One of the most prominent figures in the advertising industry, Sir Martin Sorrell calls 2016 a “maxi-quadrennial” year, meaning that it has a number of significant four-year events that typically boost investment in advertising and marketing. But despite the Rio Olympics, UEFA Euro Football championship and US presidential elections, the year has seen generally muted growth across many territories—not helped by a short-term mindset and focus on costs, on the client side. China’s slowing economy is affecting business, but Sorrell remains bullish on the country’s future. Given the pressure on the agency business, Sorrell warns of a consolidation among the holding company groups, specifically IPG and Havas.
Aged 71, Sorrell will earn £70 million (US$90 million) this year. And with his wife expecting a baby next month, Sorrell shows no signs of slowing down. A fan of Formula One (early in his career he worked with Jackie Stewart) and holding a seat on the Formula One Group board, Sorrell is a regular the Singapore Grand Prix. We meet at WPP’s offices on Monday after race day at the start of what proves to be a controversial week for the advertising industry—as news of Dentsu’s overcharging scandal in Japan breaks, GroupM global CEO Dominic Proctor steps down and Facebook’s video viewing controversy fuels the transparency debate.
Our business in China had a tough time in the first six months. It’s forecast to improve in the second half, but we’ll see what happens. Interestingly, the ‘Next 11’—places like Vietnam, the Philippines, Indonesia and Thailand—continue to do well.
Atifa Silk: What’s life like?
Sir Martin Sorrell: Worldwide GDP growth is about 3 percent to 3.5 percent this year. Next year, people are talking about 3.5 percent to 4 percent, so slow growth. Some are saying, ‘not too hot, not too cold’. I think it’s a bit too cold. You’d like to see a little bit more growth. The forecast for next year is slightly better, despite the fact this is a maxi-quadrennial of a year. In theory, 2017 should be more of the same. No reason for an upside breakout that I can see. On the other hand, no reason for a downside breakout—a recession. Although, some countries are clearly in recession: Brazil and Russia. China is not in recession, but more muted growth. We had a tough first half in China, but overall, we did very well. There’s a lot of uncertainty about. There are all the grey swans that we know about. Then, there are the black ones we can’t predict, like bombs going off. Obviously, what’s going to happen with Trump vs Clinton, and Brexit is still not sorted. I still believe Hillary Clinton will win, but it’s going to be tough. One American said: Oh, there’s no way that Hillary can lose; the electoral arithmetic favours her over Trump. When you watch it, you see it’s very well packaged on TV.
Atifa Silk: Are fast-growth markets keeping pace?
Sir Martin Sorrell: The so-called faster growth markets have had a tougher time recently, with the exception of India. Brazil is having a tough time but we expect it will recover in the next two to three years; 200 million people can’t disappear overnight. Russia is probably longer term. There’s a question mark over China. Our business in China had a tough time in the first six months. It’s forecast to improve in the second half, but we’ll see what happens. Interestingly, the ‘Next 11’—places like Vietnam, the Philippines, Indonesia and Thailand—continue to do well. Argentina, since [Mauricio] Macri has been in power, seems to have made a big change. Maybe there’s something in global or country leaders whose names begin with M—Modi, Macri, Merkel; question mark over [Theresa] May; and maybe not Mussolini! But seriously, overall, it’s going to be more of the same. I don’t see any structural changes in Japan and it remains a difficult market. Recent events [at Dentsu Tokyo] might open it up a bit and that would be a good thing if it did. Overall, things aren’t going to change for the worse or for the better. It’s going to continue to be a grind.
Atifa Silk: Are clients cautious on spending?
Sir Martin Sorrell: We’ve been through this before with clients; the new normal is a low-growth economy with very little inflation and very little pricing power. There is therefore a focus on costs, which we think is wrong. But clients are faced with disruption at one end of the spectrum: the likes of Air B&B and Uber. At the other end of the spectrum, we have the zero-based cost budgeters. In the middle, you have the disruptors, the activist investors, all of whom claim to be long term, but who really have the perception of short term. They need big advertising campaigns to convince people they’re focused on the long term. Investment as a proportion of GDP has declined. The average life of a CEO is six to seven years, although I saw recently that it is dropped further to four-and-a-half years. The CMO’s term is about two to three years. The CFO is five to six years. So, short life in the firm, meaning a focus on the short term. We think that’s wrong. Brands live or die by investing in innovation and branding. If you invest in those areas, the top line is going to grow faster.
The real competitors to our clients are not the multinationals themselves, so it’s not P&G vs Unilever or Nestlé, it’s the local companies. These companies have started to build big positions.
Atifa Silk: Is digital investment moving in the right direction?
