Gideon Spanier
Feb 18, 2022

Do agency groups’ strong results prove the doubters wrong?

The industry has some strong opinions after the big agency holding companies reported strong 2021 financial results that eclipsed 2019 levels.

Clockwise from top left: Biggam, Douglas, Sorrell, Jones, McCabe, Richards, King, Smoorenburg
Clockwise from top left: Biggam, Douglas, Sorrell, Jones, McCabe, Richards, King, Smoorenburg

The big agency holding companies have reported some of their best results in living memory in the annual earnings season.

Publicis, Omnicom, Interpublic and Dentsu all had organic growth of 10% or more in 2021. Revenues not only bounced back from the slump of 2020 but also eclipsed 2019 levels—in most cases.

What’s more, all of the groups are forecasting solid revenue growth of 4% to 6% in 2022—albeit that is still behind the rapid double-digit rates enjoyed by some of the tech giants and the adtech players.

The recovery comes after the leaders of some “challenger” groups such as S4 Capital’s Sir Martin Sorrell and The Brandtech Group’s David Jones were highly critical of the holding company model—both before and during Covid—and suggested it was no longer fit for purpose.

So, have the agency groups’ strong 2021 financial results and their confident outlook for 2022 proved the doubters wrong? Campaign’s question has provoked some strong answers:

Douglas McCabe, CEO, Enders Analysis

Yes, if doubters argue that investment in creative and planning are a declining need. A bunch of things have happened through the pandemic: WFH accelerated the balance of ecommerce in retail (about five years of projected growth was delivered in a lockdown or two). Most tech platforms have had bumper years. Online advertising, strongly correlated with ecommerce, has grown enormously.

But people get fixated on one side of the story. The big tech companies spend big in offline and online media. Native businesses are not just relying on search and social: TV has grown strongly, adding more new advertisers to its roster than ever. New categories like crypto products have robust marketing budgets. Outsourcing was a wildly exaggerated trend, with many experiments quickly retreating. Companies are building sustainability, not just this week’s sales.

Distinctive creative, consumer cut-through and cross-media planning deliver profit. Inflation will reinforce it: businesses need to grow to offset rising costs as economies hot up. None of this is to say agencies don’t need to continue to change. It is to say the fundamentals have not gone away.

Paul Richards, executive director and head of research, Dowgate Capital

The reporting season has seen pleasing results, with Publicis, Omnicom, IPG and Dentsu reporting organic revenue growth of 10-13% with margins in the upper teens and good cashflow. WPP will report on 24 February, and at its Q3 results guided to a similar level of growth. This double-digit rebound in revenues reverses the pandemic decline, while strong margins and cashflow put the groups on a secure financial footing. S4 Capital [for which Dowgate acts as corporate broker] continues to significantly outpace the industry, guiding to organic growth of well over 40%.

Looking forward, we note the industry is pivoting towards faster-growth areas including ecommerce, connected TV and digital transformation. The holding companies expect growth of 4-5% in 2022 while S4 Capital will be 20% higher. The share prices of the holding companies have recovered to, or are slightly above, their pre-Covid levels while S4 Capital and tech transformation companies, such as Globant, Epam and Endava, are two to three times their pre-Covid levels—clearly indicating the direction of travel.

Annette King, CEO, Publicis Groupe UK

It is certainly reassuring to see how quickly the groups have bounced back from the pandemic, demonstrating the long-term value of our different business models. The question now is: “What separates the holding companies?”

If the job for holding companies and agencies is to help clients understand and connect with their consumers in a platform world, with the smart acquisitions and investment in the right talent that we’ve made at Publicis Groupe, I’d say we’re in good shape. Our people have shown incredible resourcefulness over the past two years – we know they’re our greatest asset and we continue to do everything we can to help them thrive.

Julian Douglas, president, IPA; and international chief executive, VCCP

With my IPA hat on, I’d say yes—it was never in doubt. Always back creativity to find a way and the strong performance from our agency groups is further evidence of the adaptability and resilience of advertising to not just weather the storm but bounce back and deliver growth.

With my VCCP hat on, I’d say let’s see... It is relatively easy to deliver good numbers in the short term if you take an axe to costs in the business. The bigger question is how the agency groups perform in the quarters ahead or whether the cuts were too deep for sustained growth.

Sir Martin Sorrell, founder and executive chairman, S4 Capital

Bouncebacks or dead cat bounces? Everyone from President Biden and Prime Minister Johnson to the CEOs of the holding companies are claiming that 2021 was their best year ever for growth. 

True to form, they conveniently forget that 2020 was one of their worst years ever. They ignore the impact of the pandemic-driven $16tn or so fiscal and monetary stimuli, which drove global GDP growth to 5-6% in 2021. The two-year like-for-like revenue growth stacks for the holding companies over the period 2020-21 were around 3% or 4% at best, compared with pure-play digital companies at well over 60%. 

These bouncebacks, or dead cat bounces, may continue to some extent in 2022 as GDP growth rolls on at 4-5%, but will subside in 2023 and 2024, when growth is projected to fall to 2-3% and 1-2%, respectively.

Unless the holding companies really deal with their 20th century structures and silos, or are broken up, the analogue chickens will come home to roost—whild the digital pure-plays revel in accelerating digital transformation, the other engine that drives digital advertising apart from GDP growth.

David Jones, founder and chief executive, The Brandtech Group

The key thing is to forget opinions and look at the data. The holding companies all had stronger years in 2021 than they have had in over a decade, so, on the surface, it looks great. But if you spend two minutes looking at the data, you can quickly see what's really going on.

The reason for the strong performance is simply the poor performance in the years before. Publicis, which grew its revenue organically 10% in 2021, declined organically -6.3% in 2020 and -2.3% in 2019. That basically means they've grown 0.7% since 2018. WPP hadn’t grown since 2016 until this year. Revenue declined organically -0.9% in 2017, -0.4% in 2018, -1.6% in 2019, and -8.2% in 2020, so 11% organic growth [at its forthcoming Q4 results] would only get it back to the same size it was in 2016 (source: earnings reports).

According to Morgan Stanley, the market cap of the big five legacy holding companies dropped $32bn pre-pandemic. That doesn't suggest that a growing industry was suddenly hit by the pandemic.

The new model companies are growing 40-50% and would view a growth rate of under 20% as a disaster. The holding companies are opening Champagne at 10%. It shows the dramatic difference between the old industry and the new one.

Jenny Biggam, founder, The7stars

In some ways, yes, the agency groups have emerged from the pandemic leaner, stronger and in better shape financially. There is a lot for shareholders to rejoice in.

But many of the challenges with those agency group models still exist – from transparency through to in-housing, and now the added pressures around talent turnover and salary inflation.

And it would be remiss of me not to point out that the independent sector has also delivered great growth – with billings growth, new agency launches and M&A activity leading to new models on both sides of the Atlantic.

In fact, growing advertiser confidence, rising adspend forecasts, and strong results from advertising, data and tech businesses across the sector, all suggest it would be difficult not to deliver strong financial results in the current market.

Richard Smoorenburg, MD of data and digital media, MediaMonks

I never doubted the holding companies would bounce back to pre-pandemic level—certainly not with the fiscal and monetary stimulus in play. It’s a very "business 101" response wanting to get back to where you were pre-pandemic. However, while the old normal is back in play with the majority of the holding companies, client needs have evolved in this new normal that is our reality today.

Therefore, it is about what happens next. Can holding companies transform their legacy business models and adopt a digital-first model for the future? A bigger transformation is required to deliver on speed, quality and value for modern day brands. The companies that are best positioned to deliver on that promise generally don’t thrive on legacy business models.

Campaign UK

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