Advertising bounces back

By Mandy Merron, campaignlive.co.uk, Thursday, 24 November 2011 12:00AM

The advertising industry is showing a tentative recovery from a weak 2009, according to the latest annual survey on financial performance from Kingston Smith W1.

Paul O'Donnell... Ogilvy & Mather saw a profit increase

Paul O'Donnell... Ogilvy & Mather saw a profit increase

Times are tough, but advertising agencies are proving resilient to the economic challenges thrown at them. The top 50 advertising agencies' most recent accounts show the sector's partial recovery. Looking mostly at results from 2010, agencies have reported an immediate increase in operating profit following the first fall in six years reported last year. Operating profit margin (operating profit as a percentage of gross income) increased to 11.9 per cent from 11.3 per cent, and overall operating profit was up by 5 per cent for the top 50.

Nearly two-thirds of agencies reported an increase in operating profits and five reported an operating loss.

Agencies bounce back

Operating profit increased by 4 per cent on the back of a 6.3 per cent increase in gross income. Staff costs rose by only 4 per cent, but a non-staff overhead rise of 11 per cent meant that not all the additional income translated to the bottom line. Of the top 50 advertising agencies, 45 recorded an operating profit, with 32 reporting an increase. Publicis and Ogilvy & Mather led the way on profit increases.

The biggest falls in operating profit came from Lawton Communications Group and Dentsu UK.

It took agencies three years to recover operating profit margins following the last significant recession in 1991. The improvement in operating profit margin from last year's fall shows that agencies' management teams were better-prepared for the recession and ensured they were well-positioned coming out of it.

A well-run agency should be able to generate an operating profit margin of 15 per cent or more. Of the top 50 agencies, 17 beat this benchmark and 11 generated an operating margin in excess of 20 per cent.

Agencies that consistently achieve higher profit margins tend to be those that keep staff costs in check. Of the 16 agencies that contained staff costs as a percentage of gross income within our recommended benchmark of 55 per cent or less, ten generated operating margins in excess of 15 per cent. Staff costs on average absorbed nearly 59 per cent of gross income - an improvement from last year. Staff numbers rose by 2 per cent to nearly 10,700 in the top 50 this year.

Independent agencies have tended to have a higher ratio of employment costs to gross income than group-owned agencies in the past. This is no longer the case, due to a combination of increased gross income and decreased employment costs per head for independent agencies. One of the features across this survey is that business owner-managers have contained their remuneration to help their companies through difficult times.

Narrowing the Gap

Independent agencies' gross income rose by less than the 8 per cent reported by the group-owned companies. Traditionally, group-owned agencies have been better at converting gross income into profits as groups tend to impose tight margin controls on their subsidiaries while independents can choose to let margins slip if their strategy requires. But following last year's reversal of this position, the independents once again have the upper hand.

Independent agencies' operating profit increased by 13 per cent, while the group-owned agencies' operating profit increased by only 3 per cent. Of the independents, Adam & Eve, Bartle Bogle Hegarty, CHI & Partners, LS Kansas Six (which owns Karmarama), The Red Brick Road and WCRS all reported an increase in operating profit of more than £1 million. Accord Group, Lawton Communications and Wieden & Kennedy UK all reported significant falls in operating profit.

Of the group-owned agencies, ten reported operating profit increases of more than 25 per cent, with Publicis reporting an increase of more than £5 million after a poor 2009.

The gap in salary between group-owned and independent agencies widened in spite of the improved performance of the independents. Group-owned agency staff pick up an extra £8,500 per employee on average, compared with a differential in gross income per head of £12,500. This equates to a premium of 11 per cent per person and, with higher overhead costs of £5,000 per employee, explains why group-owned agency margins have suffered.

Productive

Productivity, as measured by gross income per head, increased to £106,600. Operating profit per head reflects a combination of productivity and how effectively an agency converts revenue into profit. This increased by 4 per cent to £12,650 per head. LS Kansas Six led the way with £56,000 per head, and 18 of the top 50 agencies achieved in excess of £15,000 per head.

Conclusion

The top 50's bounce-back to improved margins and profitability is encouraging and shows that agencies were not only better-prepared for this recession but also took action early to deal with it. As predicted in the last survey, the independent agencies have narrowed the gap on profitability and, on average, have generated operating profit per head of £2,000 more than the group-owned agencies. Their strength is a sign that the independent agencies are hungry, attracting work and providing strong competition for their group-owned counterparts.

