WPP has “confidence” in its prospects for 2023 despite global economic challenges because demand from large clients “remains strong” and its new-business pipeline looks to be “slightly bigger than a year ago”.
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That’s according to Mark Read, the chief executive, who spoke to Campaign at WPP’s Q3 results about how the agency group’s revenue growth – now forecast to be between 6.5% and 7% this year – is evidence that it has modernised its “offer” since before Covid and is winning business.
Read cited WPP’s recent win of Ford’s US creative account, in partnership with independent agency Wieden & Kennedy, and the continued on-boarding of Coca-Cola’s global consolidated account from a year ago as examples that are driving revenue.
He declined to name any pitches but Volkswagen Group and HSBC – two big media accounts that WPP lost in 2016 and 2018 respectively – and a Heineken creative review are all known to be under way.
Read also talked about how WPP has “held our margin back a little bit” to invest in people and IT and why agency groups have been performing better than some of the big digital platforms.
You’ve nudged up your full-year forecast with growth of between 6.5% and 7%. But the negatives would seem to be that your Q3 revenue growth of 3.8% was slower than your main peers – Publicis (10.3%), Omnicom (7.5%) and Interpublic (5.6%) – and the share price slipped following the results [partly because WPP’s profit margin won’t be up as much as previously announced].
What’s important to us is our underlying growth, measured by how we are doing on a three-year basis, has improved each quarter this year – from 9.3% in Q1 to 9.7% in Q2 to 10.9% in Q3 [compared with the same quarter in 2019].
I think that reflects the underlying health of the business if you strip out some of the pandemic-related comparatives. And that reflects the fact that clients continue to spend while consumers spend – particularly in [areas beyond paid advertising such as] communications, public relations, commerce, data and technology.
Can you help explain something that has picked up a lot of commentary in recent months – the differential between the performance of the agency groups and some of the world’s biggest digital advertising platforms, such as YouTube, Meta, Snap and others that have seen really significant slowdowns?
It’s a factor of a number of things: First, the law of large numbers — given their market share, it’s impossible for the platforms to out-grow the overall spend in the advertising business.
Second, it reflects the fact that, ironically, our business is broader than some of those advertising-related platforms. WPP is in part an advertising company but we’re not just an advertising company and actually we have a much more diversified revenue base away from advertising than any of the digital platforms.
Third, it reflects the difference in client mix. We tend to work with the world’s largest marketers who’ve seen strong revenue growth and have a long-term commitment to invest behind their brands and many of the digital platforms are driven by much more ephemeral advertisers, looking for app downloads, launching new products, driven by venture capital and other investments. We have a more robust and resilient and long-term-focused customer base than some of those platforms.
How significant have the Apple “Allow App To Track” changes been [in terms of curbing ad targeting and undermining some of the digital players]?
The [ATT] privacy changes at Apple have clearly had a major impact on advertising spend on some of the social platforms. But that is only part of the story and it has come at the same time as the explosion of TikTok and greater competition more broadly in the digital advertising market – not just from TikTok but also from Amazon, from Uber, from retail media platforms, from Netflix [which launches its ad-supported tier on 3 November].
So, despite the fact that some pundits write off the advertising industry, it seems to me that everyone wants to become an advertising company these days.
What about WPP’s profit margin, which has been behind peers for some time? Some of your peers [Publicis, Omnicom and Interpublic] are expecting to report a margin between about 15.5% and 18% this year, and you’re below that [in the region of 14.8%]. Is there something that WPP needs to change in a structural way?
This year, while we will still deliver margin improvement [between 0.3% and 0.5% higher than last year’s 14.4%], there’s no doubt that as we continue to invest in the business and, importantly, continue to invest to service our clients and in our people, we’ve held our margin back a little bit from what we expected. At the beginning of the year, we thought we’d do 50 [basis points or 0.5% improvement], now we’re thinking we’ll do 30 to 50 [basis points].
In the short term, our margin has been held back by investments in our people. In the longer term, we have a programme under way to simplify and streamline WPP [in areas such as IT], which, for many reasons, is a very complicated company [given its history of acqusitions], and over the next two to three years that’s expected to move our margin much more in line with our peers.
