Ian Graham, partner and media specialist, Kingston Smith
The results of the 2018 Kingston Smith annual survey confirms that the marketing services industry continues to prove itself as robust and resilient amid continuing Brexit chaos. Despite growing concern over reduced client budgets and unpredictable levels of activity, collectively the sector continues to show year-on-year growth in gross income. However, as we have seen in recent years, agencies are still struggling to translate this into increased profit margins. Operating profit margins remain low at 12.0%, with the top 50 independent agencies (ranked by gross income across all sectors) only managing to generate average operating profit margins of 9.5%.
We reviewed the financial performance of eight distinct sectors: six individual disciplines – advertising, branding and design, digital, marketing and sales promotion, media buying and public relations – as well as the UK quoted groups and independent marketing services groups (whether individual or mixed discipline). The accounts that are reviewed are those that were filed at Companies House on, or before, 30 September 2018 and, in the majority of cases, cover the calendar year to 31 December 2017.
Agencies managed to achieve growth across the board this year with total gross income increasing by 7.1% and all eight sectors achieving growth in gross income in the year. The top 50 independents were the only group to achieve double-digit growth, which was consistent with the three previous years at 10.3%. There was a reasonable amount of merger and acquisition activity that boosted growth in this sector, but improved service offerings that capture the changing marketing services landscape also contributed to the results.
The marketing and sales promotion sector remains stubbornly flat with 1.2% growth and, following the WPP-driven 17.4% growth seen in the quoted agencies last year, growth in gross income for this sector is back down to a slightly more sustainable 6.6%. Special mention, however, goes to the advertising sector, which, following a stagnant 2016, achieved a slightly more encouraging 4.0% growth in gross income in the year.
Operating profit margin is a key performance indicator for agencies. The Kingston Smith target for any marketing services business is an operating profit margin of 15%; however, for premium businesses or those with a specialism, this should be closer to 20%. Although none of the individual sectors achieved the minimum target, the branding and design sector was the closest with an operating profit margin of 14.9%. Other sectors have struggled with rising staff and freelance costs, notably media buyers, where the changing model for that sector has depressed operating profit margins to the lowest ever average of 12.2%.
Last year, the industry prepared for what surely would be a continuing shortage of top-level creative talent with the increased pressures surrounding employment and retention of key staff resulting in staff costs escalating. In line with expectations, employment costs per head across all the sectors has continued to increase this year, reaching a high of £62,415.
Despite relying heavily on freelancers, the digital sector looks to have made a notable investment in key workers this year, with a significant 16.5% increase in employment costs per head to £63,964, bringing this sector’s employment costs above average for the first time. We have yet to see what impact a post-Brexit Britain will have, but it’s likely to further reduce access to talent, making it even more expensive. All this alongside the prospect of having to put freelancers onto the payroll from April 2019 as the off-payroll working rules come in to effect likely means further financial strain. Whether it will lead to a cooling off of what will surely be a smaller freelance market remains to be seen.
One of the key ratios for any agency to monitor is the proportion of fee income spent on staff costs. The Kingston Smith target ratio has historically been 55%, although a more realistic target in the current climate including freelancers would be 60%. The amount of fee income spent on staff costs actually reduced again this year by 1.9% to 58.6%. However, the modest improvement may be more of a reflection of businesses being more reliant on more expensive freelance talent rather than any easing up of the upwards pressure on people costs caused by on-going skills shortages.
Despite operating profit margins remaining low, productivity is high with gross income per head across the sectors increasing by 6.8% to £107,012. The digital sector achieved the most significant improvements with gross income per head, increasing to £126,240 and exceeding the Kingston Smith minimum benchmark of £100,000 by some way. Since total employed staff numbers across all the sectors have remained fairly consistent, we can safely conclude that this increased revenue growth has partially been achieved through increased freelancer use alongside efficiency gains from existing staff.
This year it is the non-staff costs that have had the largest negative impact on operating profit margins. The top 50 independent agencies alone saw a huge 21.4% increase in non-staff costs, which is primarily due to large restructuring costs, overseas investment and increased rental costs, particularly in the London based agencies. This is in addition, of course, to the increased reliance on expensive freelancers.
Operating profit generated across the quoted groups decreased for the first time since 2013, falling by 6.6%. As always, the quoted sector is dominated by WPP. Looking at historical figures over the past 10 years, it becomes clear that WPP is outperforming the rest of the sector and has boosted the average margin. With WPP stripped out, we can see that the remaining groups have struggled to return to their pre-recession highs when operating profit margins were consistently hitting 15%.
