The four largest ad-holding groups recently posted healthy third-quarter earnings, buoyed by a continued digital advertising rebound and client demand for services spanning e-commerce to data and analytics. Organic revenue growth, a key measure of category health, was up 11.2% year-on-year at Publicis Groupe, 11.5% YoY at Omnicom and 15% YoY at Interpublic Group of Companies (IPG). WPP, which focuses on like-for-like net revenue, saw that metric rise 15.7% YoY.
For a sector that until recently was in somewhat dire straits, the question is whether the upward trajectory — which picked up momentum in the first half of the year — is sustainable heading into a topsy-turvy fourth quarter mired in operational challenges. Despite the ongoing uncertainty, analysts see agencies as making smart bets, including acquisitions, that will help them stay the course in a volatile period and even come out of the pandemic stronger than before.
"The agencies remain in growth mode," said Jay Pattisall, a principal analyst covering agencies at Forrester Research. "It's their media and digital businesses that are driving growth, and they have yet to encounter any budget cuts as a result of supply chain or any residual COVID-related issues."
The supply chain crunch, rising inflation and labor shortages are looming over the critical holiday window, where categories like retail historically ramp up marketing spending. Some businesses are already pulling back due to the inability to keep store shelves stocked. But agencies don't see clients hitting the brakes in the way they did at the pandemic's outset. Part of that could be attributed to brands locking in deals for channels like TV months ahead of time, but digital, too, might benefit from more marketers playing things by ear in 2021's hectic final stretch.
"If anything, it's likely to accelerate," Pattisall said of digital activity. "There will be certain retailers or brands that will find a need to move their inventory and will be using digital to do that because of the flexibility."
Agencies clearly feel a shared sense of optimism. WPP, IPG and Publicis all raised their organic revenue outlooks for 2021. Discussing Q3 results with analysts, Omnicom CEO John Wren noted that the supply chain pinch, while undoubtedly more significant now, hardly comes as a shock.
"We are being a bit conservative this year because there have been supply chain concerns throughout this pandemic," Wren said during the Q&A portion of the call. "They have gotten a bit more severe, but not outrageously more severe."
Deal-making pays off
Clogged ports and rising costs are certainly obstacles to growth, but also potentially short-term ones. Marketers and platforms alike have affirmed that their bets on areas like e-commerce and performance media are long-view, while the flow of consumers toward digital channels continues to surge. Agencies at the same time have been using their replenished war chests to acquire more shops specialized in these fields, which could help safeguard their businesses against future bumps in the road.
"The common denominator is that the agencies are seeing commerce and media as a growth driver," Pattisall said. "You can also see that in the acquisition strategy, because they're buying pieces to bolster media and commerce execution."
Omnicom in October acquired the performance marketing firm Jump 450, which serves as the backbone for a new performance media platform and business unit within Omnicom Media Group (OMG).
"Its focus on e-commerce and pure performance marketing will strengthen and add a distinct set of capabilities to OMG's existing performance media offerings," Wren said of Jump 450 on the analyst call.
WPP in August snapped up Satalia, an artificial intelligence firm that has about 80 employees and uses machine learning to improve operational efficiency at companies. As part of the deal, Satalia CEO and founder Daniel Hulme joined WPP as chief AI officer. Other moves from the network have started to pay off.
"The common denominator is that the agencies are seeing commerce and media as a growth driver."
Jay Pattisall
Principal analyst, Forrester Research
In May, it combined the data specialist units from GroupM and Wunderman Thompson to form a consultancy called Choreograph that focuses on strategies for first-party data, a hot item as clients face cookie deprecation. Executives indicated the offering helped secure important accounts in the Q3 period, like Unilever's $3.3 billion media business.
"A critical part of our Unilever media review was not just data and the work we did with Choreograph, but was also demonstrating our credibility and capability with them with Amazon with other retail media," WPP CEO Mark Read told analysts on the Q3 earnings call.
Weighing the risks
That said, nothing is certain in agency land, and some issues are enduring. Madison Avenue in recent years has experienced more intense competition from global management consultancies like Accenture and Deloitte. Current deal-making shows more traditional agencies building out their consultative competencies to keep pace, but Pattisall cautioned they should not to lose sight of the creative specialties that distinguished them in the past.
"What I think could potentially derail the agency's growth in 2022 is an overcorrection to technology and consulting," Pattisall said. "It truly needs to be a combination ... for them to be able to deliver the ideas, along with the executions and the solutions.
"If the agencies play their creativity heritage correctly and their creative expertise correctly, then they should benefit from this anticipated era of innovation that should start once we've gotten a complete handle on the pandemic and have defeated this pandemic," he added.
Another COVID-19 phenomenon that could weigh on the space is the so-called great resignation. People are leaving their jobs in droves, and agencies have infamous problems around burnout and long hours. It was a point of discussion across several Q3 earnings reports.
"The talent market clearly has become more competitive and attrition is higher post the pandemic," IPG Chief Financial Officer Ellen Johnson told analysts. "We went through a period of time where no one left. So you're seeing, I think, a two-year attrition rate this year and as a result, specifically because we're growing so fast, our hiring [has] not kept up."
Where are employees going? As much as agencies are still grappling with the encroachment of consultancies, the call of client-side opportunities similarly remains a point of tension.
"Every time I have a conversation with an agency or an in-house agency, the in-house agencies continue to talk about the rush of talent to them and then the agencies maintain that it is incredibly difficult to find talent," Pattisall said. "[Third-party agencies] ability to see some of this growth, whether it be in Q4 or into 2022, depends upon their ability to recruit and retain talent or to augment some of the talent skills and roles with technology."
