India's advertising market soars, but can it elevate the global agency groups?

The Austrian writer Stefan Zweig wrote about his adopted land, Brazil; that "Brazil is the country of the future—and always will be." It was a phrase that was used by many outsiders to dismiss Brazil as a land with great potential, but always one that would fail to reach its potential due to the many endemic issues associated with the country such as corruption and poverty.

No one would use Zweig's phrase about India, a country that has very much arrived on the world stage and whose influence grows daily (to be fair, it is a phrase that has also largely fallen out of fashion when it comes to Brazil). It would be beneficial for the global agency groups if India saw a similar rise in its contribution to the global agency groups, especially as the long-term optimism around China has diminished.

The question is, will this happen?

Agency heads seem to think so. Martin Sorrell, the executive chairman of S4 Capital, has waxed lyrical about India's potential to become a major powerhouse for a long time and his successor at WPP, Mark Read, also argued last month when he came to India for a global board meeting, that the growth opportunity in the country was very significant. It is an optimism shared by the forecasters. In February, WPP's Group M forecast that the Indian advertising market would grow 15.5% in 2023 and mentioned that India was the 8th largest advertising market globally. From an ad market standpoint, India is very much there.

Yet, when it comes to the contribution to the agency groups, both for now and the future, the picture may be different. As I have mentioned before, country data for the agencies tends to be limited and that is certainly the case with India. As usual, WPP is the most transparent and it is interesting to see where India sits compared to some of WPP's other country operations. In H1 2023, India made up 3% of WPP's revenues, not far behind China's 4% but less than half of Germany's 7% share and just over one-fifth of the UK's 14%. Like-for-like net revenue growth was also subdued, with -1.4% in Q1 2023 and +2.5% in Q2, although that was off tough comparables.

It is fair to say that WPP is the biggest of the global agency groups in India, mainly for historical reasons, so if India is only 3% of its revenues, then it is also probably fair to say that India will make up less share of other groups' revenue streams. It is a point that I made in my first, slightly controversial piece for Campaign Asia-Pacific, namely that, for the global agency groups, the traditional markets such as North America and Europe still are the most important factors when it comes to their financial results and whether the groups meet expectations. Two to 3% of a group's revenues are still important, but it is not dominating. The question is, will this change and will India become as crucial as markets such as the UK and Germany over time?

Those who are optimistic say that India's growing economy, population and media market are still traditional in many ways. It means that growth will continue to be strong for many years to come, and that will feed itself through to the agencies' revenue line. In this argument, there is an absolute and relative rationale for India to become as important in the future as the names mentioned above, namely higher Indian advertising growth and stagnation in the traditional markets.

It is not an argument I would necessarily buy. Part of that reflects a belief that the traditional markets will show more life in the future than people expect. Still, it also reflects the nature of the Indian advertising market, and that boils down to the pricing element. For most agency groups, media is the most important part of their operations and, put simply, if media prices are low in absolute terms relative to western markets, then that will always constrain the amount of revenues that agencies will be able to make.

On the creative side, the system has evolved over the years to be effectively a cost-plus one. If your staff costs are low, that will also be reflected in your revenues. Add in other factors, such as is the case with China, of the importance of local advertisers who may be less willing to pay agency fees, and it is easy to imagine a scenario where absolute revenues—if not revenue growth—will be well below western markets.

However, that may not matter for many groups. If you have 3% of your revenue base growing at 15%, then that is approaching 0.5% to an entire agency group's organic revenue growth, which is helpful when meeting your market estimates. And India does not come with some of the complications that can arise in China. So, agency leaders are likely to wax lyrical about the future growth prospects of India for quite a while.

As usual, this is not investment advice.

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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 is not investment advice. For further insights and articles, subscribe here.