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Breakingviews-WPP underestimates pinch from corporate austerity
August 23, 2017 / 10:54 AM / a month ago

Breakingviews-WPP underestimates pinch from corporate austerity

Martin Sorrell, Chairman and Chief Executive Officer of WPP, at the Times CEO summit in London, Britain June 28, 2016. REUTERS/Neil Hall

LONDON (Reuters Breakingviews) - WPP has underestimated the pinch from corporate austerity. The world’s largest ad group cut its forecast for its preferred measure of sales, blaming lower spending by consumer-goods giants it counts as clients. Boss Martin Sorrell reckons this will reverse. Alternatively, marketing frugality might become the new normal.

Ad land’s ills are proliferating. As well as the previously hyped threats – including the shift to commoditised digital-media buying, competition from consultancies and frenemies like Google and Facebook, and concerns over billing transparency – WPP’s half-year results on Wednesday focussed on yet another foe. Makers of fast-moving consumer goods – think Unilever and Procter & Gamble – are cutting back on spending. That sector makes up around a third of WPP’s revenue.

The 20 billion pound ad group now expects like-for-like net sales growth, which excludes currency moves, acquisitions and fees it merely passes through to clients, to be at most 1 percent this year, compared with previous guidance of 2 percent. That’s the second time WPP has disappointed markets in a few months, having dropped the forecast to 2 percent in March from 3.1 percent growth last year after it lost accounts with Volkswagen and AT&T.

Sorrell suggests the effects of so-called zero-based budgeting and margin-obsessed activist investors, the pace of which has clearly taken WPP by surprise, will abate. Stagnant revenue growth at consumer-goods companies will induce them to increase marketing spending. A number of companies have already said they intend to ramp up spending in the second half of the year, WPP points out.

The catch is that the torrent of value-focused activists targeting the sector shows no sign of slowing. Third Point’s Dan Loeb in June trumpeted a “rare” opportunity at Nestle, while Reuters reported this month that activist hedge fund Corvex Management has a $400 million stake in Danone. Procter & Gamble last month said its move to cut $100 million in “ineffective” digital ads had little impact on its business. If consumer groups are intent on staying slim, WPP will have little choice but to do likewise.

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