business

Ad Woes in Focus as WPP Investors Seek Signs of Turnaround

Updated on
  • CEO Sorrell under pressure after stock loses 28% this year
  • Industry in shift as web giants encroach on ad companies’ turf

WPP's Sorrell Says Agency Is Under Pressure to Cap Costs

WPP Plc, the world’s largest advertising company, is having its worst year since the financial crisis. Investors find out with Tuesday’s quarterly report whether Martin Sorrell is arresting the slump.

Hit by the likes of Unilever NV and Procter & Gamble Co. reducing their marketing spending, WPP’s stock is down 28 percent year-to-date, its weakest performance since 2008. The company forecasts net sales growth of between zero and one percent for 2017, the lowest in a decade.

WPP’s troubles are part of a wider ad-industry decline, with competitors Publicis Groupe SA, Interpublic Group of Cos. and Omnicom Group Inc. all reporting falling third-quarter revenue this month, leaving their stocks down sharply on the year. In addition to the short-term cost-cutting by major clients, a shift toward digital advertising poses a fundamental challenge, said Alex DeGroote, an analyst at Cenkos Securities in London.

More companies are handling their online advertising in-house to save on fees or are working directly with the likes of Google and Facebook Inc., cutting out the agency middlemen, he said.

“The genie’s out the bottle with these big holding groups,” DeGroote said. “There’s something about this model which just isn’t working.”

Sky Plc is reviewing its 400 million-pound ($527 million) annual ad-placement budget, most of which is managed by WPP’s Mediacom. McDonald’s Corp., which primarily works with Omnicom, is also conducting an ad-buying review, according to the Wall Street Journal. The world’s largest restaurant chain spends about $2 billion on media each year.

Chief Executive Officer Sorrell has argued that WPP’s slowing growth has largely been driven by cyclical factors, such as historically low interest rates making it cheap for activist investors to make hostile takeover bids for the consumer-goods companies that are WPP’s biggest clients.

That activist threat is creating a strong internal focus on keeping costs down, which is leading to reduced marketing spending, Sorrell said at a Goldman Sachs Group Inc. event last month.

“That’s the heart of it,” he said. “Tremendous pressure is exerted on the cost base.”

The advertising world is also battling incursions from consultants such as Accenture Plc, Deloitte LLP and International Business Machines Corp. While they do little traditional creative work, such as making TV spots, they offer digital expertise in areas such as making mobile apps and boosting online sales, which is increasingly important to companies.

Sorrell’s response to the stock decline has been to double-down on WPP’s drive for “horizontality,” a bid to better integrate its many services and divisions so clients can access the best of what it offers in one place.

He’s also said the company will focus more on tapping growth in emerging markets, and investing in digital and data businesses. Progress on those efforts means WPP’s performance in the second half is likely to be better than in the first half, Sorrell said last month.

“We’ve recovered our footing,” he said. “We’re integrating more effectively.”

Nevertheless, ongoing pressure on WPP’s revenue means the company may have to cut its forecast for operating margins as it publishes its third-quarter report on Tuesday, DeGroote said.

“The market is anticipating downgrades,” he said. “They’re in a bit of a pickle. I think the stock will go lower still.”

(Updates with ad-buying reviews in sixth paragraph.)
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