Sir Martin Sorrell: Last year, WPP invested US$4 billion with Google and this year it should be about $5 billion. Facebook went from $1 to a $1.5 billion forecast this year . Digital adspend continues to grow, and more strongly than traditional. I was at Google’s headquarters [in Singapore] and they basically say, with the exception of China and India, digital adspend remains, in most markets [in Asia], at a lower level than you would expect. The average globally is around 30 percent of budgets going to digital. In our own case, we’re at about 40 percent now. We were 37 percent digital in the first half of the year, as best as you can define it—which is difficult to define. But, in the markets beyond China and India, digital penetration is not easy. It’s not like the US and UK, where you’ve seen strong performance. But the next billion consumers are going to come from Asia and Latin America and Africa, the Middle East and Central East Europe—not from the US or Western Europe. In Asia, the penetration opportunities are colossal. They tell me that with Mukesh Ambani’s Jio giving it away for free, the YouTube viewing figures have gone through the roof in India. Whatever you think about it being given away for free, he is adding 400,000 subscribers every day.
Atifa Silk: How’s business in China changing?
Sir Martin Sorrell: A couple of changes, first of all the local companies have become much more sophisticated and the foreign companies are finding it more difficult. While the foreign companies have had great brand loyalties, the pyramid has been fat at the top in loyalty as opposed to awareness. It has been thinner at the bottom because awareness has been less. Local companies have seen a much flatter pyramid with little loyalty, but a lot of awareness. Both have had to try and change that picture. Foreign companies have had to become more about distribution and awareness; local companies have had to focus more on pricing and premium, branding and loyalty. That’s a big change.
The real competitors to our clients are not the multinationals themselves, so it’s not P&G vs Unilever or Nestlé, it’s the local companies. These companies have started to build big positions. And we’ve seen some of them try and go to America, make promises to buy companies, and fail, because they have not been able to lay their hands on the proceeds. Or we’ve seen managements that have gone up and down. We are seeing more local competition. The valuations, which in our view are meaningless, have given them an opportunity from an acquisition point of view. But the proof of the pudding is in the eating: running these things. Business in China has become more competitive and sophisticated.
[Independent agencies] have become more of a force, but not to the extent that I thought they were going to be. The ones that have made the biggest impact are those that have gone for listing. Far be it for me to talk about companies hoovering up, but they seem to be hoovers. Whether they are long-term hoovers is another question, because some of the prices are just without reason. They are driven by cheap money and by stock market evaluations; in the long run, I am not sure that can work.
Atifa Silk: Is the appetite for acquisitions from consultants growing?
Sir Martin Sorrell: The threat of consultancies has been there since the late ’80s. But certainly the tech-based consultancies or consulting companies that have a high-tech component are becoming more significant. They look at the business differently; they look at the CTOs and the CIOs. Their average transaction size is massive; they look for projects in the billions of dollars, not millions. And their attitude to the business is very different.
If your revenues are US$100 billion, in order to move the needle you have to gobble up big slugs of business. It’s high pressure, big contract business. Which is very different to the sort of business we’re in. But that has not prevented some of the big consultancies being very aggressive on acquisitions. They do it in different ways to us, such as all cash up front. I don’t think that is necessarily the way to acquire creative businesses. I’d say it’s problematic, but I may be wrong. Maybe more system-based businesses can do that.
While it’s true that to make an omelette you have to break eggs, you can have too much violent egg-smashing … you end up with an omelette that has bits of eggshell in it—not particularly tasty.
Atifa Silk: Can consultants succeed in integrating creative businesses?
Sir Martin Sorrell: I think they would be better off not. In our business, the key issue is: how do we integrate our offers more effectively? Despite Campaign writing about agency brands, our clients at the end of the day are interested in getting the best people working on their business, regardless of where they come from. The challenge for us: how do we integrate our offer in a much more coherent, meaningful way? So, Colgate and Ford become the usual, not the unusual. I know that will be disappointing from a Campaign point of view to write about effectiveness of in-house agencies—you will find it extremely boring—but that’s the way it’s going to go. These two cases are real. It’s not about some of the stuff you read, which says two people are starting an agency and it’s going to be seamless. That’s easy with two people. It’s much more difficult if you have a bigger operation but that’s where the scope is.
Atifa Silk: Have you made enough progress with integration?
Sir Martin Sorrell: We have not done enough on integration. Publicis has done it out of panic, and I think we’ve seen a severe deterioration of their brand. While it is true that to make an omelette you have to break eggs, you can do too much violent egg smashing. I guess that happens, particularly if your retirement day is looming and you want to try and get something done before it. It’s your poor successor that will have to deal with it and pick up the eggshells, which have been mixed up with the yolks and the whites of the eggs. You end up with an omelette that has bits of eggshell in it—not particularly tasty. I favour a more gentle route: evolutionary, not revolutionary. But that doesn’t mean that we have a lot of time to get it done. So, in a funny way, I would agree with the objective, but not the execution.
Atifa Silk: What’s next for GroupM?