The survey is available to purchase at a price of £460. It is available in hard copy or online. Kingston Smith W1 presents its findings and explores emerging themes at a seminar on 30 November at the RSA. For more details, contact Rebecca Stones at rstones@kingstonsmith.co.uk

TOP 50 ADVERTISING AGENCIES
Rank Rank Agency Year-end Gross Income
latest previous Latest income
(pounds Previous
000s) (pounds
000s)
1 1 M&C Saatchi 31/12/2010 125,144 103,435
2 2 Young & Rubicam Group 31/12/2009 98,614 108,955
3 3 Ogilvy & Mather Group 31/12/2010 79,071 63,953
(Holdings)
4 8 JWT Group 31/12/2010 53,964 44,199
5 10 Publicis 31/12/2010 51,327 28,360
6 6 DDB UK 31/12/2010 51,219 46,234
7 5 Abbott Mead Vickers BBDO 31/12/2010 49,319 46,926
8 7 Saatchi & Saatchi Group 31/12/2010 48,381 44,219
9 4 Bartle Bogle Hegarty 31/12/2010 48,225 55,406
10 11 Leo Burnett 31/12/2010 33,468 26,489
11 9 McCann Erickson 31/12/2009 31,420 51,030
Advertising
12 15 Euro RSCG London 31/12/2010 25,420 21,062
13 12 Wieden & Kennedy UK 31/12/2010 23,788 23,118
14 13 Grey Advertising 31/12/2010 23,753 22,460
15 16 CHI & Partners 30/09/2010 22,624 20,596
16 19 TBWA\London 31/12/2010 22,067 18,050
17 14 McCann Manchester 31/12/2010 20,173 21,231
18 17 Bray Leino 31/12/2010 18,814 19,656
19 24 VCCP 31/12/2010 18,517 15,528
20 25 Mother London1 31/12/2010 17,908 15,480
21 18 Fallon London 31/12/2010 17,334 18,862
22 27 Leagas Delaney 31/12/2010 16,910 14,343
23 - McCann Erickson Central 31/12/2010 16,425 15,404
24 26 Golley Slater Group 31/03/2011 15,092 14,954
25 20 WCRS 31/12/2010 15,017 16,825
26 23 Accord Group 31/03/2011 14,789 16,277
27 32 Tangible UK 31/12/2010 12,131 9,930
28 28 DLKW Lowe2 31/12/2009 11,751 17,063
29 31 The Red Brick Road 31/12/2010 11,577 10,001
30 30 DraftFCB London 31/12/2010 10,566 10,292
31 29 Adventis Group 31/12/2010 10,164 10,810
32 33 Beattie McGuinness 31/12/2009 9,957 9,115
Bungay
33 38 Cogent Elliott 31/12/2010 9,833 6,461
34 - Gratterpalm 31/12/2010 8,523 6,812
35 34 Brahm 31/07/2010 8,463 8,682
36 22 MCBD 31/12/2010 8,238 16,757
37 47 LS Kansas Six3 30/04/2011 7,253 5,076
38 40 CST The Gate4 28/02/2011 6,817 5,823
39 39 Langland Advertising 30/09/2010 6,653 5,830
Design & Marketing
40 35 Lawton Communications 31/12/2010 6,441 7,456
Group
41 42 Albion Brand Communication 31/07/2010 6,232 5,554
42 36 SapientNitro5 31/12/2009 6,059 7,129
43 49 ThinkBDW 31/12/2010 5,875 4,217
44 - Inferno 31/03/2010 5,416 4,898
45 44 Cheethambell JWT 31/12/2010 5,106 5,405
46 50 Big Communications 31/12/2010 5,044 5,682
47 37 TBWA\Manchester 31/12/2010 5,024 6,581
48 43 Advertising Principles 31/03/2010 4,923 5,461
(Group)
49 - Adam & Eve Group 31/12/2010 4,920 3,276
50 - Dentsu UK 31/12/2010 4,600 1,303
Rank Rank Agency Year-end Gross Operating
Income Profit
latest previous Change Latest
(%) (pounds
000s)

