There’s an old ad industry saw that goes, “a little Procter & Gamble budget in everyone’s paycheck.” Well, now there’s a half billion less.
The CPG giant told investors on the company’s earnings call in January that the company had succeeded in cutting $370 million in marketing costs in 2015, and that it expected to trim an additional $200 million this year.
P&G’s not the only one. Diageo, Unilever and Reckitt Benckiser are among the global marketing organizations that have crowed to investors about cost controls. Often these reductions are at the behest of global investors like 3G Capital and JAB Holdings, which together have amassed stakes in food and drink brands worth billions.
Meanwhile, on their own earnings calls, agency holding companies have been remarkably consistent in describing 2016 as a “challenging year” full of “increased macro uncertainty” and “market volatility.”
To better understand why cost is driving corporate strategy and how that’s likely to impact the ad sector, AdExchanger spoke with WPP Group CEO Martin Sorrell.
AdExchanger: How are macro factors influencing advertiser budgets in 2016?
MARTIN SORRELL: Worldwide GDP growth is low, certainly lower than pre-2008. We’re seeing worldwide GDP growth levels at around 3.5%. I would call that the new normal. It will be likely to continue at that level. But while I see no reason for any upside breakouts, neither do I see reason for any downside breakouts. I’m not one of those who believes there will be a recession. US corporate earnings are under pressure because of a strong dollar, and we have two central banks doing less-than-zero interest rates. That means the dollar will strengthen further.
So we have low growth and low inflation. Therefore clients have very little pricing power, which means they’re very focused on cost cutting. Procurement and finance rule.
What else is influencing CEO and CMO mindsets?
If you’re running a legacy or established company, there’s a spectrum of factors. At one end of the spectrum you have the disruptors, companies like Uber or Airbnb. At the other end of the spectrum, you have the growth of zero-based budgeters. 3G Capital is the most prominent example, with a market cap on AB InBev of $200 billion and a market cap of $100 billion for their second-string holding, Kraft-Heinz. And then you have companies like JAB [investor in Master Blenders, Keurig Green Mountain and Peet’s Coffee & Tea].
In the packaged-goods space these companies are able to do anything and everything, in terms of next moves. Therefore there’s a considerable amount of apprehension about what their next moves are. All these companies have focused more on getting costs under control.
And then you have the activist investors: the Icahns, Ackmans and the Loebs. Whether it’s reality or not, the perception is they’re focused on the short term.
If you put that little cocktail of things together, you have clients that are very focused on cost and understandably so. Add to that that the average tenure for a CEO is five years, for a CFO four to five years and for a CMO two years.
When clients cut costs to drive short-term performance, how does that filter down to agencies and media?
The biggest element is not agency fees. It’s media costs, which they pay to us and we deliver on to media owners.
I recently shared with Business Insider our investment totals with some digital media companies. [Google got $4 billion in 2015, Facebook got $1 billion.] By contrast, our payouts to traditional media owners that we deal with are all between $750 million to $2.5 billion. The largest of the traditional media companies is News Corp. They are probably the only truly global traditional media company.
Given the changes in traditional media and the growth in new media, clients want more for less, and understandably so. That’s not a complaint. The savings for most of those clients are in what they call non-working costs, which can be production costs. Agencies don’t generally earn commission on that. They call them non-working media, which is a bit of an insult to the people who do the work.
There is pressure on agency fees, but we’ve been saying this for the last number of years. If you ask anybody in our industry, “How’s business?” you never hear the truth. You always hear, “It’s never been better.”
Given the conditions I’ve outlined, I think it’s unrealistic to believe clients are going to behave any other way in the short term. Having said that, the clients that really win are the clients that invest in brands and focus on the top line.
What can you do from a technology and media standpoint to preserve your margins in the face of client pressure?
Technology, data and content all become increasingly important.
Technology is Xaxis and AppNexus. That gives us our programmatic platform, where we use our scale to leverage our buying power.
Data is Rentrak and comScore. The merger was completed, and we now have a very effective alternative measurement system to Nielsen. We measure media in about 47 countries in the world outside the US, and it’s not easy but the system has to change. The way old media is measured is inefficient, ineffective and too stringent. And the way new media is measured, the bar is too low: three-second views and 50% of the time with no sound.
Content is Vice, Refinery29, FullScreen. All are examples of content investment.
There are plenty of bargains for buyers of marketing tech right now. Are you shopping?
I welcome a decline in valuations because I think the Internet market, of which marketing technology is a part, got overblown in several previous boom and bust cycles.
Marketing technology in the US will give us some opportunities. There are the declines in values. But I would say some of the valuations are still pretty high. People look at valuations that were achieved in the public or even the private markets and don’t believe those valuations have changed until a considerable period of time elapses. What you’re talking about will take some time to filter through.
Generally we’re very aggressive. We did 42-odd deals last year. It continues this year at the same pace and in the same space. The strategy is around fast-growth markets, digital and data, and that’s where we’ll continue to focus.
