunks of the estate agency market in the nineteen eighties.  In the meantime, WPP needs to remember that Accenture’s shares are listed in New York with a market capitalisation of $83 billion which compares with WPP’s market capitalisation of “only” $26 billion (see What is Brand Learning Group worth to Accenture?).  That’s a lot of financial muscle to cope with.   And Accenture is not alone.

Not only does WPP have to contend with the threat of new market entrants like Accenture, static revenue prospects, profit margin pressures and agitating shareholders, it has one further risk on the horizon.   Contrary to popular belief, Sir Martin Sorrell is probably not immortal.  Very talented, yes.  Outstandingly successful, yes.  And deserving of massive respect.

But if the group’s performance begins to stutter and the share price continues to decline, investors will not contain their frustration.  Sir Martin controls only about 2% of WPP’s shares, currently worth about £350 million.  He has every incentive to take whatever steps are necessary to ensure the group continues to prosper, whether under his own leadership or not.