1 1 M&C Saatchi 31/12/2010 20.99 12,675
2 2 Young & Rubicam Group 31/12/2009 -9.49 6,853
3 3 Ogilvy & Mather Group 31/12/2010 23.64 4,321
(Holdings)
4 8 JWT Group 31/12/2010 22.09 4,819
5 10 Publicis 31/12/2010 80.98 7,290
6 6 DDB UK 31/12/2010 10.78 9,886
7 5 Abbott Mead Vickers BBDO 31/12/2010 5.10 10,883
8 7 Saatchi & Saatchi Group 31/12/2010 9.41 12,363
9 4 Bartle Bogle Hegarty 31/12/2010 -12.96 8,024
10 11 Leo Burnett 31/12/2010 26.35 6,615
11 9 McCann Erickson 31/12/2009 -38.43 3,748
Advertising
12 15 Euro RSCG London 31/12/2010 20.69 1,585
13 12 Wieden & Kennedy UK 31/12/2010 2.90 1,632
14 13 Grey Advertising 31/12/2010 5.76 3,309
15 16 CHI & Partners 30/09/2010 9.85 3,800
16 19 TBWA\London 31/12/2010 22.25 3,111
17 14 McCann Manchester 31/12/2010 -4.98 2,285
18 17 Bray Leino 31/12/2010 -4.28 2,349
19 24 VCCP 31/12/2010 19.25 885
20 25 Mother London1 31/12/2010 15.68 1,029
21 18 Fallon London 31/12/2010 -8.10 479
22 27 Leagas Delaney 31/12/2010 17.90 1,824
23 - McCann Erickson Central 31/12/2010 6.63 2,648
24 26 Golley Slater Group 31/03/2011 0.92 1,324
25 20 WCRS 31/12/2010 -10.75 3,862
26 23 Accord Group 31/03/2011 -9.14 3,380
27 32 Tangible UK 31/12/2010 22.17 731
28 28 DLKW Lowe2 31/12/2009 -31.13 167
29 31 The Red Brick Road 31/12/2010 15.76 1,635
30 30 DraftFCB London 31/12/2010 2.66 344
31 29 Adventis Group 31/12/2010 -5.98 15
32 33 Beattie McGuinness 31/12/2009 9.24 1,635
Bungay
33 38 Cogent Elliott 31/12/2010 52.19 564
34 - Gratterpalm 31/12/2010 25.12 2,770
35 34 Brahm 31/07/2010 -2.52 864
36 22 MCBD 31/12/2010 -50.84 -524
37 47 LS Kansas Six3 30/04/2011 42.89 2,638
38 40 CST The Gate4 28/02/2011 17.07 282
39 39 Langland Advertising 30/09/2010 14.12 1,364
Design & Marketing
40 35 Lawton Communications 31/12/2010 -13.61 -720
Group
41 42 Albion Brand Communication 31/07/2010 12.21 2,333
42 36 SapientNitro5 31/12/2009 -15.01 -1,300
43 49 ThinkBDW 31/12/2010 39.32 1,195
44 - Inferno 31/03/2010 10.58 597
45 44 Cheethambell JWT 31/12/2010 -5.53 592
46 50 Big Communications 31/12/2010 -11.23 954
47 37 TBWA\Manchester 31/12/2010 -23.66 -670
48 43 Advertising Principles 31/03/2010 -9.85 207
(Group)
49 - Adam & Eve Group 31/12/2010 50.18 1,365
50 - Dentsu UK 31/12/2010 253.03 -2,701
Rank Rank Agency Year-end Operating profit
latest previous Previous Change
(pounds (%)
000s)
1 1 M&C Saatchi 31/12/2010 10,178 24.53
2 2 Young & Rubicam Group 31/12/2009 12,792 -46.43
3 3 Ogilvy & Mather Group 31/12/2010 1,406 207.33
(Holdings)
4 8 JWT Group 31/12/2010 4,189 15.04
5 10 Publicis 31/12/2010 1,915 280.68
6 6 DDB UK 31/12/2010 10,030 -1.44
7 5 Abbott Mead Vickers BBDO 31/12/2010 10,621 2.47
8 7 Saatchi & Saatchi Group 31/12/2010 8,305 48.86
9 4 Bartle Bogle Hegarty 31/12/2010 5,593 43.47
10 11 Leo Burnett 31/12/2010 5,493 20.43
11 9 McCann Erickson 31/12/2009 6,973 -46.25
Advertising
12 15 Euro RSCG London 31/12/2010 915 73.22
13 12 Wieden & Kennedy UK 31/12/2010 3,613 -54.83
14 13 Grey Advertising 31/12/2010 3,950 -16.23
15 16 CHI & Partners 30/09/2010 2,702 40.64
16 19 TBWA\London 31/12/2010 449 592.87
17 14 McCann Manchester 31/12/2010 2,893 -21.02
18 17 Bray Leino 31/12/2010 3,995 -41.20
19 24 VCCP 31/12/2010 1,455 -39.18
20 25 Mother London1 31/12/2010 864 19.10
21 18 Fallon London 31/12/2010 1,655 -71.06
22 27 Leagas Delaney 31/12/2010 990 84.24
23 - McCann Erickson Central 31/12/2010 2,358 12.30
24 26 Golley Slater Group 31/03/2011 1,693 -21.80
25 20 WCRS 31/12/2010 2,254 71.34
26 23 Accord Group 31/03/2011 6,766 -50.04
27 32 Tangible UK 31/12/2010 667 9.60
28 28 DLKW Lowe2 31/12/2009 1,306 -87.21
29 31 The Red Brick Road 31/12/2010 233 601.72
30 30 DraftFCB London 31/12/2010 -2,127 116.17
31 29 Adventis Group 31/12/2010 1,282 -98.83
32 33 Beattie McGuinness 31/12/2009 2,475 -33.94
Bungay
33 38 Cogent Elliott 31/12/2010 192 193.75
34 - Gratterpalm 31/12/2010 1,816 52.53
35 34 Brahm 31/07/2010 727 18.84
36 22 MCBD 31/12/2010 2,137 -124.52
37 47 LS Kansas Six3 30/04/2011 1,072 146.08
38 40 CST The Gate4 28/02/2011 -84 435.71
39 39 Langland Advertising 30/09/2010 1,040 31.15
Design & Marketing
40 35 Lawton Communications 31/12/2010 420 -271.43
Group
41 42 Albion Brand Communication 31/07/2010 1,801 29.54
42 36 SapientNitro5 31/12/2009 1,185 -209.70
43 49 ThinkBDW 31/12/2010 877 36.26
44 - Inferno 31/03/2010 121 393.39
45 44 Cheethambell JWT 31/12/2010 412 43.69
46 50 Big Communications 31/12/2010 1,401 -31.91
47 37 TBWA\Manchester 31/12/2010 -638 -5.02
48 43 Advertising Principles 31/03/2010 181 14.36
(Group)
49 - Adam & Eve Group 31/12/2010 213 540.85
50 - Dentsu UK 31/12/2010 -1,118 -141.59
Source: Kingston Smith W1 has used figures filed at Companies House,
covering periods ending predominantly in 2010, with some 2009 and 2011
year-ends. Definitions: gross income - turnover less direct costs of
sales, if any; employment costs - the total of gross salaries,
employers' NIC and pension costs; operating profit - excluding the
amortisation or
impairment of goodwill. Where it is obvious that significant staff costs
have been included in cost of sales, we have in some cases made a
compensating adjustment based on the data available and our experience.
Notes: 1 Prev. Mother Advertising 2 Prev. Lowe & Partners 3 Prev.
Karmarama 4 Prev. The Gate Worldwide 5 Prev. Nitro
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TOP TEN MEDIA AGENCIES
Rnk Agency Year-end Gross income Operating profit
Latest Change Latest Change
(pounds (%) (pounds (%)
000s) 000s)
1 Aegis Media 31/12/2009 129,757 1.12 24,550 14.60
2 MediaCom UK 31/12/2010 66,036 5.62 14,958 -0.58
3 Mindshare
Media (UK) 31/12/2010 61,817 -27.20 4,549 -65.26
4 OMD Group 31/12/2010 53,674 2.47 13,002 3.97
5 PG Media
Services1 31/12/2010 40,681 -5.17 5,438 1,262.91
6 ZenithOptimedia 31/12/2010 27,638 19.19 2,787 -6.29
7 MEC UK 31/12/2010 25,308 24.69 5,111 -8.17
8 PHD Media 31/12/2010 21,449 9.74 5,278 65.56
9 Mediabrands2 31/12/2010 20,693 -1.61 4,619 4.50
10 Media Planning 31/12/2010 19,725 9.92 1,284 -45.13
Rnk Agency Year-end Operating profit
margin on gross income
Latest Previous
(%) (%)
1 Aegis Media 31/12/2009 18.92 16.70
2 MediaCom UK 31/12/2010 22.65 24.06
3 Mindshare
Media (UK) 31/12/2010 7.36 15.42
4 OMD Group 31/12/2010 24.22 23.88
5 PG Media
Services1 31/12/2010 13.37 0.93
6 ZenithOptimedia 31/12/2010 10.08 21.18
7 MEC UK 31/12/2010 20.20 -26.62
8 PHD Media 31/12/2010 24.61 16.31
9 Mediabrands2 31/12/2010 22.32 21.01
10 Media Planning 31/12/2010 6.51 13.04
Notes: 1 Prev. DMB&B 2 Prev. Initiative Media London

