Feature

Agencies warned over rising costs

The latest Kingston Smith W1 survey shows economic conditions are improving in adland, but agencies still need to keep an eye on costs, Ian Graham writes.

The UK’s top 50 advertising agencies have reported a very mixed set of results in the most recent Kingston Smith W1 survey.

The industry grew 3.5 per cent annually and the total income generated was up again, to more than £1.3 billion – although, surprisingly, the rate of growth slowed significantly.

Given that most results are for the calendar year 2012, this news is perhaps unexpected, but it is explained by a lower-than-normal amount of consolidation within the top 50.

The growth was spread fairly evenly throughout the industry, although special mention should go to Inferno, which continued to blaze a trail – growing its gross income by two-thirds in the year ended 31 March 2012 on the back of 50 per cent growth in the previous 12 months.

Operating profit suffered last year despite the general increase in income. The total profit generated fell 6 per cent across the industry, with operating profit margins dropping 0.9 per cent.

The average operating profit margin, 11.2 per cent, is the lowest reported in the survey since 2006.  At Kingston Smith, we believe the benchmark target for operating profit margin should be 15-20 per cent. Clearly, there remains some work for the top 50 as a whole to do.

This fall in profit margins was driven by agencies spending more of their income on staff costs, as well as an increase in property and other non-staff expenditures.

Yet the average salary across the industry actually fell 1.3 per cent over the year, due to an increase in the number of relatively junior staff and continued wage restraint.

However, these savings were erased by a general rise in employee numbers, either to service existing work or, possibly, in anticipation of future growth.

We recommend agencies spend no more than 55 per cent of their income on staff costs. Of the 18 companies that achieved this target, 14 went on to record a healthy operating profit margin of more than 15 per cent.

The increase in staff numbers also had an impact on productivity, with the key measure (amount of income generated per head) falling slightly to £110,000.

If the increase in headcount is indeed an investment in future growth, then this figure should improve in the coming years.

Six agencies – Adam & Eve (prior to its merger with DDB), Abbott Mead Vickers BBDO, Beattie McGuinness Bungay, Saatchi & Saatchi, The Red Brick Road and Publicis – stood out by meeting our three most important financial targets.

They all generated in excess of £120,000 of income per employee, kept staff costs to within 55 per cent of their income and reported an operating profit margin of more than 20 per cent.

Operating profit generated per head is the best overall measure of a  creative business’ financial performance, and Adam & Eve once again saw off all the competition to come out as our top-ranked agency in this regard. It will be interesting to see whether that success has been transferred into the new combined business.

Predicting what the future holds is not easy but, if history tells us anything, it is that as economic conditions continue to improve, so the demand for great creative work will continue to pick up. For those ad agencies that can attract this work, it will, in turn, lead to a shortage of talent in some key areas.

Combined with increasing wage expectations, the challenge for those agencies that continue to grow will be to retain (or obtain) the best of this talent at the right cost in order to deliver improved profit margins.

Agencies that either struggle to generate significant income growth or fail to keep wage demands under control as they grow are not going to find things getting any better in the coming years.

However, as the top-performing agencies in this survey demonstrate, outstanding financial results can be achieved from great creative work.

The survey is available to purchase at a cost of £295 and is available in either hard copy or online formats. For more information or to order a copy, please contact Edwina Scott at escott@kingstonsmithw1.co.uk

