Gideon Spanier
Aug 10, 2020

Virus accelerates need for agencies to change 'at speed of WhatsApp'

Q2 results show how the crisis has magnified pre-existing trends.

Virus accelerates need for agencies to change 'at speed of WhatsApp'

The advertising industry is suffering an exodus of talent. 

Almost every day brings news of another agency or media person announcing on LinkedIn that they are stepping down from their job and looking for “new opportunities”.

Behind the scenes, employment lawyers are busy negotiating more exit packages.

These are grim times as coronavirus infects much of the economy. When clients suffer, agencies and media owners suffer too.

The fortunes of the global agency sector, in particular, are an important barometer for the health of the ad industry.

Most of the big six agency holding companies were reporting low or no growth before the crisis as they struggled to adapt to a faster, more digital, flexible world.

New entrants from management consultants to agile start-ups were invading the agencies’ turf while advertisers were able to buy direct from Google, Facebook and Amazon.

We are now in the earnings season that covers the April to June quarter during the worst of lockdown and, in some respects, coronavirus has magnified pre-existing trends.

The big tech giants all beat expectations on revenue, albeit that Google suffered a decline because of its heavy exposure to the online travel sector. 

Meanwhile, four of the big six global agency groups have reported weak numbers – but with surprisingly varied results.

Interpublic did best, with organic revenues down 9.9% in the second quarter. Publicis Groupe dropped 13% and Vivendi’s Havas fell 18.3%.

Omnicom was worst, slumping 23%, although that includes some third-party costs. The net figure, which may be a fairer comparison with Omnicom’s rivals, was probably 19%, according to analysts at investment bank Macquarie.

The contrast between IPG and Omnicom was striking because the US-based pair were the two strongest performers, with little to choose between them, in the run-up to the crisis.

Both also have the longest-serving and wisest bosses, Michael Roth and John Wren.

Suddenly a large gap has opened up between them, even if these quarterly results might look different by the end of this extraordinary year.

Clients, capabilities, costs

Client mix is likely one factor. IPG’s relative strength in “pharma, retail and tech helped”, Macquarie suggested.

IPG gets 27% of revenues from healthcare compared with about 16% for Omnicom.

Havas also singled out its healthcare division as the only part of its business that grew in Q2.

In contrast, Omnicom is exposed to some hard-hit categories such as automotive, and lacks exposure to better performers such as consumer packed goods, which has bounced back during Covid-19.

Range of capabilities will also have affected performance. 

IPG and Publicis both own big, recently acquired data businesses – Acxiom and Epsilon respectively – which tend to have more solid, recurring revenues than agency services.

Acxiom and Epsilon, as well as Dentsu’s Merkle, are all “a little bit protected” in a downturn while Omnicom “suffered from not having a data business”, according to Sir Martin Sorrell, executive chairman of S4 Capital, who previously ran WPP and has been combing through the results.

Omnicom may also be vulnerable because of its high reliance on traditional creative capabilities. Its ad agency networks, BBDO, DDB and TBWA, were arguably in need of restructuring before the crisis, as Omnicom resisted the internal surgery that WPP undertook by merging creative and digital capabilities at Wunderman Thompson and VMLY&R.

Clients in-housing more services is also a trend that continues to chip away at agency revenues and is not going away.

PepsiCo, a large Omnicom client, said at its Q2 results that it has been building up its in-house agency capabilities during the lockdown because it brings twin benefits – it speeds up working and saves money.

“So, we can actually get [the] same or more value for less money, which is obviously a terrific outcome for the company,” Hugh Johnson, chief financial officer of PepsiCo, told investors – a comment that will be noted in other boardrooms.

Procter & Gamble is another top advertiser that is reducing its dependence on agencies, after taking more control of its digital marketing and building a “large proprietary database” of more than one billion consumer IDs.

The consumer packed goods giant is now going direct to some US broadcasters to negotiate trading deals at this year’s TV upfronts, AdAge has reported.

Coronavirus is also forcing change in the way big agencies operate and how clients view them in the era of remote working.

“Quite a lot of Zoom working is showing how quick and flat you can run things,” a founder of a young, independent creative agency says.

Contrast that with some of the big networks where “everyone is determined to be on the call to preserve their jobs”, this person observes, after being on a joint video call with a shared client.

Everyone is under pressure to move faster. An executive at a creative agency that is part of a consulting giant talks about how clients’ expectations have sped up because of Covid-19.

“We’ve got to go from strategy to creative to execution in 48 hours – it’s the only way we can fend off the in-house teams,” this executive says. “It’s about formatting and templating: speed, speed, speed. We’re moving at the speed of WhatsApp. The Jurassic production times are never coming back.”

Indeed, it has never been easier for a company to buy and create its own digital assets, sometimes with no input from an external agency – witness Facebook’s disclosure at its Q2 results that it now has nine million advertisers globally.

Cutting costs has become paramount for the agency groups. 

Again, the comparison between Omnicom and IPG, which is about three-quarters of the size, is revealing. 

Both have slashed office space – Omnicom by about one million square feet and IPG by 500,000 square feet, respectively.

When it comes to headcount, Omnicom has slashed 6,100 employees (about 9% of the previously 70,000-strong workforce) and IPG has cut just 694 staff (1.3% and now employs 52,000), according to stock market filings.

One Omnicom agency leader says “every cent of cost was pushed through the quarter” and Sorrell thinks that Wren may have been savvy.

“Although revenues fell by 23%, they’ve ‘kitchen-sinked’ it,” Sorrell says, meaning Wren has taken all the pain in one go in Q2. “It’s the intelligent thing to do. I would be a buyer of Omnicom stock at this level.”

IPG has said it has more restructuring to do and will make further savings in the second half of 2020. Publicis Groupe, which declined to disclose the number of job losses, has also signalled additional cuts.

Further pain

All of this points to further pain for the agency holding companies as worries grow about a second wave of coronavirus infections that could hamper recovery.

WPP, which reports Q2 numbers on 27 August (Macquarie forecasts a 19% decline), ended salary sacrifice for higher-earning executives after an initial three-month period in July but some people, both inside and outside the company, wonder if that was premature, as the group is making redundancies in Q3.

For newer agency entrants, which have little in the way of legacy operations, life is easier. 

David Jones, founder of You & Mr Jones, which owns in-housing specialists Oliver and has just bought US influencer marketing company Collectively, claims organic revenues at his brand-tech group grew 27% in the first half of 2020.

Sorrell’s S4 Capital, which has also been on the acquisition trail during Covid-19 and bought three companies, including Amazon specialists Orca Pacific, told investors in July that like-for-like gross profit was up 12% so far this year.

The former WPP boss is an irritant to his old firm but turning S4 Capital into a company worth more than $2bn in two years – by focusing exclusively on digital and persuading investors to regard it as a “proxy” for the tech sector – is a feat.

S4 Capital’s value has nearly trebled since March and is now a quarter of WPP’s stock market value with 2,600 staff – barely 2.5% of WPP’s 100,000-strong pre-virus headcount.

The future of the big agency groups was already clear before coronavirus: to be nimbler, simpler, more digital and more consultative, with an integrated, joined-up approach to creativity and innovation for clients.

The best agency people have always been enterprising, inventive and adaptable.

Coronavirus has accelerated the need for change.

Gideon Spanier is UK editor-in-chief of Campaign.

Campaign UK

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