When top advertising executives gather this week at the Cannes Lions festival in France, the focus of the discussion will be far away from the yachts and luxury hotels of the Cote d’Azur.
Europe’s slowdown has pushed the ad agencies into faster-growing markets and led to an acquisition boom in Brazil, Russia, India and China, with WPP Plc and Publicis SA racing to buy local marketers. Now, with the BRIC economies at risk of slowing too, the agencies are spreading deeper into emerging markets, making deals in Malaysia, Turkey, Indonesia and Pakistan to boost revenue.
“They are chasing growth where they can find it,” said Stuart Sparkes, a partner in the corporate-finance advisory at Deloitte LLP in London. “It’s a good way of the marketing-services conglomerates getting faster profit growth.”
The challenge for the agencies is to identify markets and takeover targets little affected by the slump caused by Europe’s debt crisis. WPP and Publicis, the two largest advertising agencies in the region, also risk overspending after an acquisition spree in the BRIC countries pushed up prices, potentially diluting the expansion’s benefits.
WPP Chief Executive Officer Martin Sorrell and Publicis’s Maurice Levy are betting on emerging-markets demand to revive the companies’ stocks, which have dropped more than 10 percent in the past three months as Europe’s debt crisis intensified and threatened to weigh on growth globally. Paris-based Publicis said in April sales growth will slow this quarter as clients cut spending.
WPP, the world’s biggest ad agency, has made more than two dozen acquisitions this year, including expansion into emerging markets beyond the BRICs, such as Malaysia and Turkey. The Dublin-based company now sells spices and Downy soap in Malaysia and last month bought a stake in Myanmar's Today Group advertising agency, which handles marketing for Mandalay Beer and City Mart Supermarkets.
Publicis, the third-largest marketer, acquired United Arab Emirates-based Flip Media in February, winning access to customers in the Middle East.
Developing advertising markets in such countries may keep growing even if other regions cool. If faced with budget cuts, advertisers will reduce spending in Western Europe and the U.S. in favor of faster-growing economies, where advertising has a better chance of earning a return, said Claudio Aspesi, an analyst at Sanford C. Bernstein & Co. in London.
“The bulk of what they will try to save will be saved in the mature markets where you have an aging population, which has already made up its mind about what brands it wants,” Aspesi said. “The money will be preferentially deployed in the countries where the brands can still be built.”
Still, the smaller growth economies are also at risk of getting hit by Europe’s debt woes, Aspesi said.
“It would be naive to think that you could have a massive recession in the developed world and no impact on the BRICs or even the more nascent, next tiers,” he said. “However they should still drive faster revenue growth than the mature markets will.”
Economic growth in India during the first quarter was the slowest in almost a decade as the crisis in Europe, India’s top trading partner, hurt exports. Standard & Poor’s said this month that it may lower the nation’s credit rating to junk. Deutsche Bank AG and Credit Suisse Group AG cut growth forecasts for China this month on projection that Europe’s debt crisis would crimp the economy.
“The slowing growth in emerging markets is definitely a concern and is front of mind at the moment,” said Conor O’Shea, an analyst at Kepler Capital Markets in Paris.
WPP gained 0.7 percent to 752.5 pence at 8:48 a.m. London time. Publicis added 0.6 percent to 37.59 euros in Paris.
WPP’s Sorrell told investors this month that he is “increasingly wary” of a slowdown in high-growth countries as he looks for places to spend as much as 400 million pounds ($626 million) on deals this year.
Sorrell also expressed concern that he may get less bang for his buck after the rush for ad companies in the emerging markets drove up valuations.
“Brazil and China have been affected, in our view, by significant overpaying by some of our competitors to catch up, and have made those markets a little bit less attractive,” Sorrell said at an investor meeting this month.
Ad agencies rely on acquisitions as the vehicle of expansion to gain local expertise about products, markets and customers. Western corporations are viewed with suspicion in some emerging markets, said Alex DeGroote, an analyst at Panmure Gordon in London.
One challenge for the agencies in their push beyond Europe and the U.S. is to find acquisition targets that will give them scale they need to win business, DeGroote said.
Cannes Lions, modeled after the film festival in the same location, is one of the biggest advertising events and will judge more than 28,000 entries from all over the world for its awards. More than 9,000 participants from 90 countries are expected to attend, according to the conference organizers.
Emerging markets are a theme at the Cannes event this year. The organizers named Lo Sheung Yan, ad agency JWT’s executive creative director for northeast Asia, to head the awards jury, making him the first person from the country to hold that role at the event, which is now in its 59th year.
WPP has said it wants to get about a third of revenue from these high-growth markets in Asia, Africa, Latin America and the Middle East in the next three-to-four years. The company got more than 29 percent of revenue from those regions last year. Publicis got about 21 percent of sales from countries outside of Europe and North America.
Global advertising is expected to increase 6.4 percent a year to $661 billion by 2016, with expansion in emerging markets topping the average and growth in U.S. and Europe trailing it, according to PricewaterhouseCoopers LLP.
China will expand an average of 15 percent over that period to make its ad market, excluding Hong Kong, worth $71.64 billion by 2016. Indonesia and India will grow at 13 percent.
In Latin America, Venezuela and Argentina will outpace Brazil, the region’s biggest economy. European ad growth will be fastest in Russia and Turkey with about 13 percent.
Advertisers “will continue to prioritize investing in emerging markets just because the growth profile is so much more attractive,” DeGroote said. “The more mature markets are hard work.”