Dentsu's -6% 3Q23 Decline And An Exploration of Divergent Agency Trends
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On Tuesday, Dentsu reported its third quarter 2023 results, which came in much lower than expected, as evidenced by their reduction in guidance for the full year.
International growth continued to under-perform industry averages to a significant degree again in the third quarter, falling -6.6% in the Americas, -17.2% in EMEA and -9.1% in APAC outside of Japan. Only the EMEA figures involved difficult comparables, as the company posted 15.4% growth there in the year ago period. By contrast, last year’s third quarter only saw 0.7% growth in the Americas and a -1.1% decline in APAC ex-China. Japan was a relative bright spot with a 3.0% organic growth rate, although this wasn’t enough to prevent an overall decline, as the company’s organic revenues fell -6.0% in the third quarter vs. last year. As indicated above guidance was reduced: in August the company called for full year organic revenue growth to range from flat to down -2%, but new guidance calls for a -5% organic decline.
By functional area, media was called out as declining in the Americas with reduced client spend and lost clients there, and slower spending from their clients on media in EMEA was also referenced. Notably, creative was up in the Americas. CT&T (Customer Transformation & Technology, including businesses built around Merkle) saw project delays in the Americas and client losses in EMEA. Most markets in APAC were generally described in broadly negative terms due to reductions in spending from their clients.
Interestingly, results from the two main publicly listed mid-sized agency groups were much more similar to Dentsu’s.
At S4, which reported last week, we saw a -10% organic decline. As their larger clients grew (the top 20 were up 2.9% and top 50 up 4.6% organically), weakness was primarily in their smaller clients. Both the content and data & digital media activation businesses were down significantly (15.6% and 8.4% organically, respectively) with EMEA similarly much worse than the Americas, and guidance for the full year now calls for a revenue decline.
At Stagwell, which reported earlier in the month, we also saw organic revenue growth trends which came in well below those from the larger holding companies. Stagwell saw a -4.6% ex-Advocacy organic revenue decline, and now guides towards a -4% organic decline for the calendar year. As with S4, management noted that the company’s largest (its top 100, accounting for 48% of net revenue) grew spending by 18% during the third quarter implying significant declines for its smaller clients.
What are we to make of these trends? Of course, “technology” clients were called out as drags on results from everyone, but technology can represent a broad range of categories. Moreover, it’s evidently not as much the industry but the size of client that’s driving the negative trends at S4 and Stagwell at least – and perhaps it’s impacting Dentsu, too. If correct, a focus on trends from differently-sized marketers could explain the gap between this group of three and the other five public companies referenced above whose growth rates were individually and collectively much faster (Havas may be closer in revenue to S4 and Stagwell than to WPP, Publicis, IPG and Omnicom, but it does tend to have larger clients like its larger peers).
It’s hard to say with certainty, but here are several ideas that could partially explain the divergence in trends for different agency groups related to the different sizes of their customer bases:
First, a significant amount of competition in the middle market for agency services has emerged in recent years. As I’ve written previously, there are now dozens of scaled privately owned agency groups with thousands of employees each. Heightened competition from this set of agencies presumably would impact S4, Stagwell and Dentsu more than WPP, Publicis, Omnicom, IPG and Havas, given the typical sizes of each company’s client bases (notwithstanding that each of S4, Stagwell and Dentsu have large clients which can be comparable to large clients serviced by the biggest holding companies).
Second, the massive expansion in revenues from AI-driven ad products at Meta and Alphabet and the continuing rapid growth from Amazon and retail media could very well be disproportionately capturing spending from mid-sized marketers, leading to less demand for many agency services. Of course, if this were true it would probably be impacting the larger privately held mid-sized agencies who could very well be experiencing more weakness than I think is occurring
More generally, it’s possible that in the current environment, mid-sized marketers are behaving more conservatively in terms of paying for agency services. Clearly the growth we are seeing from the largest digital media platforms conveys that total spending isn’t slowing, but perhaps these marketers are relying less on agency services because of outsized concerns and general belt-tightening at the present time
Another related possibility is that mid-sized marketers were among the most significant beneficiaries of zero-cost capital, driving a disproportionate amount of agency services growth in 2022 and then providing difficult comparables this year.
Only time – or more comprehensive data releases from more companies – will tell the full story of these trends. Until then, theories such as those put forward above will rule the day.