Even Cindy Rose is said to have been surprised that most industry observers did not think to look at WPP’s board when speculating on who would next take on the toughest job in adland.
Yet the appointment to the top job of Rose, a former WPP non-executive who has spent the past decade in the upper echelons of the American technology industry rather than the agency world, speaks to an internal recognition that the embattled advertising group needs a dramatic shake-up in its approach.
The stakes are high. Once a pillar of the FTSE 100, Britain’s largest advertising group is now perilously close to being ejected from London’s blue-chip index almost three decades after its entrance into the top flight.
Its market value has shrunk to £3.9 billion, from a peak of about £24 billion in 2017. Short interest in its shares has shot up to 5.9 per cent, almost doubling in the past month alone, making it one of the most heavily bet against stocks in London.
When Rose, 60, delivers her first update to the market as chief executive next week she is expected to lay out another slide in the top line. City analysts forecast a 5.5 per cent contraction in organic revenue growth over the third quarter. For the year, a decline of 4.5 per cent is expected, towards the top end of guidance for a 3 to 5 per cent contraction in the top line set out in August, weeks after a bruising profit warning.
Under the weight of a string of high-profile account losses, a macroeconomic slump that has pushed big brands to cut back on their spending and the existential questions raised by the rise of artificial intelligence, the share price trades close to its lowest since the 2008 financial crisis.
“It’s not quite clear what WPP’s real points of strength or unique selling proposition is,” Adrien de Saint Hilaire, Bank of America’s head of European media research, said.
For many inside and outside group it seems clear that more simplification is needed, in the hope of becoming more nimble in how it services clients and delivering cost-saving benefits to the bottom line.
Freeing up enough cash is seen as crucial if WPP is to have the capacity to invest in attracting and retaining talent
REUTERS
The path to focusing WPP, which is centred on three main pillars (media, creative and public relations), had already been set down by Mark Read, Rose’s predecessor, who resigned in June after almost seven years in the job.
He had inherited a sprawling mass of agencies built up from the original Wire and Plastic Products, the Kent-based basket-maker that Sir Martin Sorrell, the ad group’s founder, bought 40 years ago. Read is credited with merging agencies and selling businesses seen as non-core, including a 60 per cent stake in Kantar to Bain Capital. The feeling among industry watchers, however, is that he did not go fast or far enough.
“I think the direction of travel has been right … it’s just probably been a bit slow compared to what’s going on in the wider market,” one big shareholder said.
Selling agencies and shrinking headcount, which numbered just under 96,000 at the end of last year, could also help to raise cash to strengthen the balance sheet. Average adjusted net debt stood at £3.4 billion over the first half of the year, equivalent to almost two times adjusted earnings, above a target range of 1.5 to 1.75 times, as profitability has declined.
• Cindy Rose has a thorny problem at WPP
In August the dividend was halved and Rose was to undertake a review of the group’s capital allocation strategy. Some analysts believe, however, that more may need to be done. A capital raise is one option, but unpalatable for some, given the extreme pressure already on the share price.
“Given the valuation they’re on, the cost of capital implied from doing a raise at this point would be humongous,” the shareholder said.
Freeing up enough cash is seen as crucial if WPP is to have the capacity to invest in attracting and retaining talent and faster-growth business lines.
Fundamentally, the company needs to “regain flexibility”, de Saint Hilaire said. “Having a stretched balance sheet when you’re in the agency business is not good because you can’t do the acquisitions that you may be required to do to diversify and reinvent your business.”
An AI advert for Virgin Voyages features Jennifer Lopez’s digital double, which can be used to send personal invitations
VIRGIN VOYAGES/VML
Deals are seen as a potentially faster way to adapt in a rapidly evolving market, which is also being forced to respond to the emergence of artificial intelligence, which threatens to complete work faster and more cheaply than human marketers.
Analysts at UBS estimate that Publicis, its French rival, has invested about €12 billion in buying up faster-growing businesses, including Sapient and Epsilon, its specialist data agencies over the past seven years. Its $4 billion purchase of Epsilon in 2019 has been seen as key to driving the Paris group’s winning streak, helping it to better target advertising to consumers.
“It certainly gives Publicis a good story to tell in those pitches and that can win the day,” one analyst said.
WPP’s AI pitch has primarily been focused on WPP Open, its AI-driven operating system that it has been building for the past four years. The platform, which is built on the large language models created by the likes of Google and Amazon-backed Anthropic, as well as its own proprietary technology, can spew out all the ingredients needed for the modern ad campaign, including realistic videos, images and audio. It is to spend about £300 million this year on the platform.
Because the offer has yet to translate to more client wins or make an impression on the top line, however, it has yet to land with investors. Rose’s tech nous, a key deciding factor in awarding her the chief executive job after almost a decade spent at Microsoft, could help to convince would-be clients that WPP can harness data and AI to its advantage.
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Publicis, which took WPP’s crown as the world’s largest advertising group last year, has become a thorn in the side of the British group. In June, shortly before Read announced his resignation, Publicis won WPP’s $1.7 billion global media planning and buying contract for Mars. That followed other high-profile account losses, including media planning and buying for Coca-Cola in North America.
Under Arthur Sadoun, its seemingly indefatigable boss, Publicis has left rivals, which also include the soon-to-be merged Omnicom and Interpublic, in the dust. This year it is on course to post organic revenue growth of between 5 per cent and 5.5 per cent and its operating margin at the half year was almost twice that of WPP at just over 17 per cent.
“There’s a culture here of, ‘We are going to change things, get used to it.’ They’re unafraid to make big decisions or buy big businesses,” one Publicis insider said.
Reviving the media business, which plans and places advertising for brands and is seen as the profit engine for the big advertising houses, is seen as central to returning WPP to growth.
In the second quarter the media business, which accounted for 41 per cent of revenue, shrank by 4.7 per cent on an underlying basis. With its large scale, vital to succeeding in the global media planning and buying arena, the business formerly known as GroupM has a right to win, analysts say. Its underperformance is all the more painful because of the growth opportunities on offer as the rise of social media has driven greater proliferation and complexity in potential advertising channels.
Meanwhile, creative, where the barriers to entry are lower, fees more volatile and AI poses potentially the biggest challenge, recorded a more severe 7.2 per cent slide in the second quarter. So-called “integrated creative” still accounts for 44 per cent of WPP’s revenue, versus about 25 per cent for Publicis, which some see as having a more favourable revenue mix.
Analysts think that investors will probably need to stomach more margin pain in the short term as WPP seeks to invest in potential growth opportunities. With the shares trading at just over five times forward earnings, a record low, speculation has mounted that it could fall prey to an activist investor, who may agitate for a break-up of its operations.
Some have argued, however, that such a move would run counter to the chief selling points of the big ad houses, which act as a one-stop shop for brands running global marketing campaigns.
With investors already fatigued, Rose will need to quickly convince that she is capable of returning WPP to its glory days.
“From an investor point of view it has been a catalogue of exceptionals and downgrades for a very long period of time … you want to get to a point where you feel that they have got their arms around the business and can actually drive the business forward,” one shareholder said.