WPP warns ad industry ‘in danger of losing the plot’ over discounting as revenue growth slows

WPP has warned the industry is “in danger of losing the plot” as it accused rivals of offering discounts, cheap creative, underwritten media and other tricks to win business.

Reporting a slowing of revenue growth for the second quarter, the world’s largest marketing and communications holding company revised down its predictions for the full year on the back of a challenged global economy.

Total billings for the first half were up 6.3% to £26.906b, but down 4.7% on a constant currency basis. Revenue was up 13.3% to £7.404b, but up only 1.9% on constant currency.

Reported headline earnings before interest, tax, depreciation and amortisation was up 14.2%, crossing £1 billion for the first time in a half-year, with constant currency growth up 1.7%, and reported headline operating costs up 14.0%.

The company said 2017 was in contrast to 2016: “After another record year in 2016, the group’s performance in the first seven months of the new financial year has been much tougher, as worldwide GDP growth, both nominal and real, seems to have slowed in the second half of last year and into the new year.”

“As client spending appears, at least at this stage, to be less predictable, our operating companies are still hiring cautiously and responding to any geographic, functional and client changes in revenue – positive or negative. However, in the last year or so, growth has become even more difficult to find, perhaps due to increasing social, political and economic volatility, for example with the rise of populism typified by surprise election results in the United Kingdom and the United States and bumpy growth in three of the bigger BRIC countries of Brazil, Russia and China, although India continues to develop rapidly.”

It noted that even growth in the digital space had been “dogged” despite the growing powers of Facebook and Google.

However, the company fired a warning shot across the bows of the rivals claiming that many agency groups were pushing the boundaries when it came to winning and retaining business.

“Competition is fierce and as image in trade magazines, in particular, is crucial to many, account wins at any cost are paramount,” the company said.

“There have been several examples recently of major groups being prepared to offer clients up-front discounts as an inducement to renew contracts, heavily reduced creative and media fees, extended payment terms (which are starting to show up on agency balance sheets), unlimited indirect liability for intellectual property liability and cash or pricing guarantees for media purchasing commitments, even though the latter are difficult for procurement departments to measure and monitor. As some say, you are only as strong as your weakest competitor.

“These practices cannot last and will only result eventually in poor financial performance and further consolidation, the premium being on long-term profitable growth.

“Our industry may be in danger of losing the plot. Once you accept benchmarking as a means of evaluation you become a cost and are viewed as a source of funding or insurance, rather than an investment or value added and recent industry results have reflected this increased pressure and inconsistencies. Some are storing up problems for the next generation of management.”

The company also reflected on the cyber attack earlier this year which crippled communications within the group for several days, but said it did not have an effect on its financial performance.

“On 27 June, the group, together with several other multi-national companies who also had operating companies active in Ukraine using a piece of tax filing software, experienced a network cyber-attack, which led to a significant disruption of some of the group’s operating companies, particularly at GroupM and the Y&R Group,” it said.

“However, despite the disruption, the majority of the group’s systems were restored and operating normally within one week or so of the attack with the help of its IT partners led by IBM, with some remaining issues in a few locations, which are being worked through. Although there was some delay to certain financial processes, the group did not experience any significant loss in revenue from clients or of data and believes that the cyber-attack cannot be blamed for the weaker performance in June and July.”


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