Promisingly, the marketing services agencies have continued to achieve growth in gross income despite the challenging and unpredictable market conditions. However, with the industry struggling to convert gross income into improved profit margins, operating profit margins remain low and we do not expect to see improvements in the near future due to pressures surrounding talent shortages and staff costs.
Top 50 ad agencies by gross income
|Company name||Year end||Latest||Previous||Change|
|1||McCann WorldGroup UK||31/12/2017||182,543||158,887||14.89|
|2||Ogilvy & Mather Group (Holdings) Limited||31/12/2017||121,735||120,591||0.95|
|3||Young & Rubicam Group Limited||31/12/2017||119,478||110,299||8.32|
|4||DDB UK Investments Limited||31/12/2017||97,206||94,780||2.56|
|5||Engine Acquisition Limited||31/12/2017||91,856||89,479||2.66|
|6||The & Partners Group Limited||31/12/2017||70,277||52,331||34.29|
|7||TBWA UK Group Ltd||31/12/2017||61,356||70,355||(12.79)|
|8||Abbott Mead Vickers.BBDO Limited||31/12/2017||60,153||59,918||0.39|
|9||Saatchi & Saatchi Group Ltd||31/12/2017||59,163||57,208||3.42|
|10||VCCP Group LLP||31/12/2017||57,182||54,048||5.80|
|11||BBH Partners LLP||31/12/2017||53,963||57,813||(6.66)|
|13||Grey Advertising Limited||31/12/2017||42,121||51,815||(18.71)|
|15||Oliver Marketing Limited||31/12/2017||35,767||29,354||21.85|
|16||Leo Burnett Limited||31/12/2017||32,928||31,382||4.93|
|17||Wieden & Kennedy UK Limited||31/12/2017||30,207||26,374||14.53|
|18||J. Walter Thompson Group Limited||31/12/2017||26,871||35,154||(23.56)|
|19||Havas Worldwide London Limited||31/12/2017||26,477||23,252||13.87|
|20||Mother London Limited||31/12/2017||23,250||21,677||7.26|
|21||FCB Inferno Limited||31/12/2017||21,697||21,770||(0.34)|
|23||M&C Saatchi (UK) Limited||31/12/2017||16,097||20,020||(19.60)|
|24||Mullenlowe London Limited||31/12/2017||15,985||20,406||(21.67)|
|25||Bray Leino Limited||31/12/2017||15,968||16,535||(3.43)|
|26||Cello Signal Limited||31/12/2017||15,641||10,963||42.67|
|27||Cheil Europe Limited||31/12/2017||14,738||11,327||30.11|
|28||Langland Advertising Design and Marketing Limited||31/12/2017||12,929||11,130||16.16|
|30||AKA Promotions Limited||25/03/2017||12,232||11,732||4.26|
|31||HPS Marketing Communications Limited||31/10/2016||10,819||9,544||13.36|
|32||Accord Marketing Limited||31/03/2018||9,401||10,181||(7.66)|
|33||BMB London LLP||31/12/2017||9,346||6,463||44.61|
|34||Golley Slater Group Limited||31/03/2018||9,324||9,531||(2.17)|
|35||Connect Advertising & Marketing LLP||31/05/2017||8,598||8,163||5.33|
|36||Big Dog Agency Limited||31/12/2017||8,458||9,143||(7.49)|
|37||Home Marketing Limited||31/12/2017||8,410||8,904||(5.55)|
|38||Leagas Delaney - London Limited||31/12/2017||7,234||7,324||(1.23)|
|39||Aylesworth Fleming Limited||30/06/2017||6,883||7,677||(10.34)|
|40||Lawton Communications Group Limited||31/12/2017||6,865||6,030||13.85|
|41||Krow Communications Limited||31/12/2017||6,772||7,220||(6.20)|
|42||Dentsu McGarryBowen UK Limited||31/12/2016||6,433||6,227||3.31|
|43||Wednesday London Limited||31/12/2017||6,035||6,435||(6.22)|
|44||The Red Brick Road Limited||31/12/2017||6,001||6,414||(6.44)|
|45||Maverick Advertising & Design Limited||30/06/2017||5,850||5,702||2.60|
|46||Innocean Worldwide UK Limited||31/12/2017||5,580||5,052||10.45|
|47||Fallon London Limited||31/12/2017||5,381||6,779||(20.62)|
|48||St Luke's Communications Limited||31/12/2017||5,304||5,652||(6.16)|
|49||Cogent Elliott Limited||31/12/2017||4,935||5,132||(3.84)|
|50||Anomaly London LLP||31/12/2016||4,409||2,716||62.33|
Top 10 independent agencies
|Gross income||Operating profit|
|Company name||Year end||Latest||Previous||Change||Latest||Previous||Change|
|1||Engine Acquisition Limited||31/12/2017||91,856||89,479||2.66||8,423||1,839||358.02|
|2||The Imagination Group Limited||31/08/2017||81,305||75,727||7.37||6,619||7,090||(6.64)|
|3||Digital Unlimited Group Ltd||31/03/2017||76,453||82,645||(7.49)||3,007||8,672||(65.33)|
|4||Inside Ideas Group Ltd||31/12/2017||73,576||46,789||57.25||191||294||(35.03)|
