March 1, 2018 / 12:36 PM / a year ago

Breakingviews - WPP raises spectre of adland stagnation

Martin Sorrell, Chairman and Chief Executive Officer of WPP, attend The Times CEO summit in London, Britain June 28, 2016

LONDON - Martin Sorrell has raised the spectre of adland stagnation. The boss of advertising bellwether WPP, which lost 2.5 billion pounds of market value on Thursday morning, said 2018 revenue could be flat and reduced long-term earnings targets. Mad Men will have to get used to an increasingly frugal future.

Last year was one of the worst in WPP’s history. Revenue excluding currency fluctuations and acquisitions fell 0.3 percent, compared with an annual average of 5.5 percent growth over the previous three decades. That closely watched measure of the group’s health has shrunk in only four other years since 1986: in 2009 after the financial crisis, 2001 and 2002 after the dot-com crash, and during the 1991 British recession.

The short-term problem is lower spending at large consumer-goods advertisers like Unilever and Nestlé, who are under pressure from investors to cut costs. Deeper problems include advertisers cutting out middlemen like WPP by going straight to digital giants Google and Facebook. Sorrell reckons the latter is overstated, while the former will reverse as companies return to advertising as the only way to boost sales in a slow-growth world.

Perhaps, but Thursday’s results imply more pain ahead. Sorrell is pursuing a “simplification of structure” to tidy up the sprawling group that’s grown through scores of small acquisitions. He’s setting budgets based on flat sales and a flat operating margin in 2018. WPP may end up beating that, since a torrid 2017 will flatter this year’s growth figures, while the soccer World Cup typically induces clients to spend more on high-margin TV ads. Having originally estimated 2 percent growth last year, Sorrell is probably being over-cautious for fear of further harming the credibility of WPP’s forecasts.

The bigger red flag is WPP’s new long-term target of growing earnings per share by 5 to 10 percent each year. As recently as October, that was 10 to 15 percent. Take the low end of the new target and strip out around 2 to 3 percent for share buybacks and the same again for acquisitions. That implies “organic” earnings growth would be flat. Granted, that’s the bottom range of Sorrell’s target. But if adland’s most prominent chief executive is bracing for stagnation, investors are apt to do the same.


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