Sir Martin Sorrell: There’s more to be done. If I look at GroupM in India, that’s the model that we should be doing everywhere. We have very strong market share, very good people. If you said to me: how do I think GroupM should look on a global basis? That’s how it should look, with a fully integrated Xaxis and Essence. That’s a model for WPP as a whole: a fully integrated operation with horizontality, that terrible word. The challenge for all businesses is trying to get everybody aligned to the strategic purpose of the company.
Atifa Silk: How do you see regional structures evolving and why?
Sir Martin Sorrell: You know the argument that Mrs Thatcher did not like Europe because she was the ultimate country manager who did not want a European boss, right? So, it is the same thing in companies. I remember we had the big debates about where we should have regional heads and who the regional heads should be. In those days, it was almost inevitable that it was a man. Now, thank god, it’s more balanced—not enough, but getting there. The big argument now is: do I surrender my power to some regional force? It’s said that regional people have the power to say no, not the power to say yes. They can stop things going down the line, and stop things coming up the line. Technology is enabling you to network organisations much more effectively and exchange information much more effectively. That makes a big difference. That’s the way things are going and clients want that. We set up regional organisations to match our clients. As clients take out regional management, which increasingly they are doing, you have global and local. We have to match those organisations, and that would make us much more efficient as well, and then we can integrate more effectively as well. I’m speaking as an ex-CFO now. If you’re a regional manager there are demands on the markets. If you’re trying to manage APAC from Tokyo to Wellington, it is a big region and you end up jet-lagged out of your brains, and you always focus on the negatives not the positives. You tend to look at where you have problems, rather than where you have opportunities. As you do your jet-lagged trips around the region, you tend to focus on the numbers and become a glorified finance director. That’s not the objective. The focus needs to be on the clients, on developing their business, markets that are growing faster, digital and data.
Atifa Silk: Where has this structure been necessary and worked well?
Sir Martin Sorrell: It’s what we’ve done in Australia, which is a US$900 million business, our fifth largest business after the US, UK, China and Germany. Our top 10 include France as sixth, India seventh, Brazil eighth, Italy ninth and Spain in 10th. We have to make sure that Australia/New Zealand is organised in the best way. Sitting in London or New York, how can you know if you have a problem in Sydney, Melbourne or Auckland? By the time you get to the problem it’s too late. You need good people on the ground—country managers, client leaders. There’s one horizontal leadership and you manage the clients on a worldwide basis from the centre. To complement that, you have country managers who are pulling it all together. It’s what we are doing in Singapore. We now have a country manager [with the government practice] and get together with all of our businesses here. That gives us a way that we can ‘horizontalise’.
My bet would be that IPG and Havas will get consolidated. I can’t see that staying as it is because the pressures in the system are just too great. I think the big six will be four. I don’t see IPG and Havas having independent lives long term.
Atifa Silk: Which of the latest tech are you most excited about?
Sir Martin Sorrell: Probably virtual reality, although a lot of our people think it gives you a headache. It’s going to be extremely big. It’s true that 3D has never really taken off; we never got away from the glasses. The problem here will be content. The moment for me was the [Syrian] refugee camp film, where you literally walk around this camp 360-degree. That was a pretty chastening experience. I also did the [Ridley Scott] Martian, Mars Rover experience. I got into my space ship, my capsule took off, there was flapping tarpaulin and I was rescued in space. I get vertigo and I was looking down and it was bottomless. I was sweating. It was scary.
The opportunities for brands, Formula One, the Olympics and FIFA are unbelievable. We’re trying to invest in VR. I believe business is going to be very different, and I think agencies are going to be very different. Clearly, we have to do more in the content area. That also goes for online media ownership or media rights. What [Vincent] Bolloré is doing with Havas is interesting, with effective combined control of Telecom Italia with Vivendi [which owns Universal Music Group] becoming a media owner. He doesn’t do it easy; he likes complexity. The idea is interesting, whether it’s powerful or not, I don’t know.
Atifa Silk: Do you see continued pressure on agency business?
Sir Martin Sorrell: Agencies will continue to be squeezed because of rising finance and procurement, not for bad reasons but for understandable reasons. But I believe that’s wrong because investing in brands is where you will secure long-term success.
The last time we talked [in June], I told you that my bet would be that IPG and Havas will get consolidated. I can’t see that staying as it is because the pressures in the system are just too great. I think the big six [holding companies] will be four. I don’t see IPG and Havas having independent lives long term. MDC has had its challenges recently and it’s basically a US business, not a network business. We did see POG [Publicis / Omnicom] attempt it and that would have reduced it, but eventually it is going to happen.
Atifa Silk: Will Google gobble up one the groups?
Sir Martin Sorrell: Anything is possible. And, they are 20 times bigger than us. It would be transformative for the company that’s purchased, but it won’t be transformative for [Google’s] business. The only statistic where we come anywhere near Google is the number of people: we’ve got more people than they have. They’re labour intensive. Our billing standard matches their revenues, but their revenues are growing at such a rate that they’ll soon even surpass our billings numbers. That will probably happen this year because they’re growing at 20 percent.