The other thing is we have a slightly different business mix – we have more of our business outside of the USA compared to our peers and that explains part of the difference as well.
At the half-year results, WPP talked about how freelance pay had shot up by between 15% and 20% and there are stories that when agencies win big clients or expand big clients – for example, a Coca-Cola – there’s a downside to that. It seems as if freelance costs got out of control – are you having to do things differently as a result?
I don’t think they got out of control but we needed to bring freelancers into the business to support our clients and there’s been a bit of pressure on costs in a very tight labour market, particularly in the first part of the year with inflation in freelance costs.
It’s a balance. You’ve got to deliver top-line [revenue] growth and deliver margin [at the bottom line]. I feel we’ve got the right balance with the results now – to continue to drive the top line and continue to deliver margin improvement but perhaps temper it slightly from where we were at the start of the year.
I would remind you that we gave our [full-year revenue and margin] guidance at the beginning of the year on the day that Russia invaded Ukraine, since when we’ve upgraded the top line three times [in April, August and October] and we’ll deliver close to our original margin expectation. Which, I think, demonstrates the resilience of our business and the importance of what we do for clients despite the challenging macro environment.
On the cost-of-living front, is there anything more that you can do for employees? We’ve seen one of your peers, Publicis Groupe, give money ahead of the holiday season [in the form of an extra week’s pay for all staff who are not entitled to variable compensation].
Every company tackles this in different ways. We’ve really been focusing on WPP investing in our people, which, in part, is why we are softening our margin guidance. We’ve been able to offer people slightly higher raises this year than normal [about 5%, according to the half-year results]. We’re also continuing to promote hybrid working and we’re very cognisant of the pressure on people’s budgets and what we can do to support them.
Can you give any clues about what to expect in 2023?
We’re not giving any guidance for 2023. The experience of what we’ve seen so far this year would suggest that we have good momentum in Q4.
You see that run through into new business and the business more broadly [for two reasons]: First, client demand remains strong and our underlying growth has accelerated this year, demonstrating the importance of what we do. Second, we have a strong offer, excellent talent and investments in technology. These are all driving our performance and this will all remain true next year.
The strength of our performance this year and our business gives us confidence in 2023, notwithstanding there’ll be a slightly more challenging macro environment. WPP is a very broad-based business. We’ve got a really strong business in India, growing over 10%, a really strong business in Brazil, growing 20% this year. We’ve got a really strong presence in technology – a sector that has structural growth ahead of it – and healthcare, which is very resilient.
I think we’ve got a very, very different business from where we were five years ago and that positions us well to help our clients.
Our clients are going to have a challenging 2023 and the more that we can demonstrate to them how we can help them innovate, how we can help them be on the side of consumers, how we can help adapt their business in a more digital environment and use data or technology, the better we will do next year.
Looking at the main Global Integrated Agencies division with 4.3% growth in Q3, have the creative agencies been doing better (up 4%) or have the Group M media agencies had a slower quarter (up 4.7%)? A year ago, Group M grew twice as fast as the other agencies.
Group M had a very strong comparative with last year – they were up nearly 20% in Q3 2021. AKQA is doing extremely well – they’re up double-digit this year. We’ve seen a great new-business performance at Ogilvy – with Audi, H&R Block and the consolidation of the SC Johnson business with VMLY&R Commerce. Hogarth, our production company, continues to help clients find ways to save money on production work and I think that’s going to be a very important capability going into next year. Our public relations businesses, Hill & Knowlton, BCW and FCS Global, have performed strongly and were very resilient during Covid.
The other reason to be positive about next year is the strength of our new-business performance and new-business pipeline. We’ve had some great new-business wins including Ford – WPP will be collaborating very closely with Wieden & Kennedy as creative partners [after the car brand moved most of its account away from BBDO]. And we continue to on-board Coke this year and next year [after winning the global consolidation a year ago] and that will support the top line, which is critical to us.
So when others say the new-business pipeline looks thinner, that’s not the way you see it?
No. Our new-business pipeline, if anything, is slightly bigger than this time last year.
