It has been a miserable year for the holding companies that own the world’s largest advertising groups, with shares in WPP, Publicis, Omnicom and Interpublic Group all down sharply over the past 12 months.
Consumer groups are rethinking their marketing spending while unease about the effectiveness of digital advertising has damped investor spirits. With advertising’s Mad Men in danger of becoming sad men, what future is there for the holding companies?
Their business model, which has traditionally brought together creative agencies, media buying and planning groups, is under attack on multiple fronts. Activist investors are putting pressure on the biggest advertisers to cut spending while professional services firms such as Accenture have emerged as able competitors to the big agencies.
Meanwhile, Facebook and Google have effectively become a “digital duopoly” to the extent that they represent about 60 per cent of the global digital ad market, according to eMarketer, the research group.
“The ad holding companies are seen as being vulnerable and disintermediated,” says Thomas Singlehurst, analyst at Citi. “Their performance suggests there is something wrong. If the market is growing then they should be growing too . . . but they’re not.”
Negative commentary from big clients has also weighed on the holding companies, he adds.
Procter & Gamble, the world’s largest advertiser and owner of brands such as Pampers and laundry detergent Tide, slashed $100m from it second-quarter digital budget as the group questioned whether its marketing was being seen by bots rather than real people. It then said the cut had no impact on its growth.
P&G is trimming its marketing budget by more than $2bn in the next five years as the group, which was recently embroiled in an expensive proxy fight, tries to boost profits. About $500m of this will come directly from money paid to ad agencies, according to a spokesperson. P&G has also reduced the number of agencies it works with by about half.
Unilever, the world’s second-biggest spender on advertising after P&G, spent €7.7bn on marketing last year — up from €7.3bn in 2013 — and says this year’s total will be similar.
But the company behind brands such as Sunsilk shampoo, Magnum ice cream and Persil laundry tablets is changing how it does its marketing — and is spending less money with ad groups. Unilever is making fewer ads and films but is airing them for longer, a step it took after realising that 95 per cent of its commercials were being replaced too soon — and before they had time to become effective.
The company said in July that it had saved €300m by taking this approach. This led to a 17 per cent drop in the amount it spends with agencies in the first half of this year compared to last year.
“We were producing too much content, so this year we will produce 30 per cent [less],” says Keith Weed, the Anglo-Dutch group’s marketing director. “Some misunderstood this to mean we were reducing our advertising but we weren’t.”
He adds that the company will have invested a similar amount on marketing in 2017 as last year, with new product launches in the second half of the year meaning more advertising spend.
This may be some comfort to holding companies such as WPP, which has cut its forward guidance three times this year. But can the holding companies bounce back?
“This is not cyclical . . . it’s definitely structural,” says Nick Manning, chief strategy officer of Ebiquity, the marketing analytics group. “The key drivers are not activist pressure but changes in consumer behaviour and people’s use of technology.”
Companies are increasingly allocating “customer experience” to the marketing budget — such as the costs associated with developing apps that allow brands to form a direct connection with their customers. “Marketing spending is going up healthily but increasingly the money is going towards customer experience rather than traditional advertising,” says Mr Manning. This presents a big challenge to the holding companies. The holding companies are in the conventional advertising business.”
Sir Martin Sorrell, WPP’s chief executive, disagrees and remains optimistic about the holding company model. He told the Financial Times that companies would have to invest in branding and innovation in order to compete with the likes of Amazon, which is increasingly manufacturing its own products.
“Volume growth is coming under pressure in consumer packaged goods companies and the two essentials to counter that trend are innovation and branding,” he says. “Once you’ve cut costs, you can’t continually ratchet down, which is why we see current trends as more cyclical than structural. Having made reductions, many companies have talked about increasing spend again.”
Mr Singlehurst at Citi says the holding companies also have another card to play: they are people-based organisations with no big fixed structural costs and workforces that are “culturally attuned”. Changing the way they work in response to an evolving consumer environment should not be impossible.
“People tend to miss is that it is relatively easy [for them] to shape-shift. I would have thought that the holding companies are more adept at changing than a traditional media company — or even a consultancy firm.”
Nestlé cuts spending for the digital age
Like Unilever and Procter & Gamble, Nestlé has cut back significantly on “consumer-facing marketing spending”, which ranges from digital and in-store marketing spending to conventional advertising, writes Ralph Atkins in Zurich.
The 1.8 per cent cut in the first half of this year marked a sharp reversal by the world’s largest food and drinks company. The Swiss group had previously been increasing marketing spending significantly faster than sales growth, peaking at 16 per cent year on year in 2013.
Much of that past expansion was the result of a one-off investment in building Nestlé’s “digital capability”, François-Xavier Roger, finance director, told an investor conference in London in September. However, this year’s cuts also reflected an efficiency drive, Mr Roger said.
At the same conference, Patrice Bula, marketing director, said the share of Nestlé’s marketing budget accounted for by digital was above the industry average. Digital spending was “a lot more than just YouTube and Facebook”, he said. It also included local and specialist platforms, with a focus on reaching younger consumers via mobile phones. “We are forcing all our operations to think first mobile and no more the large TV screen in the living room”.
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