Historically, the media buying sector has been one of the most profitable marketing sectors, even during downturns. This is still the case but, over the past year, media buyers have enjoyed less growth than other sectors. The bottom line has also been hit by the reduction in interest rates. Interest earned on cash balances through tight management of media cashflows is a key component of profit and, due to low interest rates, this has started to fall.

Media buyers continue to generate healthy levels of gross income and profitability, with an increase of 4 per cent in operating profits to £116 million for the top 30. Last year, operating profit fell for the first time since the last recession in 2001. In the most recent results, 13 agencies suffered reductions in operating profit, compared with 15 in 2010.

Operating profit increased overall, but operating profit margin fell from 19.4 per cent to 18.8 per cent. Nonetheless, 11 agencies generated operating profit margins in excess of 25 per cent. Twenty-one agencies achieved the Kingston Smith W1 target benchmark profit margin of 15 per cent, and all but two achieved at least 5 per cent.

Productivity remained healthy at a similar level to the previous year, with an average gross income per head at £105,000. This is still above Kingston Smith W1's benchmark figure of £100,000, but a slight decrease from last year's figure of £106,000. Within the top 30, 18 agencies generated gross income per head in excess of £100,000, with ten exceeding £120,000 per head.

Gross income remained static, but staff and other overheads increased, and so profitability reduced overall. Employment costs per head increased by 3 per cent despite a small increase in staff numbers of 1 per cent. Other non-staff operating costs increased by 4 per cent per employee, but this was not as high as the increase in overheads suffered by other sectors.

Independent agencies continue, on the whole, to be smaller as they cannot achieve the sheer scale of output of group-owned agencies. Independents contribute just 11 per cent (2010: 13 per cent) market share of the top 30's gross income. But they are profitable and increased growth in both gross income and profitability more than the group-owned agencies. Independent agencies' gross income increased by 13 per cent compared with a fall of 1 per cent for the group-owned agencies.

The top 30 media buying agencies generated £8 million of net interest income, representing 7 per cent of the profit before tax. This is a big decrease on last year's £14 million, or 12 per cent of profit before tax. Interest has traditionally been a key source of profit for media buyers. With interest rates remaining at record lows, it is unlikely to increase significantly in the next few years.