Top 50 advertising agencies
Rank latest Rank previous Agency Gross income Operating profit margin on gross income
Latest (£000s) Change (%) Latest (£000s) Previous (%)
1 1 M&C Saatchi 169,486 10.7 9.7 9.8
2 2 Young & Rubicam Group 104,951 -14.2 3.2 15.1
3 3 Ogilvy & Mather Group (Holdings) 104,092 31.6 11.2 5.5
4 - Sapient 103,127 -1.8 4.4 15.7
5 4 Abbott Mead Vickers BBDO 60,938 9.8 21.8 22.5
6 9 BBH Partners LLP 53,469 5.0 - -
7 7 J Walter Thompson Group 52,263 1.1 10.1 9.6
8 8 Saatchi & Saatchi Group 51,714 6.1 27.2 25.0
9 6 Publicis 48,133 -8.3 25.8 13.3
10 5 DDB UK 40,858 -22.8 13.5 17.0
11 10 Leo Burnett 36,325 4.1 15.6 14.0
12 12 Grey Advertising 33,895 16.5 15.8 17.5
13 11 CHI & Partners 32,497 5.7 12.7 13.1
14 21 DLKW Lowe 28,239 4.0 15.2 6.0
15 15 TBWA\\London 27,620 11.0 8.5 10.2
16 13 Havas Worldwide London (formerly Euro RSCG London) 26,577 2.5 1.3 6.8
17 19 VCCP 24,293 23.7 -1.3 8.6
18 17 Mother London 24,179 15.5 6.8 10.9
19 14 McCann Erickson Advertising 24,056 -1.5 7.5 -4.6
20 20 Bray Leino 21,783 11.3 13.2 16.2
21 16 McCann Manchester 20,119 3.3 17.4 14.0
22 24 McCann Erickson Central 18,810 14.5 14.3 16.1
23 18 Wieden & Kennedy UK 17,502 -15.2 -2.4 -8.7
24 22 Leagas Delaney 17,262 2.1 9.2 10.8
25 26 Golley Slater Group 14,280 -5.4 5.6 8.8
26 35 Inferno 13,790 67.1 16.8 14.0
27 23 Fallon London 13,769 -16.6 -0.9 3.3
28 32 Beattie McGuinness Bungay 13,426 38.2 27.0 12.1
29 31 DraftFCB London 13,277 5.9 -20.0 7.4
30 27 Accord Group 12,652 -6.6 19.5 17.8
31 29 The Red Brick Road 12,523 18.0 27.3 0.2
32 30 Cogent Elliott 11,706 5.3 5.1 5.7
33 28 Tangible UK 10,676 -14.2 -0.4 -1.2
34 33 ThinkBDW 9,977 11.6 18.1 18.3
35 36 Gratterpalm 7,987 0.4 22.0 23.3
36 38 Karmarama Comms 7,826 7.9 16.6 29.6
37 41 Langland Advertising Design & Marketing 7,709 19.1 20.5 12.7
38 34 Adam & Eve Group 7,523 -10.7 40.3 35.9
39 44 HPS Group 6,497 11.4 12.3 11.7
40 48 Home Marketing 6,464 34.4 24.3 27.9
41 43 Albion Brand Communication 6,339 5.2 22.7 30.0
42 37 TBWA\\Manchester 5,801 -21.6 -3.7 10.1
43 40 The Gate Worldwide (formerly CST The Gate) 5,746 -19.8 -5.2 -12.2
44 39 BRAHM T/A Brass (previously BRAHM) 5,677 -20.1 7.7 8.5
45 42 Lawton Communications Group 5,632 -9.5 -5.7 4.8
46 46 Advertising Principles (Group) 5,592 7.2 0.9 2.8
47 45 Big Communications 5,068 7.2 9.4 19.3
48 - BJL Group 4,534 23.7 21.5 7.6
49 - Brothers and Sisters Creative 4,053 4.0 -7.9 6.7
50 - Maher Bird Holdings 4,004 -7.5 21.6 26.4
Notes: 1 In previous years "SapientNitro" was used but, given changes that have occurred at the company and in the sector, the decision was taken to use "Sapient" for the current survey. 2 BBH Partners LLP replaces Bartle Bogle Hegarty from last year’s survey. 3 Karmarama Comms was previously LS Kansas Six LLP and Karmarama LLP 4 BBH Partners LLP’s operating profit was not comparable as a result of its LLP status.
Top ten media agencies
Rank Agency Gross income Operating profit Operating profit margin on gross income
Latest Change Latest (£000s) Change (%) Latest (£000s) Change (%)
1 Aegis Media 162,361 4.4 14,399 -52.5 8.9 19.5
2 MediaCom UK 76,854 6.4 8,744 -6.4 11.4 12.9
3 OMD Group 68,602 13.0 17,315 9.8 25.2 26.0
4 Mindshare Media (UK) 65,382 -0.9 5,366 -52.5 8.2 17.1
5 PG Media Services 45,219 6.0 8,892 9.7 19.7 19.0
6 ZenithOptimedia 35,335 9.4 7,934 40.1 22.5 17.5
7 Mediaedge:cia UK 33,197 16.7 5,769 45.5 17.4 13.9
8 PHD Media 28,382 11.1 6,757 25.7 23.8 21.0
9 Media Planning 26,759 -0.5 2,428 -36.5 9.1 14.2
10 Carat Media UK 22,681 15.5 8,721 22.1 38.5 36.4

The top 30 media buyers reviewed in the latest Kingston Smith W1 survey continued to operate in tough trading conditions, and it showed – there was a large reduction in average operating profit margins. For competitive reasons, ad agencies invested heavily in staff, but their increase in gross income was not enough to compensate, leading to average operating profit margins reducing from 19.5 per cent in last year’s survey to 14.9 per cent – the lowest level recorded since 1995.

