By Nick Kostov and Lara O'Reilly
Some of the world's biggest consumer-goods firms are ratcheting
down ad spending, starving Madison Avenue of revenue and further
threatening ad firms and ad-dependent media companies already
coping with a rapid shift to digital advertising.
Shares in the world's largest advertising company, London-based
WPP PLC, fell nearly 11% Wednesday after it reported a
steeper-than-expected slowdown in global ad buying, particularly
from consumer-goods companies. It was the stock's biggest one-day
drop in more than 18 years. Stocks of rivals also tumbled.
WPP, which owns agencies such as J. Walter Thompson, Young &
Rubicam and Ogilvy & Mather, said the pain was global, with
North American advertisers pulling back especially hard.
Consumer-goods companies, including Procter & Gamble Co. and
Unilever PLC and packaged food giants like Kraft Heinz Co. and
Nestlé SA, have typically driven revenue at the world's biggest
agencies. But these clients are struggling to boost sales amid
pressure on multiple fronts. To cope, they have been cutting back
on spending.
WPP Chief Executive Martin Sorrell on Wednesday said the
pullback was cyclical but cautioned that it's a "big wake-up call."
Sales volumes at consumer-goods companies "are flat or falling,"
Mr. Sorrell said. "It means you have less consumers, and that's the
beginning of serious problems."
The penny pinching has been widely telegraphed, but the sharp
declines at WPP shocked investors.
Already, the world's largest advertising companies have been
coping with marketing clients reviewing their agency contracts to
reduce costs, questions about the effectiveness and quality of
digital advertising, digital ad fraud, and demands for assurances
that ads won't run alongside inappropriate content.
The pressures in the industry have been exacerbated by a
breakdown in trust between marketers and agencies. A report from
the Association of National Advertisers last year found that ad
agencies were accepting rebates from media companies without
clients' knowledge, stoking concerns about transparency. Big ad
companies denied wrongdoing.
Ad companies' revenue growth is slowing as companies continue to
cut the fees they pay agencies and amid growing competition from
consulting firms, said Brian Wieser, a senior analyst at Pivotal
Research Group.
There is also heightened competition from clients creating
in-house marketing and digital buying groups and from media
companies creating bespoke brand content.
"I do think the spending levels will return," said Wenda Harris
Millard, a media veteran and vice chairman of consultancy
MediaLink. "There's just a confluence of factors that are making
people very, very nervous."
In response, ad-holding companies such as WPP have been
simplifying their organizational structures and consolidating
agency groups to be more nimble and coordinated in response to
client requests.
Marketers, meanwhile, have been auditing their agency contracts
and frequently switching firms or reducing the number of agencies
they work with.
P&G, long the biggest advertiser in the world, reduced
digital ad spending by $100 million in the last quarter. It said
the reductions came mostly from cutting out what it found was
largely ineffective digital advertising. It also reduced overhead,
agency fee and ad-production costs in the quarter.
"We want our advertising to be seen by real people, not bots,
and where we could be assured that our brands would not appear next
to objectionable content," a P&G spokeswoman said, adding that
the company has been outspoken about identifying "fraud and waste"
in the ad industry.
Others are experimenting. Unilever, the Anglo-Dutch maker of
Dove soap and Hellmann's mayonnaise, and WPP's biggest client, has
been turning to YouTube stars and beauty bloggers to push its
products, diverting some money from traditional advertising
channels. Earlier this year, it said it planned to cut the number
of ads it created by 30% and reduce the number of creative agencies
it works with by half.
Kraft Heinz, Mondelez International Inc. and Kellogg Co. are
also shifting more marketing dollars to nontraditional forms of
advertising, including hiring people with influential social media
presence to promote their brands. A report by Nielsen showed that
92% of consumers trust that type of advertising over traditional
marketing.
Carli Evilsizer, head of marketing at the privately held
snacking company Graze, said with these so-called influencers, "for
a relatively small amount of money, we're reaching a large amount
of customers who are the right people for Graze. It is game
changing."
Still, digital ads are growing strongly. Worldwide revenue is
projected to increase 17% this year to $223.7 billion, according to
eMarketer. In a period of confusion about the kind of advertising
that works, analysts say companies are choosing to tighten their
belts, or experiment on their own.
"All of a sudden, marketers realize that they don't know what
they're buying," said Charles Bedouelle, an analyst at Exane BNP
Paribas, adding: "The clients are lost."
Google parent Alphabet Inc. and Facebook Inc. aren't showing
signs of taking on the creative role that big ad agencies say
clients need. Still, they wield enormous clout as media sellers,
capturing 77 cents of each new digital ad dollar spent, and their
ability to target ads is the envy of ad land.
Shares in other advertising giants, as well as media companies
reliant on selling ad space to them, also tumbled Wednesday.
Omnicom Group Inc. shares fell 7%. Interpublic Group of Cos.
dropped more than 6%, and France's Publicis Groupe SA slid more
than 3%.
The S&P 500 Media Index fell 1.45%. Axel Springer SE, the
Berlin-based publisher of Germany's mass-market Bild newspaper and
operator of the N24 cable-news station, ended down 1.4%. British
broadcaster ITV PLC closed 1.9% lower.
Those moves came after WPP said like-for-like net sales fell
0.5% in the first half of the year, from a year earlier. In July
alone, they fell 2.6%. The company also lowered its net sales
growth forecast for the full year to 1% or less.
Its closest competitors face similar headwinds. Japan-based
advertising company Dentsu lowered its full-year net sales guidance
by 1.5% earlier this month, citing ad account reviews at
consumer-goods firms. Last month, Interpublic said spending cuts by
such clients hit revenue.
Consumer-goods companies have all struggled with a host of
headwinds. Changing tastes are favoring healthier, fresher options
for food makers. New, often smaller, local upstarts are competing
for sales of everything from shaving cream to ice cream. Low
inflation in many parts of the world has kept them from raising
prices to make up for slowing volumes.
The industry -- in many cases encouraged by activist investors
-- has responded by cutting back on costs. Nelson Peltz's Trian
Fund Management is agitating at P&G, though it has specifically
objected to P&G's decision to cut advertising. Daniel Loeb's
Third Point has taken a big stake in Nestlé.
A key cost-cutting strategy for many firms has been so-called
zero-based budgeting, the practice of justifying every cost from
scratch each year. The tool was made popular by 3G Capital, the
Brazilian investment fund that rolled it out in recent years at
companies like Kraft and Anheuser-Busch InBev NV.
The strategy can be particularly painful for ad executives, who
essentially have to justify their campaigns to clients each year.
WPP's Mr. Sorrell specifically blamed zero-based budgeting among
clients for some of his company's woes. Still, he said there are
indications consumer goods companies are planning to increase their
spending again as early as the latter half of the year.
"Whether they have the vim and vigor to do that given the
current market situation is another story," Mr. Sorrell said. "We
will have to see how those activist situations, zero-based
budgeting situations play out over time."
--Saabira Chaudhuri, Alexandra Bruell, Sharon Terlep and Annie
Gasparro contributed to this article.
Write to Nick Kostov at Nick.Kostov@wsj.com and Lara O'Reilly at
lara.o'reilly@wsj.com
(END) Dow Jones Newswires
August 23, 2017 19:18 ET (23:18 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.