Squeezed by Zero-Based Budgeters, WPP Cuts Growth Outlook

WPP cut its growth outlook from 2% to between flat growth and 1% during its Q2 2017 earnings call on Wednesday as clients, particularly CPGs, squeeze their marketing budgets. WPP pegged 2017 growth at 3% at the beginning of the year and reduced it to 2% in Q1.

“The key factors here were the trifecta of digital disruption, zero-based budgeting (ZBB) and activist investors [in CPG companies],” WPP CEO Martin Sorrell said on the call.

WPP’s revenue declined 0.4% to $9.3 billion and reported billings were down 4.7% to $34.4 billion on constant currency basis in the first half. For Q2, organic revenue declined 1.7%.

In addition to activist investors, declining volumes against price growth also pressured CPGs to cut marketing spend. CPGs make up about 30% of WPP’s revenue.

“ZBB funded by cheap money and activist investors have put an enormous amount of pressure particularly in the packaged goods space,” Sorrell said. “When [you] see volumes come off, that is the warning signal that the number of users of your product starts to flatten or drop.”

But declines in volume will create opportunities down the road for WPP as clients put more money toward branding to increase sales, Sorrell said. Some clients have already said they will invest more in advertising and marketing in H2 2017.

Consultancies’ continued encroachment on agency turf aren’t to blame for WPP’s slowed growth outlook, Sorrell said. Their acquisitions of fragmented design shops have yet to reveal a larger strategy. WPP, Publicis and Omnicom all have higher digital revenues than Accenture, Deloitte and PricewaterhouseCoopers.

“There’s a lot of commentary about what the impact of consultancies will be on our business,” Sorrell said. “The question really is raised as to how much market penetration there’s been. There’s little to no evidence of that happening yet, but of course you can’t rule it out in the future.”

Looking For Growth

Despite chopping its growth outlook, WPP sees opportunities for growth in H2.

The company is seeing a resurgence of its programmatic business at Xaxis in the US “as clients acknowledge they can get more effective use of their programmatic investment through media such as Xaxis and others,” Sorrell said. Xaxis continues to grow at roughly 10% each year.

WPP also believes that doubling down on its Horizontality initiative, which brings together disciplines from across its network on client-centric teams, will fuel growth in the second half of the year. WPP now has 50 global client teams, including new additions like Team Horizon and Team Google. (Google is also the largest destination for WPP’s media investments, gobbling up $6 billion of its $75 billion media portfolio.)

“Clients are pressuring us for more simplicity and efficiency,” he said. “This is the way.”

Consolidation will also help WPP get back to growth, Sorrell said. The company’s merger of MEC and Maxus, expansion of Essence and Kantar and Wunderman’s acquisition of Possible all put the company in a better position to deliver for clients.

“Clients are pushing for more efficiency and consolidation becomes a growth opportunity,” Sorrell said.

This post was syndicated from Ad Exchanger.