Marketing and sales promotion agencies enjoy bigger profit margins

Profit margins at marketing and sales promotion agencies have returned to pre-financial crash levels according to Kingston's Smith's latest report. The company's partner Esther Carder explores the category in more depth.

Marketing and sales promotion agencies enjoy bigger profit margins

Despite a decline in fee income, the Top 40 Marketing and Sales Promotion consultancies saw an improvement in their operating profit margins to 11.4% – a level not seen since the start of the financial crisis.

With the political uncertainty that 2016 brought, it was no surprise really to see that fee income stagnated as the Top 40 experienced a slight fall of 1.1% to give a combined total gross income of £607m. However, there were winners and losers with exactly half seeing a growth in income and the other half seeing a fall. 

We believe that a well run agency should be able to generate fee income of at least £100,000 per head and it was satisfying to see that 14 of the Top 40 were able to exceed this target

However, after two years of record low average profit margins this year saw a welcome improvement to 11.4%. A considerable factor in this was the number of agencies that managed to pull themselves back up to respectable margins. While in the comparative year there were some 11 agencies that generated margins of less than 5% or indeed suffered a loss, this figure reduced to just eight agencies this year. This helped the average margins considerably.

We consider that a well-run agency should be able to achieve an operating profit margin of at least 15%. Unfortunately, only a quarter of the Top 40 agencies managed to achieve this target, slightly fewer than last year.

Staff costs remain the largest cost for any agency, and we recommend that agencies contain these costs to within 55% of fees income in order to achieve sustainable margins. Only 11 agencies managed to control their costs within this target and consequently the average across the Top 40 slipped further away from our target, deteriorating to 58.5%.

Overall the difference in operating profit margins between independents and groups was not vast,  although the independents just nudged it at  11.7%

Of course, once freelance costs are factored in, this ratio would be even higher and we recommend that total people costs are contained to 60%. Given the additional compulsory costs that now exist for agencies, such as increasing auto-enrolled pensions and the apprenticeship levy, the need for agencies to consider whether alternative lower costs benefits can be used in order to motivate and retain staff has never been greater.

We believe that a well-run agency should be able to generate fee income of at least £100,000 per head and it was satisfying to see that 14 of the Top 40 were able to exceed this target. Across the sector the average was disappointing at £84,294, increasing by just 3.1% to as a result of a reduction in the number of employees.

DM and sales promotion top 10

Employment costs per head rose to £49,307, an increase of 5.1% which indicates the reduction in headcount has been made at the lower end of the pay structure as inflation and pay rises are unlikely to account for all of this increase.

A key barometer of financial performance is operating profit per head which combines both the productivity and profitability of an agency. An increase in revenues per head, coupled with non-staff cost savings, meant that the Top 40 generated profit per head of £9,613 compared to £7,974 in the comparative year.

Once again the Top 40 continues to be dominated by group-owned agencies where they now occupy 26 of the available spots.

While the gap in productivity narrowed, group companies continued to outperform their independent peers as revenue per head increased to £92,178. Productivity at independents did improve but continues to lag way behind that of the group agencies at £67,522 per head.

However, while productivity at groups is higher, so are their staff costs per head which increased by 7% to £51,527 per head. This was in stark contrast to independent agencies where staff costs remained almost flat year on year and noticeably lower at £43,439.

Overall the difference in operating profit margins between independents and groups was not vast, although the independents just nudged it at 11.7%. However this was a vast improvement on last year’s Annual Survey where the margin achieved by independent agencies was just 1% due to so many of them making losses.

Following several years of low margins, agencies seem to have taken the bull by the horns and the theme of cost saving was a recurring one throughout the strategic reports of the Top 40 agencies. The slowdown in the growth of gross income will be a concern for some agencies as political uncertainty mounts and budget holders review where to place their funds but, overall, an increase in profits will be a welcome sign of relief for agencies which have recently struggled with the fallout from the financial crisis and the pace of change in technology.

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