Ian Whittaker
Jul 9, 2024

If agencies want to see higher share prices, they should be pushing the case for creative

INVESTOR VIEW: Creativity is often perceived as a 'low growth, 'low margin' business, a 'necessary evil'. It's a perception at odds with its value and one that's ripe for change.

If agencies want to see higher share prices, they should be pushing the case for creative

Cannes Lion has just finished and the global advertising industry can rest easy for another year before embarking on the same odyssey in 12 months time. Many of the themes were as you expected this year – the importance of AI and plenty of predictions about what will happen, the rise of retail media and its consequences, plus the plethora of technology solutions that can make one wonder whether you are attending an advertising or technology conference.

However, one theme was also talked about increasingly and that was the role of advertising – and creative – in  directly improving the bottom and top line numbers for companies. Herein lies an opportunity for creative – and the agency holdcos. 

Probably the key highlight of this topic was the presentation given by McDonald’s chief finance officer Ian Borden, which highlighted the importance of marketing for the group. Stating: “We spend a lot of money on marketing, and it’s one of the most important investments we make as a business to drive growth”, Borden highlighted the work done by global chief marketer Morgan Flatley to how her team uses data and analytics to demonstrate to management and the board how advertising adds value. 

For those who read my column regularly, this touches on several themes I often expound on – that advertising is an investment or, as I like to say, that "advertising is intangible capex" (TM). Moreover, there is the need to speak the language of the chief executive, CFO and the board to push this message effectively. Managements are willing to listen. CEOs and CFOs have cited time and time again that brand strength was key to firms’ ability to push through much greater than expected price increases to consumers in what became a vast unplanned experiment. 

If the message is starting to get through that advertising is an investment, this is obviously a positive for the advertising industry, but where it may really prove transformational is in the area of creative. Creative is typically seen as a low-growth, low-margin business, one often characterised as a necessary evil rather than a potential major source of value for agency groups. Yet if companies do believe that brand strength has directly contributed to the bottom line, then the logical conclusion is that creative work should be compensated adequately. That should not be a controversial statement. 

This is where the opportunity for the agency holdcos appears. First, there is the potential impact on financials. None of the major groups splits out the contribution to profits from creative but looking at WPP, which is the most transparent in reporting terms of the major holdcos, I estimate only 5% of the group’s 2023 headline operating profits come from creative. Get clients to pay more, and that figure should increase. 

However, there could also be potentially a greater impact for the holdcos’ share prices. Holdcos as a sector are not particularly valued by the market: over the past five years, while the wider S&P 500 (which is the main index for US stocks) has risen more than 80%, groups such as Interpublic, Omnicom and WPP have all lagged this performance significantly. Some of this undoubtedly has to do with operational performance. Publicis, which has significantly outperformed up over 140% in the period, has had a long track record now of meeting/beating estimates. However, the core reason is that creative is seen by many analysts and investors as a business that adds little value. Change that perception and the rating should improve. 

Of course, holdcos cannot just expect advertisers to start paying more. They need to go out and prove their case with data and hard facts, which was made clear in the McDonald’s presentation. Yet the timing could be perfect. Not only are advertisers starting to realise the value of creative in pushing sales but the introduction of AI is making the old "cost plus"/FTE model of compensation look increasingly outdated and we are moving towards an output-based compensation model that ties into this theme. It is time for the holdcos to show some Mad Men spirit and tell the world why they should be paid more for what they do. 

Ian Whittaker is founder and managing director of Liberty Sky Advisors. He writes a regular column for Campaign about the advertising landscape from a financial standpoint. It is not investment advice.

Campaign UK

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