The accounting firm’s latest Marketing Monitor report looks at the accounts for the UK’s 30 biggest 30 media buyers via Companies House, as well as top ad agencies and PR shops.
It shows PR agencies are generating the highest profit margins at 13% for the first time. This is calculated by dividing total operating profit for the firms by their total gross profit.
The top 30 media buyers, meanwhile, generated a profit margin of 12.7% – considerably less than the 17.8% average achieved over the past 16 years.
Kingston Smith said this is reflective of a broader industry trend in which media, advertising, design and digital sectors are all reporting lower operating margins.
The report said: "Putting aside any Brexit fallout, arguably the move away from retainer income towards shorter-term project based work and increasing zero based budgeting is continuing to have a negative effect on margins.
"Agencies are still reliant on freelance labour to service this type of work, especially as the on-going effect of ‘digital disruption’ results in a talent shortage, as the digitalisation of marketing results in more and more specialist activities."
The report also demonstrates a "big chasm" between group-owned agencies, which saw a decline in profit margins from 15.6% last year to 12.4%, and independent shops which saw an improvement from 14.6% to 17.1%.
Kingston Smith says this is because independent agencies have "tighter control on employment costs at just 56.1% of fee income compared to 60.7% among group agencies. We suggest that staff costs should be less than 55% of fee income."
Meanwhile, the top 50 ad agencies’ profit margins fell slightly since the last report six months ago – from 11.2% to 11.1% – with agencies seeing a decline in retainer fees which are being replaced by shorter term projects and zero-based budgeting.