WPP’s CEO has blamed “macroeconomic uncertainty” in the global economy for the agency group’s falling revenues as clients have become “a little more cautious” and cut some “discretionary” work.
Mark Read spoke to Campaign following second-quarter results, in which WPP reported a 0.5% decline in revenue, net of pass-through costs, and revised down its annual forecast. The UK-listed group now expects revenue to fall between 0% and 1% in 2024. In contrast, French rival Publicis Groupe raised its annual forecast in July, predicting growth between 5% and 6%.
China was a key weak point in the second quarter, with Group M, the media buying arm, suffering account losses following a Shanghai police investigation into bribery allegations and WPP’s revenues falling 24 percent. However, Read said there were “pressures” in the Chinese market across all of the group’s activities, not just media.
Read acknowledged that Group M needed to change following the global sales decline, saying that “improving our new business” and “continuing to innovate on the product side” would be priorities for Brian Lesser, who will replace Christian Juhl as global CEO in September.
He added that Group M was “carefully” considering whether it could expand its scope into client-based media buying – where the agency acts as the principal and agrees to buy inventory up front and then resell it to the client later, sometimes at a higher price – after previously seeing rivals in the US win deals.
WPP also announced in its second-quarter results that it will make a windfall profit of £600 million from the sale of its remaining majority stake in PR firm FGS Global to private equity investor KKR. There was a hint of suspense when Alex Geiser, the CEO of Campaign’s stablemate FGS Global, told PRWeek that there had been “very little synergy with WPP” and that being part of the holding company had “created limitations for us”. Read responded to PRWeek by saying that there were “many advantages” to being part of WPP and that “I don’t think KKR will be an easier steward of the asset than WPP”.
Campaign discussed a number of other issues with Read, including WPP’s decision to cut more than 3,000 jobs since January to improve efficiency, but he declined to answer questions about X’s owner Elon Musk, who has criticised both the UK government and global advertisers in previous days.
Campaign: You have cut your forecast for the year. To what extent is this a WPP-specific problem?
Read: If you’ve been following the earnings season over the last few weeks, you’ve noticed that there’s been some caution in many consumer-related companies. You’ve seen in the spirits sector, the airline sector, and some areas of the packaged goods sector that sales are under pressure. There’s no doubt that (customer) companies are a little more cautious, and we’re reflecting that.
Some of the pressure is on us in the more project-based areas of our business, as well as in the branding and identity areas and the more technical consulting areas where projects are more discretionary.
I think what we’re seeing reflects a more general caution in the global economy and a higher level of macroeconomic uncertainty, and the need to be cautious and give people the right guidance for the second half of the year (which is why WPP has lowered its full-year forecast).
There are clearly some challenges. Let’s start with China, where there was a huge 24% drop in the second quarter. How does that relate to Group M (which faced bribery allegations and experienced some account losses as part of a Shanghai police investigation that began in the fourth quarter of 2023)?
In China, there are pressures across businesses – partly within Group M, but really across the whole company. We see many Western multinationals operating in China facing challenges and a tougher environment, particularly in some of the sectors where we are strong – like automotive and luxury.
And what about the UK, where there was a pretty sharp decline of over 5%?
Essentially, it’s a combination of a strong year-on-year comparison (when revenue was up 8% in the quarter) and timing issues. We’re strong on branding and identity, and some of those constraints are a little more pronounced in the UK (especially).
Do you need to appoint a Country Manager or President for the UK? after the departure of Karen Blackett (in spring 2024)?
We will look at what structure is right for the UK in due course.
Let’s talk about Group M, because the company has been through a downturn and China has hit it. What does Brian Lesser, the new global CEO, need to change at Group M? Some of your competitors have double-digit growth rates (in media) and Group M has not grown very quickly (with low single-digit growth in three of the last four quarters, including 1.4% in the second quarter).
We need to focus on improving our new business record. Brian will focus on customers, new business and continuing to innovate on the product side.
IPG recently announced during its second-quarter earnings call that it plans to expand its role in client-based media buying (where the agency acts as the principal and agrees to buy inventory up front and resell it to the client later, sometimes at a higher price). The company even said that some of its competitors have grown faster because of it. What is WPP’s position on client-based media buying? To what extent do you think Group M is already involved?
While we have a strong owned media business globally, it is certainly much smaller in the US than many of our competitors. I think that is a trend in the US – some of our competitors are using owned media to generate new business.
I would say that’s something we look at carefully, but we want to make sure that we’re always acting in the best interests of our clients. And the U.S. has always been a market that has historically favored more transparent business models, and that’s probably a good thing in the long run.
WPP seems to have undertaken a fairly profound workplace restructuring programme. Your headcount has fallen by over 3,000 since the start of the year to 111,000 and you seem to have lost quite a lot of top talent in the last six months – either you’ve said goodbye to them or they’ve said goodbye to you. How painful and disruptive has that process been?
When you combine four global businesses (including the VML-Burson mergers and the simplification of Group M), restructuring is inevitable, and when offices are combined, some of that responsibility unfortunately falls on the leadership of those respective agencies.
We have tried to use natural turnover as much as possible. Turnover (of staff) in our industry is perhaps 25% and we try to use natural turnover to adjust costs to the new structure. Unfortunately, however, there have been cases where jobs have been cut when companies have merged.
We need to make the company more efficient. I think in the long run that will make us more competitive and more effective.
The sale of FGS to KKR was announced, but it means you’re losing a fast-growing part of WPP when you could use faster growth. And all the money (from the sale) just seems to be going back into the company. At first glance, it doesn’t seem to be of much benefit to shareholders, apart from improving the balance sheet.
This puts us in the middle of our range (in terms of net debt to earnings), which is good for shareholders (as it reduces debt repayments) and gives us more financial flexibility going forward, allowing us to focus on our core offering.
FGS is a great business but is very different from the rest of WPP. It works with different (types of) clients within the client organisations in most cases. We have very strong PR capabilities in consumer and corporate PR (under the recently merged Burson and Ogilvy PR brands) and I think it makes sense for us to focus on that.
When we started merging FGS four years ago, we brought together three different businesses within WPP and worked with the management team to bring them together into one company. We also supported them in the acquisition of Sard Verbinnen in the US (in 2021). We created almost over $500 million in value. This is a very good result for WPP shareholders and we are pleased to be able to do this at an attractive valuation.
Could you repeat this with another part of WPP (by spinning off another agency division)?
You know we worked on Kantar (in partnership with private equity firm Bain after we sold a majority stake in 2019), but no – I think the rest of WPP is strategic. The reality is that FGS is really the only significant asset of its kind that is not integrated into the rest of WPP. This transaction makes sense from both a strategic and financial perspective.
There’s a lot of talk about advertisers and their agencies playing a role in where they invest, and that includes social media platforms. Given the unrest in the UK – and this could apply to other markets too – what should advertisers be doing around social media (even if you’re not talking about Elon Musk, the owner of X, in this earnings interview)? As the world’s largest media buyer, how do you hold these platforms accountable?
Our role continues to be to communicate our clients’ views to the platforms and provide objective advice in their final decision about where to place their advertising.
One final word on artificial intelligence. In your findings, you talk about already knowing enough about AI to know that its impact will be “significant”. We keep hearing that brands can do more (with AI) and much more cheaply. Does this have an impact on the revenue pressure you’re seeing, particularly among creative agencies (which fell 2.4%)? Is AI hurting marketing services revenue?
I would say it is a growth engine for us at the moment. What the long-term impact will be is too early to say.