Media buyers continue to hold their ground in light of the recession, but margins are under threat as operating costs are growing faster than revenue and interest rates remain low. Maybe media buyers need to find new income streams that would provide higher gross margins going forward.

Cliff Ireton, partner, Kingston Smith W1

TOP TEN DIGITAL AGENCIES
Rnk Agency Year-end Gross income Operating profit
Latest Change Latest Change
(pounds (%) (pounds (%)
000s) 000s)
1 Progressive
Digital
Media Group 31/12/2010 42,776 25.80 -4,475 -70.41
2 20:201 31/03/2011 35,971 1.44 1,124 -51.34
3 AKQA 31/12/2010 34,398 15.89 4,296 61.20
4 Razorfish UK 31/12/2010 15,569 -2.80 473 49.21
5 Dare Digital 31/12/2010 14,802 0.04 196 -90.17
6 Profero 31/12/09 14,492 19.33 -28 -106.78
7 LBi2 31/12/2010 12,427 -6.84 3,716 -43.23
8 Amaze 31/12/2010 11,086 14.25 393 -25.00
9 Investis 31/12/2010 10,461 -0.71 1,178 29.17
10 Reading Room 31/03/2010 9,406 -2.21 269 180.21
Rnk Agency Year-end Operating profit
margin on gross income
Latest Previous
(%) (%)
1 Progressive
Digital
Media Group 31/12/2010 -10.46 -7.72
2 20:201 31/03/2011 3.12 6.51
3 AKQA 31/12/2010 12.49 8.98
4 Razorfish UK 31/12/2010 3.04 1.98
5 Dare Digital 31/12/2010 1.32 13.47
6 Profero 31/12/09 -0.19 3.40
7 LBi2 31/12/2010 29.90 49.07
8 Amaze 31/12/2010 3.55 5.40
9 Investis 31/12/2010 11.26 8.66
10 Reading Room 31/03/2010 2.86 1.00
Notes: 1 Prev. Digital Marketing Group 2 Prev. Bigmouthmedia

Times remain tough for digital agencies, despite continued growth for the sector. Merger and acquisition activity has increased: Bigmouthmedia and LBi's merger, Progressive Digital Media's purchase of the market research business Canadean and DraftFCB's acquisition of Blue Barracuda are prime examples.

Revenues increased by 8 per cent across the digital sector, making digital the fasting-growing sector of all the marketing disciplines reviewed in our survey. This continued growth suggests client spend is still gravitating to online and digital communication, which is not unexpected given the increasing importance of social media and mobile content, where there are further opportunities to be seized.

Independent agencies continued to grow faster than their group-owned counterparts, achieving a 13 per cent increase in fees compared with a 6 per cent rise for group-owned agencies.

Digital agencies still struggle to be as profitable as their more traditional marketing peers. Operating profit margins fell from 7.5 per cent to 4.7 per cent, which is disappointing news given fee income had risen. A combination of a 9 per cent staff costs increase and an 8 per cent rise in overheads more than eroded the increase in income, resulting in the fall in margin. Just five agencies achieved or bettered Kingston Smith W1's target for a well-run agency of at least 15 per cent operating profit margin.

Operating profit margins were higher across the independent agencies, at 8 per cent on average, compared with a margin of just 2 per cent for group-owned agencies. It may be that the networks see digital as a way to capture a more integrated or fuller brief from clients and therefore are willing to suffer such low margins on their digital work. Equally, some independent digital agencies are starting to provide more strategic advice, so competing more against the networks' increasingly wider offering.

Employment costs across the sector rose by 9 per cent and total headcount by 10 per cent. The key ratio of employment costs to gross income remained at just below 62 per cent, still some way short of the target ratio of 55 per cent. A third of agencies managed to equal or better the target, and with the cost of living increasing in recent times and a downward pressure on fees from clients, agencies will continue to face an uphill battle to reduce this ratio.

Productivity, measured by gross income per head, fell 1 per cent to £72,911. Nearly a third of agencies achieved or bettered our £100,000 per head target.

Operating profit per head, the combination of both productivity and profitability, fell by 5 per cent to £3,400 per head. Digital remains the poorest-performing of the marketing sectors in terms of operating profit per head.

Although fee levels of digital agencies have continued to grow during difficult economic conditions, this has come at a price. The increased revenues have been outstripped by increased costs, and margins have consequently declined. As well as getting clients to understand the value of digital, agencies must avoid over-servicing and keep a closer rein over costs in order to get closer to the margins achieved by the more traditional marketing agencies.

