Dentsu expects that improving working conditions will eat into 2018 profits

The Japanese advertising giant has forecast a decline in profit in 2018 due to continuing investment in its working environment reform program, which it intends to complete by the end of the year.

Dentsu expects that improving working conditions will eat into 2018 profits

The company expects its overall operating profit margin to decline 3% to 15.7%. In Japan, where the reforms are concentrated, it anticipates a margin of 19.8%, a fall of 4.7% on 2017.

Operating profit for 2018 is predicted to fall to ¥112.9bn (£76m) from almost ¥137.4bn in 2017, a year-on-year drop of 17.8%. Dentsu projects net profit at ¥61.6bn from almost ¥105.5bn, a 41.6% fall.

Dentsu began implementing its reform policy in late 2016 following its implication in the suicide of an employee due to extreme working conditions.

The company faced a raid by the Tokyo Labour Bureau in October 2016 leading to an open trial for labour practice violations.

On 22 September, Dentsu's president and chief executive Toshihiro Yamamoto admitted to a court hearing that the company had failed to act to rein in a culture of illegal overtime.

Here is a timeline of the events.

In Dentsu’s statement, Yamamoto made it clear that the working environment reforms were a priority for 2018. He also noted that clients are "looking for a more data-driven approach with greater insights and addressability", which applies to Japan as well as other markets.

In 2017, Dentsu Group posted gross profit of more than ¥877.6bn, up 11.2% on 2016. Dentsu Aegis Network (DAN) led with record growth of 17.1%, while Japan grew 0.4%.

Organic gross profit growth totalled 0.1% for the group. It fell 0.3% in Japan and 0.4% for DAN. Dentsu blamed a lack of major events and its investment in reforms for the decline in Japan.

Things improved in Q4, with growth of 5.5% in Japan and 1.2% for DAN. Dentsu attributed this to involvement in the Tokyo Motor Show and new business respectively. The company said it expects market conditions and advertising spend to strengthen in 2018.

Digital continued to have a bigger impact. Digital business made up 43.2% of total gross profit, up from 33.3% in 2016. It accounted for 22.2% in Japan and 57.9% for DAN. International business made up 58.8% of gross profit.

This article first appeared in Campaign Asia-Pacific