Fee pressure, in-housing and digital slowdown to stifle agency growth

Arvind Hickman
By Arvind Hickman | 9 January 2018
A media analyst predicts clients will continue to squeeze marketing budgets this year before conditions improve in 2019.

Agency holding companies and Nielsen are in for another tough year of muted growth before the market picks up in 2019, leading US media and advertising analyst Brian Wieser, of Pivotal Research Group, has predicted.

In the past year agency holding groups have reported lower organic revenue growth than previously. Omnicom Media Group's 3.5% increase in the first three quarters has been the pick of the bunch, while rivals Publicis Groupe (1.2%), IPG (1.1%) and WPP (down 0.9%) were all well below growth of recent years.

Wieser believes tough trading conditions will continue to stifle growth throughout the 2018 calendar year.

The major challenges he predicts include slow growth for core clients, the prevalence of zero-based budgeting tactics, wider in-housing of programmatic trading desks and creative production as well as greater scrutiny over fees and contracts.

Wieser predicts a slowdown in media spend on digital media and further competition from IT and consulting firms as further challenges. 

His forecast reflects similar predictions from media agencies that warn of a cooling ad market.

Global holding group growth is often weighed down by trading conditions in the US, where around half of revenue is booked.

However, the underlying challenges in the US are not uncommon in the Australian market, particularly a clamp down of marketing budgets for global clients, fee pressure, greater scrutiny and larger companies looking to in-house programmatic.

Pivoting to 'high growth' services

Last year, GroupM Australia CEO Mark Lollback  observed clients were making cuts to marketing budgets and procurement was placing greater pressure on fees.

Agency groups are also evolving towards more efficient operating models that centralise certain functions such as media buying and analytics across the group rather than sitting within individual agencies, illustrated by recent moves at Dentsu Aegis Network to build leadership of its investment arm Amplifi.

Groups are also investing in data and tech to provide more targeted media solutions, as well as building capability in higher growth services, such as performance marketing.

Wieser, pictured right, believes these moves will help groups offset leaner pickings in traditional media services.

brian-wieser.jpg

“We continue to believe that new opportunities are also always around the corner...for agencies, these M&A and capital expenditure activities mean ongoing investments in higher growth agency businesses (such as those focused on e-commerce or emerging markets) or related opportunities,” Wieser's report stated.

“For reference, our long-term growth expectations are 6.0% for WPP, 5.5% for Publicis, 3.75% for Interpublic and 3.0% for Omnicom. Growth expectations are based upon organic growth trends around 2-3% for each holding company paired with the impact of M&A and ongoing margin expansion potential given the leveragability of agency business models.”

Agency groups will begin releasing FY17 results next month.

The knock-on effect

A slowdown in marketing and media spend has a flow on effect to media owners. This, Wieser says, will have “a depressing effect on a sizeable chunk of Nielsen’s business as well, offset by growth in new digital measurement products”.

He says the main risks to Nielsen's growth include “macro-economic trends, the rising availability of less-expensive solutions (which could impact Nielsen’s discretionary services) and the potential that Nielsen’s status as the provider of a TV advertising trading currency could be threatened”.

He believes this will reduce Nielsen's long-term growth prospects from 4% to 3.5%.

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