PERSPECTIVE: Sorrell's pessimism finds justification in UK business profits

The pattern is familiar enough. Entrepreneurial Cambridge and Harvard graduate builds up company from nothing, takes over one famous company successfully, turns his eyes to the next target and in his eagerness pays too much, a realisation that dawns as the last recession was getting into full swing. Analysts note the downturn, tot up the mountain of debt and advise investors to flee. Bankers are called in, retribution all round, entrepreneur pushed out with a million pounds in compensation. Everyone agrees that as rewards for failure go, a million pounds is not at all bad.

That's what nearly happened to Sir Martin Sorrell in the last recession as he took over first J. Walter Thompson and then Ogilvy & Mather. The only difference is that Sorrell stayed, earned the respect of his critics and is now rated as one of the most daring and inventive dealmakers in the business. If there is a limit to his ambition, it is not yet visible.

And yet, Sorrell acknowledges that his experience of ten years ago is one of the reasons for his place these days as the chief pessimist of the world's top agency executives. His right to the title was cemented this week as WPP posted its results for the first half of the year, including a 17 per cent decline in pre-tax profits to £210.4 million and revenue down almost 2 per cent to £1.96 billion.

Sorrell's feeling is that a recovery might not take hold in the industry until 2003 or even 2004. To use one of his famous watery analogies, the agency world might now be facing a "a double dip bath with a corrugated bottom". It sounds painful and, as the hundreds of agency and client executives who have lost their jobs in the past two years will testify, it is.

And yet there are the usual conflicting signals swirling around. Decent TV trading upfronts in the US, the continuing consumer spending boom, genuine cause for optimism from some media owners (see this week's ABC coverage) and even the occasional chink of light in UK TV spending patterns.

Of course, all the foregoing are merely observations. You want hard-won truths derived from rigorous scientific analysis? Consider the fact that there are few stronger influences on adspend than company profits. Like it or not, low company profitability affects adspend, whether it's investment in launches or share maintenance for existing brands.

The latest Office of National Statistics data on profitability for the first quarter of 2002 shows net rates of return of 4 per cent for manufacturing and 13 per cent for services. Neither of these show much improvement on 2001, and both are way off the return enjoyed in the bubble years of the late 90s, when manufacturing typically enjoyed 10 to 12 per cent profitability and services 15 to 16 per cent. All things considered, it looks like Sorrell's got it right.

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