Aegis Media, due to its size, does impact significantly on the average ratios and itself reported a 52.5 per cent fall in operating profit, which certainly helped drag down the overall margin figure. However, even excluding Aegis, average margins dropped from 18.5 per cent in last year’s survey to 16.5 per cent. Indeed, we are not even able to take comfort in the reduction being confined to a few, as more than half of the top 30 media buyers suffered a decrease in their margins.

The main reason for this drop was the increase in staff costs, which accounted overall for 57.4 per cent of gross income – its highest proportion since we started monitoring this ratio in 1992. However, we can take some heart in the fact that overall gross income across the top 30 media buyers increased 7.7 per cent to £747 million, reflecting continued growth. Two-thirds of these agencies recorded an increase in gross income, which, given the economic climate, is pleasing.

Maxus Communications (UK) gave an exceptional performance with significant increases in both income and profit, due to new client wins and an increase in existing client spend. (The agency also reported an income rise in its recently filed accounts, which were too late to be taken into consideration for this survey.)

For all the bad news, media buying agencies still, on the whole, did well in comparison with those in other marketing sectors, and ten agencies generated operating profit margins in excess of 25 per cent.
Hopefully the investment that has been made in staff will allow media buyers to increase fees further and restore their operating profit margins. However, only time will tell whether they can return to the pre-recession level of 22.2 per cent.

By Cliff Ireton

Top ten independents
Rank Agency Gross income Operating profit margin on gross income
Latest (£000s) Change (%) Latest (%) Previous (%)
1 The Engine Group 91,158 9.9 7.4 2.9
2 Mother Holdings 67,588 16.5 8.7 12.0
3 The Imagination Group 52,372 13.3 6.4 7.1
4 Writtle Holdings 51,749 46.0 10.3 10.5
5 Iris Nation Worldwide 50,246 5.8 10.6 6.3
6 CHI Partners Holdings 32,497 5.7 12.7 13.1
7 Daniel J. Edelman 32,429 25.8 10.5 6.2
8 College Group Topco 28,848 290.6 8.6 16.7
9 Freud Communications 27,300 12.7 30.3 32.5
10 The Marketing Store (Europe) 24,490 11.1 14.6 10.0

The aggregate results of the top 50 independent groups has deteriorated since last year‚ Äôs survey, with the average operating profit margin falling from 10.9 per cent to 10.2 per cent. However, this is largely to do with the absence of Bartle Bogle Hegarty, previously the most profitable independent agency, which was sold to Publicis Groupe.

On a like-for-like basis, the results showed a modest improvement. Income rose 14.6 per cent and was matched by an increase in staff costs due to an increase in numbers and average wages. However, tighter control of non-staff costs meant, on a like-for-like basis, the average operating profit margin nudged up to 10.2 per cent from the 9.5 per cent recorded by the same companies in last year’s survey.

There were a number of standout performances. In particular, The Red Brick Road, Beattie McGuinness Bungay and Essence Digital met the targets for our three most important KPIs by recording an operating profit margin of more than 20 per cent, generating at least £120,000 of gross income per head and spending no more than 55 per cent of that on staff.

We are continuing to observe a polarisation of marketing services. There is a small group of independent agencies that are pulling away from their peers and recording extremely impressive results, driven by an ability to attract clients that are prepared to pay a premium price. There is a middle group showing modest growth and reasonable margins. But, concerningly, there is also a fairly large group of businesses that, while mostly profitable, have not been able to record the margins that should be achievable for a well-run agency.

The challenge will be to grow while not allowing this income growth to be consumed by an increase in employment costs as demand for quality staff starts to grow. Easier said than done, of course.

By Esther Carder

Top ten digital agencies
Rank Agency Gross income Operating profit margin on gross income
Latest (£000s) Change (%) Latest (%) Previous (%)
1 LBi 44,323 -4.9 20.8 27.5
2 AKQA 41,020 8.7 -9.6 13.5
3 Progressive Digital Media Group 40,271 4.8 7.3 -19.2
4 Jaywing (prev. Weare 2020) 30,078 1.1 4.2 5.9
5 Profero 22,076 5.6 3.1 0.2
6 Razorfish UK 21,147 18.7 10.4 9.7
7 Dare Digital 15,804 6.5 3.3 1.3
8 R/GA Media Group 13,237 25.7 15.2 20.7
9 Outrider 13,199 11.2 38.7 38.9
10 Reading Room 13,055 15.8 2.0 -0.4

This year's survey showed a rise in gross income of 7 per cent across the top 30 digital agencies. More than three quarters of the sample recorded growth‚ not surprising given that mobile and digital platforms, such as Google, Twitter, Facebook and LinkedIn, are attracting greater marketing budgets.

