WPP Needs to Reinvigorate Growth to Meet Targets

Strategist

Eric Compton

WPP is the largest player in the advertising space, operating in more than 110 countries. We expect the firm to maintain its market-leading position as it generates competitive organic growth, continues to make acquisitions, and increases focus on the faster-growing emerging and overall digital ad markets.

We look for WPP’s acquisition growth strategy to continue, as the firm has consistently brought in smaller local ad agencies and quickly gained traction in other faster-growing international markets. Historically, WPP has also aggressively acquired larger players in the space such as Ogilvy and Grey. Consolidation in the advertising space has resulted in the Big Five companies (WPP, Omnicom, Interpublic, Publicis, and Dentsu) generating nearly 30% of the world’s total ad revenue. Such consolidation has been driven by the globalization of businesses in various verticals, increasing demand not only for vertical-specific advertising expertise but also for experience, knowledge, and a clearer understanding of different cultures and regulations.

We also expect WPP to continue acquiring and investing in the growing digital advertising space, which will help the firm remain competitive. Clients of WPP and its peers are allocating more ad dollars toward below-the-line digital campaigns, creating growth opportunities for WPP and other players. Some of WPP’s acquisitions in the digital ad market include Taylor Nelson (which became part of Kantar, which was sold in 2019) and AKQA (which is now combined with Grey), along with investments in Essence and AppNexus (which generated a significant return for WPP after being acquired by AT&T in 2018).

To enhance its digital offerings and overall data technology, WPP plans to invest up to GBP 150 million during the next few years. We believe WPP is at the forefront when it comes to providing different components of digital advertising such as programmatic media buying and ad placement, along with performance measurement. As most of WPP’s larger clients favor omnichannel and advertising campaigns, past and future acquisitions and investments help make WPP a one-stop shop.

Business Strategy & Outlook

We view WPP as a narrow-moat company. WPP holds valuable intangible assets, in our view, around the holding company’s brand equity and the strong reputations of its various advertising agencies around the world. We also think the firm's continuing investments in consumer data accumulation and analysis give WPP a maintainable competitive advantage. To a lesser extent, we think WPP benefits from customer switching costs associated with further integration of its resources with its clients’ marketing departments. We believe the utilization of the firm’s moat sources and overall execution will result in WPP earning excess returns on capital for at least 10 years.

WPP is the world’s largest ad holding company based on annual revenue. It has transitioned from traditional advertising, which includes print, broadcast and cable television, billboards, and mail, into a complete solution provider by combining traditional with digital (including online video, social media, and mobile), along with other services such as public relations, through many acquisitions including Ogilvy and Grey. The acquisitions have added an average of 1% per year to total revenue growth during the past three years. WPP services are provided worldwide, with over 70% of its revenue coming from more developed regions such as North America, the UK, and Western Europe.

Advertising firms provide various services to help businesses market their products and brands more effectively. The services include the design and creation of advertising content, in addition to its distribution and placement through various channels. Ad firms also manage the campaigns that they help their clients launch. This includes not only working with various mediums to purchase media and place the ads, but also tracking the effectiveness of the ads by gathering data and measuring the return on investment.

WPP, Omnicom, Interpublic, Publicis, and Dentsu generate nearly 30% of the world’s total ad revenue. In our view, three factors drove this space toward consolidation: globalization, the emergence and growth of digital media, and more cost-control initiatives taken by clients.

Globalization of businesses in various verticals has increased demand not only for vertical-specific advertising expertise, but also for experience and clearer understanding of different cultures and regulations in the geographic regions in which businesses want to market and sell their products. For this reason, WPP and the other largest ad holding companies have consistently acquired smaller local ad agencies and quickly gained traction in other international markets.

This consolidation can also be viewed as somewhat of a hedge against revenue volatility, as WPP’s revenue is driven mainly by macroeconomic factors, such as overall GDP growth, consumer confidence, and growth in disposable income, which influence businesses’ decisions regarding the size of their ad and marketing budgets. The status of these factors varies at different times within different regions around the world. While the US, UK, and Western Europe remain the most attractive markets for ad agencies and are usually highly correlated from a macroeconomic standpoint, other regions—such as Asia-Pacific, Latin America, Africa, the Middle East, and Central and Eastern Europe—grow at slightly faster rates when in the growth stage. In addition, they are not as highly correlated, in terms of when the peaks and troughs of their economic cycles take place. While revenue from those regions accounts for only around 30% of WPP’s total revenue, its presence in those areas can be viewed as a hedge against the volatility of ad agencies’ revenue. However, different exogenous shocks, such as the coronavirus pandemic in 2020, could significantly increase revenue volatility from all regions.

The emergence and growth of digital media has also driven increased consolidation in the ad space, as WPP and its peers have acquired various smaller agencies that focused on the growing digital advertising niche in the overall ad space. As most of the ad holding companies’ larger clients and Fortune 500 firms favor omnichannel or multichannel marketing and advertising campaigns, these acquisitions help make the ad holding companies platform-agnostic and one-stop shops.

Larger clients’ cost-reduction steps have also forced WPP and the rest of the Big Five to further consolidate to create cost efficiencies over smaller ad agencies and minimize the impact of possibly lower prices offered by the clients. While most Fortune 500 companies continue to demand creative and effective ad campaigns, they would also like to simplify the process of campaign design and launch by reducing the number of agencies with which they work for various components of their campaigns, which may include not only ad creation and media buying but also public relations. As a result, continuing consolidation has helped the Big Five provide a complete advertising solution to various clients around the world and benefit from growing digital ad platforms such as social media, mobile, and video.

While significant consolidation has taken place, WPP will continue to operate as a holding company, allowing the acquired agencies to maintain their reputations under their own brands and strengthen their relationships with clients. This helps WPP increase the value of its own brand by enabling those agencies to win larger accounts. In addition, WPP’s reputation and brand allow it to compete mainly with the other Big Five for larger accounts. When seeking ad agencies to create and manage large campaigns, Fortune 500 companies allow only a few ad companies to pitch their ideas. This is where the reputation and brands of the Big Five come into play, as the known agencies associated with the Big Five are typically asked to pitch and compete for the account or a specific campaign. In our view, this recognition, which can be interpreted as stemming from high brand value, is shared by the Big Five.

WPP and the rest of the Big Five also benefit from intangible assets in the form of consumer data, which they accumulate by managing and tracking the performance of their various campaigns. We believe this data, along with data provided by third parties, helps the firm analyze the returns on investment of campaigns very quickly, which ad agency clients tend to demand more as they launch more below-the-line campaigns. Further, access to this data may help Omnicom adjust and improve campaigns, whether on the creativity or media-buying side, to increase ROIs for clients and further enhance the value of its brand.

With regard to switching costs, as more Fortune 500 accounts seek simplicity along with multichannel marketing strategies, we believe integration must take place not only internally in the ad agency, but also externally with the accounts. This integration, whether it is due to multichannel campaigns or to enable an account’s marketing department to work even more closely with the ad agency, creates some switching costs for the clients.

Narrow

Economic Moat

WPP Plc Sponsored

WPP Plc is a creative transformation company, which engages in the provision of communications services. It operates through the following segments: Global Integrated Agencies, Public Relations, and Specialist Agencies. The Global Integrated Agencies segment offers creative services including advertising, marketing, and brand strategies and campaigns across all media. The Public Relations segment helps clients communicate with all stakeholders, from consumers and investors to government and non-government organizations. The Specialist Agencies segment delivers brand experience and identity, and specialist, targeted services. The company was founded by Martin Stuart Sorrell in 1985 and is headquartered in London, the United Kingdom.

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