Agency Organic Growth Remains Strong in 1Q23
In this post I explore some of the key drivers of growth, aided by a new disclosure from Omnicom
Two of the four biggest agency holding companies reported 1Q23 results this week, with organic revenue growth for Omnicom up 5.2% and for Publicis up 7.1%. Note that the two companies define revenue differently, with Omnicom including pass-through costs while Publicis excludes them. The scale of activity has become increasingly important for the industry, and thus are important to monitor in order to properly compare growth across companies
More generally, these positive results are essentially a continuation of trends we saw throughout 2022, albeit with an understandable amount of deceleration given the rapid growth rates posted in the first quarter of 2022. Here are several reasons why growth is occurring:
To start, agencies have been benefitting from the complexity of marketing at the present time. It’s harder than ever for marketers to know how to accomplish their goals in a world with growing numbers of ways to accomplish those goals, especially when many approaches require specialized knowledge.
Scarce labour probably helps, too, as a marketer who might want to initiate a campaign themselves may find that they are unable to. Agencies may have difficulty attracting talent as well, but it’s generally easier to find skilled people available to do work within a population of 100,000 rather than 100, or however many individuals a marketer have in their direct employ.
Publicis in particular is benefitting from a rebounding Sapient, which has been doing very well in the past couple of years. Now accounting for around 1/6th of the company’s revenue base, it grew by 11% in the most recent quarter, representing nearly a third of the quarter’s growth. Epsilon, comparable in size, is also doing particularly well and is capitalizing on interest in data-driven-solutions across the spectrum of agency service offerings.
Both Publicis and Omnicom have been expanding their proprietary media trading offerings in recent years, as marketers have exhibited a high degree of willingness to buy them given their heightened focus on costs and reducing “non-working” spending. We can’t know by exactly how much, but a new disclosure from Omnicom offers some clues: “third-party service costs” which, according to the company’s 10-Q “include third-party supplier costs when we act as principal in providing services to our clients” has now been separated from other third-party costs for incidentals which are billed back to clients and booked as revenue. Third party service costs grew to $640 million in the quarter, up from $582 million a year earlier. Annualizing last year’s figure, we can assume the total for 2022 was around $2.5 billion, which would be more than similar line items for WPP, Publicis, Interpublic or anyone else in the industry, based on disclosed figures. Although not all of this amount will relate to media, it’s reasonable to assume that the bulk of it is. As a total line item, it could make Omnicom the largest player in principal-based media trading in the agency industry. While we don’t know what kind of profit margin Omnicom typically realizes, if we assumed these pass-through costs represent around 60% of the revenue generated, we could infer that around $3-4 billion of Omnicom’s reported revenue was due to principal-based trading activity last year, or just under 25-30% of total recorded revenue. (As noted above, Omnicom does not provide a revenue less-pass-through costs as other agency groups do; headline organic growth is defined by other agencies as growth on the revenue-less-pass-through cost figure, which is why growth rates between them and Omnicom are not directly comparable). As reported, growth of 10% in the line item during the most recent quarter therefore implies that revenue related to these pass-throughs accounted for a majority of company’s growth during 1Q23.
Underlying growth from marketer spending is helping as well. Inflation continues to provide a tailwind, as companies typically budget for advertising on a percentage-of-revenue basis, and revenues so far this year have generally been strong in part because of inflation. Among the top 100 global marketers who have reported 1Q23 results so far, some are experiencing soft or modest results – IBM grew revenue in constant currency terms by 4% while AT&T grew by only 1% - but most are up significantly. L’Oreal reported organic growth of 15%, while LVMH grew organically by 17%. Within its consumer health segment, J&J grew by 11%. Although advertising spending figures were not disclosed for these companies, it would seem reasonable to assume that advertising numbers were more likely up than down for this group. Within financial services, each of Bank of America, JP Morgan Chase, Citigroup and American Express all saw revenue net of interest expense up by double digits as well. Disclosed marketing expenses were up by 15%, 14%, 6% and 10%, respectively.