WPP: old guard
Obsolescence due to new technology is biggest threat facing Sorrell’s ad empire
Once cheekily described as the “Napoleon of Adland”, Sir Martin Sorrell appears to be re-enacting the retreat from Moscow. Forces are massing against WPP, the advertising empire he pulled together from his far-ranging conquests. The biggest danger is obsolescence due to new technology. This, more than anything, has pushed the shares down 37 per cent in a year. A chilly outlook for 2018 contributed to the rout on Thursday.
Sir Martin is franker with the public than Boney. Disinclined to portray defeats as victories, he admits 2017 was “not a pretty year”. Though earnings rose by most measures, comparable billings fell 5.4 per cent to £55.6bn. Net sales were nearly flat at constant currencies at £13.bn.
Investors had got used to WPP’s revenues and profits compounding at a steady 7-8 per cent a year. They were shocked by Sir Martin’s warning that both are set to tread water in 2018. They have been well-served by his strategy of combining small agencies in a network able to service multinational clients worldwide.
Contrast that labour-intense expansion with the almost frictionless growth of consumer networks created by big tech groups. The world ad market depends on digital promotion for two-fifths of its estimated $530bn in sales. Google and Facebook account for half of that fast-growing sub-set.
Conventional analysis tells us WPP is undervalued. Ten times forward earnings is not a lot to pay for a group with operating margins of 12.5 per cent. The yield is a bulbous 5 per cent. But conventional analysis makes no allowance for technological disruption. Sir Martin blamed this for WPP’s mixed numbers in 2017, alongside the vapours that activism and zero-based budgeting induced in clients. An ugly word with ugly effects for WPP — disintermediation — has yet to have an impact, he added.
The bigger the slice of advertising budgets absorbed by tech groups, the greater the likelihood they will deal directly with consumer goods groups. These might still need creatives in thick-rimmed spectacles to think up ads for them. They may not need WPP account handlers to secure ad space.
One Napoleonic-era cavalry regiment had the motto “Or Glory”. Death was the unspoken alternative. Having achieved glory, WPP must show it can adapt its business model to avoid that gloomy, if still distant, fate.