|5||HH Global Limited||31/03/2018||73,302||65,579||11.78||9,607||11,494||(16.42)|
|6||The & Partners Group Limited||31/12/2017||70,277||52,331||34.29||7,961||5,636||41.25|
|7||Daniel J. Edelman Limited||30/06/2017||58,087||58,507||(0.72)||3,920||4,866||(19.44)|
|8||Mother Parent Limited||31/12/2017||53,160||48,248||10.18||4,159||1,258||230.60|
|9||Lewis Communications (Holdings) Limited||31/07/2017||46,183||45,760||0.92||4,156||4,317||(3.73)|
|10||MSQ Partners Group Limited||28/02/2018||44,002||45,269||(2.80)||3,062||2,589||18.27|
Engine secured the highest fee income of all the independent agencies last year, with a 2.66 per cent increase to £91,856,000. It was followed by The Imagination Group, Digital Unlimited, Inside Ideas and HH Global.
Top 10 direct marketing and sales promotion agencies
|Gross income||Operating profit||Operating profit : gross income|
|Company name||Year end||Latest||Change||Latest||Change||Latest||Previous|
|1||Communisis UK Limited||31/12/2017||140,561||6.40||20,179||14.78||14.36||13.31|
|2||HH Global Limited||31/03/2018||73,302||11.78||9,607||(16.42)||13.11||17.53|
|3||APS Group Limited||31/01/2017||42,880||16.41||4,661||763.15||10.87||1.47|
|4||Geometry Global (UK) Limited||31/12/2017||30,723||4.29||5,777||142.94||18.80||8.07|
|6||Proximity London Limited||31/12/2017||26,380||(3.21)||5,267||(3.85)||19.97||20.10|
|7||Iris London Limited||31/12/2017||25,912||(6.62)||3,482||(28.92)||13.44||17.65|
|8||MRM Worldwide (UK) Limited||31/12/2017||19,650||4.62||2,690||4.55||13.69||13.70|
|9||Tullo Marshall Warren Limited||31/03/2017||19,521||(10.64)||1,219||(46.68)||6.24||10.46|
|10||The Marketing Store Worldwide (Europe) Limited||31/12/2017||18,890||7.89||2,525||(37.73)||13.37||23.16|
Esther Carder, partner and media specialist, Kingston Smith
2017 was a disappointing year for marketing and sales promotion agencies. Despite a small increase in gross income (or fee income) and lower staff costs, the top 40’s operating margin has decreased from last year’s high of 11.4% to 10% this year, as agencies fail to keep other operating costs under control.
On average, the top 40 has seen gross income rise by a disappointing 1.2%, as roughly half the
consultancies saw an increase while the other half cancelled most of this increase out with reductions.
We believe that a well-run agency should be generating a minimum operating margin of 15% with a target of 20%. This year, 12 of the top 40 managed to achieve above 15%, up from 11 in the previous year. Just four consultancies managed margins of above 20% compared with five in the previous year. Overall, six companies were actually loss-making.
The average gross income per head increased to £86,089 from £84,378 last year, which is roughly in line with inflation. However, we believe a well-run agency should target gross income per head of at least £100,000. The number of agencies exceeding this target rose from 14 to 15 this year. The real measure of financial performance, as always, is operating profit per head, which combines both productivity and profitability of the agency. This figure decreased by 13.1% to an average of £8,636.
While fee income per head generated at the group agencies was more than the independents, so
was their average employment cost per head, at around £7k more at £52k per head.
This year, the top 40 saw directors’ remuneration increase by 1.6% overall. The Marketing Store,
Elvis and APS Group all saw their highest-paid director’s remuneration at least double. This made
sense for APS, as profits significantly improved – although the same can’t be said for the other two,
whose performance significantly worsened.
In an uncertain UK market, revenue growth has been fairly static. Agencies have done well to control
their staff costs, but this looks to have been supplemented with the use of freelancers, meaning that
ultimately operating profit margins decreased. Given rent and office space normally make up the
lion’s share of other expenses, agencies may find that the agile working culture that is so attractive
to millennials also helps them to use their office space more effectively and increase margins.