Reported revenues, or fee income, for the Top 30 media buyers has for the first time exceeded £1bn following growth of 11.1%. This suggests that, finally, the investment of recent years is delivering the growth the sector had hoped for. The growth in revenues was widespread with some 25 of the Top 30 seeing an increase.
The good news is that much of this growth fell to the bottom line with operating profits increasing by 17.2%. Therefore the sector continued to recover with operating profit margins improving for the third year running to 14.5%, an improvement on the 2016 and 2015 surveys of 13.9% and 12.8%, respectively. Despite the upward trend, this margin is well below the 20% margin seen in our 2009 survey before the recession hit.
In recent years, media-buying agencies have invested heavily in talent, although this year staff numbers increased by just 4% which was much less than the growth in revenues
We recommend that agencies should target an operating profit margin of 20%, with a minimum of 15%. Some 21 agencies exceeded our minimum target with 15 exceeding our upper end target. However there was a significant fall in the number of agencies with margins over 25% to five from nine last year.
Staff costs make up a large proportion of overheads and so the major contributory factor to the improved operating profit margin is the improvement in the staff costs: gross income ratio of 59.9% from 60.3%.
It is interesting to note, that three of the best-performing five companies in terms of controlling staff costs were based in the north of England, rather than in London or South with its high rents and other overhead costs. They were therefore able to deliver their services on a much lower cost base than the companies based in the south of England.
In recent years, media-buying agencies have invested heavily in talent although this year staff numbers increased by just 4% which was much less than the growth in revenues. As a consequence, fee income per head rose to £107,909, suggesting the investment of earlier years in staff and technology is paying off. This is also reflected in the improvement in operating profit per head of £15,642 compared to £13,889 last year.
Individually, 10 agencies achieved fee income per head in excess of our recommended target of £120,000.
Overall employment costs per head rose by 8.6%. This is likely a reflection of the continuing need for multi-skilled staff who are able to command higher salaries. In our opinion, media-buying agencies should aim to contain employee costs to within 50% of revenues, and as a maximum should not exceed 55%. This year only 10 companies achieved this target of 50%, which was the same as the comparative year. Historically media buyers were able to do this but not in recent years which has contributed to why margins have not recovered to pore recessionary levels.
The number of independent agencies in the Top 30 remains low at just six. There are a number of sitting just below the Top 30 and it may be that with the WPP reorganisation of Group M; and the consolidation of some of the big names in that group, we will have a bigger independent representation in the years to come.
Independents have traditionally controlled their staff costs better – it was the same this year with independents spending 54.8% of revenues on staff compared to 60.1% at the groups. This enabled the independents to deliver a ratio of operating profit to fee income of 18.9% compared to 14.3% for the groups. However, of course the effect of this higher margin amongst the independents gets swamped by the results of the group owned agencies in the overall sector averages.
As technology used within the media-buying world advances media-buying agencies need to be constantly reviewing and assessing their business strategy. As machine learning becomes more capable of automating complicated parts of the media buying process and brands increasingly go direct to the media owners, agencies need to find new ways of adding value. Success or failure depends on their ability to predict trends and reinvent their business model to differentiate themselves from their competitors.
Top 10 media buyers
Peter Smithson is a partner at Kingston Smith