The survey of advertising professionals by investment bank Credit Suisse shows the industry is challenged, with a “below-average likelihood” of a successful transition through the slump.
The Ad Agencies: Beyond the Pandemic study shows ad agencies in an increasingly crowded space with strong competition, not only from consultancies but also many specialist independent agencies, tech firms and marketing technology providers.
The 100-page report conducted a proprietary survey of about 50 industry professionals. Describing advertising agencies as “the great survivors” that have grappled with the move to digital over the past decade, the report said the Covid-19 crisis has precipitated a sea change in consumer behaviour, particularly in ecommerce, that will increase pressure on holding companies.
Longer term, group and media buying margins are likely to fall, with agencies expected to grow just 1% post COVID-19, based on the survey.
“Over the past decade they have grappled with the move to digital media, and now they are attempting another shift to ‘digital transformation’, combining media, creative and marketing technology,” Credit Suisse says in a 100-page report to clients. “This is being accelerated by the COVID-19 crisis and a sea-change in consumer and business behaviour, especially in e-commerce.”
The Credit Suisse study also sees a high risk from Facebook and Google, but rates agencies well for creativity and sees a high chance of consolidation.
“At least 70% of agencies’ revenue is still in traditional services, making the timing of acceleration in digital transformation especially tricky,” the report reads.
COVID -19 has accelerated a shift to ecommerce by business with a subsequent move to digital advertising to capture this.
This means more advertisers need to find consumers online and accelerates the shift of ad spending to Amazon and other tech platforms.
“Increase the pace of digital transformation”
“The pandemic is giving CEOs and other senior management the impetus to increase the pace of digital transformation,” said the analysts at Credit Suisse. “All of the main consultancies and many others have seized on the crisis as a marketing opportunity for their transformation services in cloud, customer experience, data collection and analytics, and IT security.”
Average organic growth of the main agency holding companies has fallen since 2016, when it was around 4%, to almost flat in 2019. This is for several reasons including clients seeking efficiencies and reducing the number of agencies with whom they work.
Creative fees have also come under pressure from new competition and in-housing of creative and production work, as well as producing fewer adverts.
In addition, media growth is slowing due to a tougher focus on transparency and in-housing of some functions. Meanwhile, average margins have been stable/rising due to cost control, and back-office and rental efficiencies.
Threat from consultancies
Respondents saw the threat from consultants as moderate and saw a below-average likelihood of a successful shift from traditional to business transformation revenues.
They also believe there’s a reasonably strong likelihood of industry consolidation over the next two years and were fairly equally split over whether this would be a combination of agency with agency, agency with consultant or agency with tech company.
Many (44%) cited Martin Sorrell’s S4 Capital as the agency that is most likely to experience long-term financial success. This was double the next option, Omnicom, on 22% and the third option, WPP, on 19%.
The Credit Suisse’s survey was taken among senior professionals from the marketing ecosystem, a majority of whom are agency professionals but also with contributions from adtech, tech platforms, agency auditors, advertisers and media owners.
Source: Credit Suisse