Richard Heap, partner, Kingston Smith W1

TOP TEN BY OPERATING PROFIT MARGIN ON GROSS INCOME
Rnk Company name Latest Previous Change
(%) (%) (%)
1 Albion Brand
Communication 37.44 32.43 15.45
2 LS Kansas Six1 36.37 21.12 72.22
3 Gratterpalm 32.50 26.66 21.91
4 Adam & Eve Group 27.74 6.50 326.71
5 WCRS 25.72 13.40 91.97
6 Saatchi & Saatchi
Group 25.55 18.78 36.06
7 Accord Group 22.85 41.57 -45.02
8 Abbott Mead
Vickers BBDO 22.07 22.63 -2.50
9 Langland Advertising
Design & Marketing 20.50 17.84 14.93
10 ThinkBDW 20.34 20.80 -2.19
Notes: 1 Prev. Karmarama
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BOTTOM TEN BY OPERATING PROFIT MARGIN ON GROSS INCOME
Rnk Company name Latest Previous Change
(%) (%) (%)
41 CST The Gate1 4.14 -1.44 386.76
42 DraftFCB London 3.26 -20.67 115.75
43 Fallon London 2.76 8.77 -68.51
44 DLKW Lowe2 1.42 7.65 -81.43
45 Adventis Group 0.15 11.86 -98.76
46 MCBD -6.36 12.75 -149.88
47 Lawton Communications
Group -11.18 5.63 -298.44
48 TBWA\Manchester -13.34 -9.69 -37.56
49 SapientNitro3 -21.46 16.62 -229.08
50 Dentsu UK -58.72 -85.80 31.57
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Notes: 1 Prev. The Gate Worldwide 2 Prev. Lowe & Partners 3 Prev. Nitro
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TOP TEN BY REVENUE PER HEAD
Rnk Company name Latest Previous Change
(%) (%) (%)
1 Grey Advertising 174,654 152,789 14.31
2 DLKW Lowe1 172,809 145,838 18.49
3 WCRS 166,856 114,456 45.78
4 CHI & Partners 160,454 145,042 10.63
5 LS Kansas Six2 154,319 133,579 15.53
6 Leo Burnett 148,088 137,249 7.90
7 Saatchi & Saatchi
Group 147,954 143,104 3.39
8 Abbott Mead
Vickers BBDO 147,221 139,246 5.73
9 Mother London3 146,787 138,214 6.20
10 The Red Brick Road 146,544 144,942 1.11
>
Notes: 1 Prev. Lowe & Partners 2 Prev. Karmarama 3 Prev. Mother
Advertising
>
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BOTTOM TEN BY REVENUE PER HEAD
Rnk Company name Latest Previous Change
(%) (%) (%)
41 Golley Slater Group 66,193 62,569 5.79
42 Gratterpalm 64,083 61,927 3.48
43 Adventis Group 63,925 72,550 -11.89
44 Accord Group 63,472 62,126 2.17
45 Cogent Elliott 62,631 61,533 1.78
46 TBWA\Manchester 59,810 55,771 7.24
47 Bray Leino 57,535 59,027 -2.53
48 Advertising Principles
(Group) 56,586 64,247 -11.92
49 Brahm 47,545 45,695 4.05
50 Lawton Communications
Group 46,338 52,879 -12.37
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TOP TEN DIRECT MARKETING/SALES PROMOTION AGENCIES
Rnk Agency Year-end Gross income Operating profit
Latest Change Latest Change
(pounds (%) (pounds (%)
000s) 000s)
1 Rapp 31/12/2010 38,110 24.80 2,184 11.03
2 Bezier 30/04/2010 31,329 -21.75 3,019 -23.78
3 Gyro
Communications1 31/12/2010 28,616 -7.18 -4,318 -220.80
4 Motivcom 31/12/2010 27,776 21.96 4,463 31.61
5 Proximity London 31/12/2010 22,006 -9.93 2,698 -28.09
6 The Marketing
Store Worldwide2 31/12/2010 20,844 209.17 2,645 371.48
7 TMW 31/03/2010 19,142 -14.76 1,751 -45.71
8 Iris London 31/12/09 18,763 -5.59 953 -12.81
9 EHS Brann 31/12/2010 18,244 10.31 2,146 12,022.22
10 Chemistry
Communications
Group 30/11/2010 13,823 7.25 1,629 0.25
Rnk Agency Year-end Operating profit
margin on gross income
Latest Previous
(%) (%)
1 Rapp 31/12/2010 5.73 6.44
2 Bezier 30/04/2010 9.64 9.89
3 Gyro
Communications1 31/12/2010 -15.09 -4.37
4 Motivcom 31/12/2010 16.07 14.89
5 Proximity London 31/12/2010 12.26 15.36
6 The Marketing
Store Worldwide2 31/12/2010 12.69 8.32
7 TMW 31/03/2010 9.15 14.36
8 Iris London 31/12/09 5.08 5.50
9 EHS Brann 31/12/2010 11.76 -0.11
10 Chemistry
Communications
Group 30/11/2010 11.78 12.61
Notes: 1 Prev. GyroHSR 2 The Marketing Store Worldwide (Europe)

The top 40 direct marketing and sales promotion agencies reported modest growth in gross income but flat profits. In their most recent filed accounts, gross income grew by 4.1 per cent overall, despite 18 of the top 40 companies reporting a fall in income. The DM/SP sector is well-placed to deal with continuing challenges as the top 40 have improved their balance sheets, with total net cash and net current assets increasing by 78 per cent and 10 per cent respectively.

