By Brian Wieser, CFA
Global President, Business Intelligence, GroupM
Doom and gloom seems to be a natural state of being for much of the agency industry. However, is it really so bad? It all depends on how one defines the industry.
It’s true that the six largest “traditional” owners of agencies grew by only +2.1% organically in 2018. While this was up from +1.0% in 2017, it was still down from +3.6% growth in 2016 and 4.8% in 2015. Looking at data going back a few years earlier we can see the following growth trends:
(Chart excludes Dentsu because of changes in accounting for revenue prior to 2015.)
Much of this growth appears to track to companies reducing spending less on marketing-related activities, as we can see in the following chart covering a composite of 20 large marketers with relatively consistent disclosures of broad definitions of marketing spending. The data here specifically conveys the median percentage of revenue allocated to marketing.
This analysis is far from comprehensive, of course. It is skewed towards US-based companies who make relevant disclosures, and the number captured is small in absolute terms. As well, definitions of marketing can vary from company to company and agencies don’t necessarily perform all types of marketing work that their clients require.
To the extent that FMCGs (fast moving consumer goods) have undergone a unique degree of pressure on their costs in recent years and implemented ZBB (zero-based budgeting) or other efforts to pursue efficiencies, it may be difficult to reduce spending by much more if they intend to produce and execute on a similar volume of work as in the past. To the extent that those marketers may have cut their spending too much and are set to rebound, and presuming that agencies continue to find ways to help their clients in their marketing efforts, the data here can provide a basis for anticipating an ongoing recovery and a resumption of more normalized growth.
Even more encouragingly, if we broadened our definition of the sector to include the digital services divisions of the five largest consulting / IT services firms focused on the sector, growth opportunities may look even better as traditional agencies evolve their mix of offerings.
We can estimate that there are around 83,000 worldwide employees focused on digital / interactive and agency services at this group of companies. This total could be added to the ~419,000 who work at the six largest “traditional” agency holding companies. If we assumed that revenue per employee were similar between the traditional agencies and consulting / IT services firms, and that growth for this latter group of companies was around +10%, we could estimate that global growth for this slightly-more broadly defined industry would have been more like +4.0% last year. And this is before considering that FMCG advertisers probably cut their spending on agency activities, much as they have in recent years. If this sector – which represents around a quarter of all agency activity, probably disproportionately within the traditional agencies – reduced spending by -10% we could calculate that growth in spending on outsourced services on marketing-related services outside of FMCG might be rising by around +6.5%.
Still, if we assume any given category might go through a downturn in their use of agencies, perhaps the appropriate reference for industry growth is the >+4% level we calculate by combining incumbent holding companies and IT services / consulting firm agency services-related spending.
Incumbent holding companies could be fairly accused of not investing aggressively enough in the past on the business transformation-related services that are increasingly part of the marketing landscape. However, their internal and external investments are increasingly oriented in this direction, and over time they should be better positioned to capture more growth from the same revenue streams that IT services / consulting firms focus on today. Agencies which have looked to evolve have often been able to do so. All of this occurs because, presumably, marketers continue to find value in the expertise and operational capabilities that agencies have historically offered.
More generally, while agencies are best known for their traditional creative and media capabilities, the industry has a tremendous capacity for reinvention in what is generally a highly entrepreneurial industry. While Silicon Valley will likely always produce greater numbers of billionaires than Madison Avenue ever will, it’s probably also true that more people who work for agencies and related businesses will at some point go on to form their own companies – whether inside of a holding company or outside of one – to capitalize on new ways to communicate with consumers on behalf of brands.
Perhaps the doom and gloom is helpful if it motivates practitioners to find ways to drive growth. However, if the industry is defined in an appropriately broad way, its efforts to add value to marketers should represent a solid basis for greater optimism.