Work Club, Campaign's Digital Agency of the Year 2012, reported a particularly impressive 40 per cent increase in gross income, which was partly due to two major client wins, Rentokil Initial and Nespresso. The top 30 digital agencies also raised their headcount by an average of 10 per cent. Many will have made changes to ensure they have the right skills in response to ever-changing demands as digital work becomes more focused on social media, mobile and data analysis.

However, the average amount spent on employment costs rose to 62.1 per cent of income, which resulted in margins dropping to an average of 8.2 per cent. Only seven agencies kept these costs at or below 55 per cent of gross income. Of those, four reported operating profit margins in excess of 20 per cent, and of the remaining 23 companies, only four achieved margins of at least 15 per cent. This shows how important it is to not stray too far from our suggested benchmark income to staff costs ratio.

While it is good to see revenues continuing to shift to digital, operating profit margins have deteriorated as employment costs have risen. It will continue to be a challenge for agencies to maintain margins while investing in new resources. As the chief executive of one tech company says: ‚"If you can't keep up now, it will only get worse as things get faster."

By Richard Heap

Top ten direct marketing agencies
Rank Agency Gross income Operating profit margin on gross income
Latest (£000s) Change (%) Latest (%) Previous (%)
1 Rapp 35,695 1.5 16.8 8.1
2 Motivcom 29,317 -0.6 11.5 11.6
3 The Marketing Store (Europe) 24,490 11.1 14.6 10.0
4 Iris London 22,215 -6.9 11.9 9.8
5 Proximity London 21,804 -4.9 9.3 14.1
6 Gyro Communications 21,246 -26.8 -1.9 1.1
7 Tullo Marshall Warren 20,014 -1.8 12.7 12.3
8 Digital and Direct Communications 19,062 9.8 1.2 -9.6
9 RPM London 18,278 53.0 8.9 9.7
10 Havas EHS (prev. EHS Brann) 17,252 3.5 15.6 4.9

Direct marketing consultancies continued to report low margins‚ a meagre 8 per cent on average, the lowest of all the disciplines reviewed in the survey. This is the third year in a row that margins have fallen and they are nearly at their lowest since their 2000 peak of 15.6 per cent.

While improvements were made to the amount of gross income spent on staff costs, this was offset by a disproportionate increase in non-staff expenditure. Unfortunately, this decline in profitability was not confined to a few, and half of the top 40 reported a fall in operating profit. Even more disappointing was that eight agencies reported a loss, compared with six in the previous year. Meanwhile, average gross income grew only slightly, with a near 50/50 split between those agencies reporting a rise and those reporting a decrease.

Employment costs are the biggest expense for direct marketing agencies, and controlling these is the key to profitability. Therefore the fact that this ratio improved to 59.5 per cent, the lowest for six years‚ is encouraging. The average cost per head remained fairly static at just over ££51,000; consultancies now need to turn their attention to non-staff costs.

The number of individual agencies reporting margins in excess of our target of 15 per cent increased to ten. Another positive note was the increased number of consultancies (12) exceeding our lower-end target of£100,000 gross income per head.

The most improved direct marketing agency was Tequila London, which reported the highest operating profit per head of ¬£41,000, compared with just £3,000 the previous year. It also had the lowest employment cost to gross income ratio (33 per cent) and increased its operating profit from £58,000 to £901,000, all on a modest turnover of £8.4 million.

By Val Cazalet

Advertising's highest-paid directors
Rank Agency Latest (£000s) Previous (£000s) Change (%)
1 Abbott Mead Vickers BBDO 1,469 1,443 1.8
2 DDB UK 1,385 1,392 -0.5
3 Wieden & Kennedy UK 1,039 774 34.2
4 Havas Worldwide London1 950 463 105.2
5 CHI & Partners 708 605 17.0
6 VCCP 678 496 36.7
7 Sapient 628 489 28.4
8 J Walter Thompson Group 627 706 -11.2
9 McCann Manchester 530 488 8.6
10 Ogilvy & Mather Group (Holdings) 508 480 5.8
Top ten advertising agencies by revenue
Rank Agency Latest (£) Previous (£) Change (%)
1 Grey Advertising 169,475 175,253 -3.3
2 Saatchi & Saatchi Group 162,623 149,098 9.1
3 Abbott Mead Vickers BBDO 157,057 141,518 11.0
4 The Red Brick Road 156,538 122,023 28.3
5 CHI & Partners 154,014 156,832 -1.8
6 Leo Burnett 153,270 145,958 5.0
7 Inferno 148,280 121,368 22.2
8 DLKW Lowe 146,316 141,391 3.5
9 Beattie McGuinness Bungay 142,830 122,987 16.1
10 Wieden & Kennedy UK 142,293 111,011 28.2
Topics