Despite growth in gross income, the total operating profit generated by the top 40 DM/SP agencies increased by 0.1 per cent. The average operating profit margin improved slightly to 8.6 per cent. While this second consecutive improvement is encouraging given the economic climate, we shouldn't be celebrating just yet as, at its peak in 2000, the average operating profit margin of the sector was 15.6 per cent.

Employment costs are the biggest expense for marketing agencies and controlling these is key to profitability. Employment costs have been contained, but non-staff overheads have risen slightly. On average, staff costs consumed 60 per cent of gross income (down from 62 per cent in last year's survey). We recommend that employment costs take up no more than 55 per cent of a company's gross income - a target that was met by nine of the top 40 agencies. This goes some way to explaining the generally poor operating profit margins being reported.

Productivity, as measured by gross income per head, has improved marginally by 1.3 per cent since the last survey and now stands at £83,547. Employment costs per head have remained unchanged at £50,493, reflecting the fact that pay rises have been limited. Productivity has improved slightly and employment costs contained, but non-staff overheads have crept up, meaning no overall improvement in profit. Given the ongoing economic uncertainty, it has never been more important that agencies take the necessary steps to keep staff costs in line with fee income levels, so that margins can start to return to acceptable levels.

The total directors' remuneration within the top 40 has increased by 7 per cent to £27.2 million. Individually, 24 of the 38 agencies that disclosed directors' remuneration saw the total amount paid to directors increase compared with their previous set of results. This included ten agencies where total directors' remuneration has increased despite a fall in gross income, and 13 agencies that have increased directors' remuneration while cutting other staff costs.

DM/SP agencies have delivered a slightly improved set of results. While profitability has improved very slightly, this is against the backdrop of a run of disappointing results in the last few years and, for that reason, the results still remain at near historic lows and there is much room for improvement. Agencies need to show good management and leadership skills in the forthcoming year in order to drive forward to further improvement.

Cliff Ireton, partner, Kingston Smith W1

TOP TEN BY EMPLOYMENT COSTS PER HEAD
Rnk Company name Latest Previous Change
(pounds) (pounds) (%)
1 DLKW Lowe1 118,912 82,906 43.43
2 Ogilvy & Mather
Group (Holdings) 91,106 73,053 24.71
3 CHI & Partners 90,574 89,218 1.52
4 SapientNitro2 86,574 64,531 34.16
5 Mother London3 81,779 83,384 -1.93
6 Euro RSCG London 79,780 75,988 4.99
7 WCRS 77,189 62,129 24.24
8 Beattie McGuinness
Bungay 76,026 69,274 9.75
9 JWT Group 75,875 83,829 -9.49
10 Wieden & Kennedy UK 75,797 80,256 -5.56
>
Notes: 1 Prev. Lowe & Partners 2 Prev. Nitro 3 Prev. Mother Advertising
>
BOTTOM TEN BY EMPLOYMENT COSTS PER HEAD
Rnk Company name Latest Previous Change
(pounds) (pounds) (%)
41 Cogent Elliott 43,803 45,305 -3.32
42 Cheethambell JWT 42,149 43,276 -2.61
43 ThinkBDW 41,465 42,086 -1.48
44 Advertising Principles
(Group) 39,862 48,894 -18.47
45 TBWA\Manchester 38,690 36,059 7.30
46 Lawton Communications
Group 38,187 37,553 1.69
47 Accord Group 37,519 33,351 12.50
48 Bray Leino 35,563 35,691 -0.36
49 Brahm 35,348 32,484 8.82
50 Gratterpalm 34,030 34,545 -1.49
>
>
UK QUOTED GROUPS - HIGHEST-PAID DIRECTORS
Rnk Company name Latest Previous Change
Director (pounds) (pounds) (%)
1 WPP Group1
Sir Martin Sorrell 4,233,000 2,705,000 56.49
2 Aegis Group2
Jerry Buhlmann 1,224,000 1,117,258 9.55
3 Chime Communications
Lord Bell 1,136,752 974,000 16.71
4 Huntsworth3
Lord Chadlington 683,000 694,592 -1.67
5 Asia Digital Holdings4
Adrian Moss 588,000 673,000 -12.63
>
Notes: 1 Includes bonus of £1.9 million (£406k previous) and
£950k (£546k previous) of incentives paid in shares 2
Includes annual bonus of £369k (£334k previous) 3 In 2009,
Lord Chadlington was awarded a bonus of £449,250, which he has
waived in full 4 Includes £240k (pounds nil previous) incentives
paid as shares
>
>
HIGHEST-PAID AGENCY DIRECTORS
Rnk Company name Latest Previous Change
Director (pounds) (pounds) (%)
1 Abbott Mead Vickers BBDO
undisclosed 708 615 15.12
2 Wieden & Kennedy UK
undisclosed 647 606 6.77
3 Leo Burnett
undisclosed 630 456 38.16
4 JWT Group
undisclosed 584 514 13.62
5 Ogilvy & Mather Group
(Holdings)
undisclosed 553 425 30.12
6 Bartle Bogle Hegarty
undisclosed 525 935 -43.85
7 Advertising Principles
(Group)
undisclosed 510 316 61.39
8 DDB UK
undisclosed 502 468 7.26
9 CHI & Partners
undisclosed 499 363 37.47
10 The Red Brick Road
undisclosed 464 494 -6.07
>
>
TOP TEN INDEPENDENT GROUPS
Rnk Agency Year-end Gross income Operating profit
Latest Change Latest Change
(pounds (%) (pounds (%)
000s) 000s)
1 BBH Holdings 31/12/2010 95,713 17.12 21,193.00 411.78
2 The Engine Group 31/12/2010 73,909 25.05 301.00 -94.86
3 Bezier
Acquisitions 30/04/2010 48,741 -23.80 289.00 142.13
4 Mother Holdings 31/12/2010 47,441 29.21 4,816.00 92.49
5 Iris Nation
Worldwide 31/12/09 44,472 16.72 -1,182.00 -111.07
6 The Imagination
Group 31/08/2010 37,042 11.44 2,113.00 243.45
7 AKQA 31/12/2010 34,398 15.89 4,296.00 61.20
8 Daniel J Edelman 30/06/2010 29,818 3.47 1,703.00 -43.40
9 Gyro
Communications1 31/12/2010 28,616 -7.18 -4,318.00 -220.80
10 Loewy Group 31/12/2010 26,919 -12.18 -554.00 63.91
Rnk Agency Year-end Operating profit
margin on gross income
Latest Previous
(%) (%)
1 BBH Holdings 31/12/2010 22.14 336.98
2 The Engine Group 31/12/2010 0.41 -95.89
3 Bezier
Acquisitions 30/04/2010 0.59 155.29
4 Mother Holdings 31/12/2010 10.15 48.97
5 Iris Nation
Worldwide 31/12/09 -2.66 -80.84
6 The Imagination
Group 31/08/2010 5.70 228.72
7 AKQA 31/12/2010 12.49 39.10
8 Daniel J Edelman 30/06/2010 5.71 -45.30
9 Gyro
Communications1 31/12/2010 -15.09 -245.60
10 Loewy Group 31/12/2010 -2.06 58.90
Notes: 1 Prev. GyroHSR

This is the second year that the full effect of the post-credit crunch recession has been reflected within the top 50 independent marketing services groups' results, and generally they have weathered the storm well. Management teams clearly reacted quickly and decisively to the recession and the results here indicate the marketing sector is generally well and professionally run. Revenue grew, profit improved and so did profit margin.

Gross income rose by 9 per cent, after negligible growth last year. Individually, 37 groups reported an increase in gross income.

Operating profit grew by 22.7 per cent despite only a 9.2 per cent increase in gross income. Eleven groups reported an increase in operating profits of 100 per cent or more. For Bezier Acquisitions and The Imagination Group, this represented a swing from an operating loss to an operating profit. Encouragingly, 31 groups generated an operating profit exceeding £1 million, with a further six surpassing £500,000. At this level of operating profit, the agencies are a very attractive acquisition target and the merger and acquisition market is more active. It wasn't all good news, as 23 groups reported a reduction in operating profit, with 12 of these reporting profits down by more than half.

The average operating profit margin across the top 50 was 9.7 per cent, compared with 8.6 per cent in the comparative year. Half of the top 50 reported a better operating profit margin than in their previous year. Nine groups generated an operating profit margin in excess of 20 per cent, although six groups reported an operating loss. However, it was encouraging to see that the majority of groups now achieved margins of above 10 per cent.

One feature of the businesses generating the highest margin is that they have generally contained staff costs effectively. Staff costs should absorb no more than about 55 per cent of gross income ideally; however, this year, the ratio for the top 50 was 60 per cent. This was a small improvement on the prior year's 61.3 per cent. Just 14 groups managed to hit 55 per cent or less, and a further 11 contained staff costs to within 60 per cent.

Of the nine agencies that achieved margins of 20 per cent or more, seven had managed to keep their staff costs within this 55 per cent target. In fact, four of them held staff costs to within 50 per cent of gross income.

Productivity is measured by how much revenue is generated by each person within the business. In a marketing services business, the income, costs and profit measured per person are key performance indicators.

In a well-run marketing services business, gross income per head of between £80,000 and £120,000 should be achievable. Overall, 33 groups were in or exceeded our target range of gross income per head, which is encouraging. On average, productivity increased by 3.5 per cent to £89,838.

Total employee numbers across the top 50 increased by 5.5 per cent, with staff numbers rising at 31 groups. Employment costs increased by 6.6 per cent, compared with the 9.3 per cent improvement in gross income, which meant that, even with a 5 per cent increase in other costs per head, there was a 16 per cent improvement in operating profit per head to £8,690.

Following a dip in margins last year, the top 50 showed improvement, although, for the fourth year in a row, they remain less than 10 per cent. Our survey last reported such low levels in 1996. It is clear that the independents still need to find ways of working more efficiently with clients in order to improve margins.

Ian Graham, partner, Kingston Smith W1

This article was first published on campaignlive.co.uk

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