After five years of evolution, does WPP need to be more radical?

Mark Read has just marked five years as chief executive of WPP and there is a strong argument for saying he has done well to simplify and modernise the group, which was in need of major restructuring after Martin Sorrell built it through a vast number of acquisitions.

Top investor David Herro on WPP vs Publicis and why he's keeping faith in agencies

When Read was promoted to CEO, he promised “radical evolution” and there has been plenty of evolution, if not so much of the radical.

He sold assets such as Kantar and Globant to cut debt, merged some underperforming agencies and focused more on commerce, data and technology services alongside communications. Then he returned WPP to revenue growth in 2021 and 2022, ending four consecutive years of decline that had begun in Sorrell’s final year in charge.

Read has positioned WPP as the “creative transformation company”, and there has been some evidence that its client-centric, integrated approach has worked, as WPP won Coca-Cola’s global, consolidated account at the end of 2021 – a significant coup.

“The company has been moving in the right direction,” David Herro, chief investment officer, international at Harris Associates, a top investor in WPP says.

“Mark has been a very good financial steward of the company,” Claire Enders, founder of Enders Analysis, adds, noting some doubters had predicted WPP “would fail or fall apart” after Sorrell left.

Read also professionalised the company, setting up an executive board for the first time, and has been more collegiate than Sorrell.

And he has kept his dignity after putting up with relentless criticism from his predecessor and one-time mentor – until recently when Sorrell quietened down, as his new company, S4 Capital, has struggled.

Yet there are several reasons why WPP is under scrutiny:

WPP’s poor share price performance

WPP is still the world’s biggest agency group by annual revenue (£14.4bn or $18bn) and employee headcount (nearly 115,000) but it has lost its crown as the most valuable group.

The share price has been trading in recent months at about £7.50 and its stock market valuation has shrunk to £8bn, making it only the fourth-largest group behind Publicis Groupe, Omnicom and Interpublic.

By comparison, WPP’s share price was £19 and its stock market valuation was £24bn at its peak in March 2017, before dropping to £11 and £16bn, respectively, by the time Sorrell left in April 2018. That drop in value has been painful, not least for WPP executives who are paid in stock.

“Is the share price disappointing? It’s extremely disappointing,” Herro said in an interview with Campaign about WPP and the wider agency sector.

It is true that other UK media stocks such as BT, ITV and Vodafone have suffered similar share price declines and the London stock market has fallen out of favour with global investors, but WPP has under-performed the FTSE 100 index.

Arguably WPP’s main competitor set, against which it should be judged, is the other global agency groups. The comparisons are not great.

Measured by total shareholder return in the period to 31 August 2023, WPP is the worst performer versus IPG, Omnicom and Publicis on the basis of one year, two years, three years, five years and 10 years.

Publicis has been growing faster

Publicis Groupe, in particular, has been putting WPP and other rivals under pressure.

Publicis and WPP, the two big European agency groups, both suffered declining revenues before the pandemic, but the French group has performed more strongly since then, notably so far in 2023, although Q3 results are looming.

During the Q2 reporting season, Publicis upgraded its full-year forecast while WPP (and some others) downgraded.

Publicis also has one of the highest profit margins in the sector at around 17.5% while WPP is stuck at around 15%. That is likely to be a priority for Joanne Wilson, the new chief financial officer of WPP, who replaced John Rogers in the spring after only three years.

“What Publicis has done very well is integrate their agencies and put businesses on common platforms and this type of thing, and this is what WPP is doing now,” Herro says. “But they're behind Publicis. I think everyone knows this, they know it.”

Publicis’ big acquisitions – consulting arm Sapient and data unit Epsilon – have also given it an edge, especially in recent years when WPP has made few acquisitions of note.

One person who is close to WPP concedes Publicis has been doing well under Arthur Sadoun but says his predecessor, Maurice Lévy, left a good legacy with his “Power of One” strategy and ensured a smooth succession, whereas Read inherited a company in need of strategic direction and restructuring and its biggest client, Ford, going into review.

The jury is still out on some of WPP’s internal agency mergers

Read has pushed though some very large internal agency mergers, notably VMLY&R (which Sorrell had begun planning) and Wunderman Thompson in 2018 and EssenceMediacom in 2022.

There have been other smaller internal mergers. WPP has said the mergers have been necessary – in some cases because the “legacy” creative agencies were weak and likely could not have been saved as standalone brands.

But some sources inside WPP say privately they are not convinced by some of the mergers or say it has led to a degree of confusion – for example, EssenceMediacom runs a second brand, EssenceMediacom X, in the UK while the union of AKQA and Grey to form AKQA Group never appeared to be fully consummated.

Some observers have also raised doubts. Julien Roch, an analyst at Barclays, suggested at WPP’s Q2 results that the company was “addicted to constant restructuring” – and that was before another shake-up at media arm Group M, which dropped its Finecast and Xaxis brands and brought them under the umbrella of Nexus in September.

A senior figure at another agency group that has been performing better than WPP says: “Maybe they spent too much time on restructuring.”

North America remains a problem

The US, the world’s biggest ad market, was a big area of weakness for WPP in the years before the pandemic and revenues turned negative again in the first half of 2023. Some of the company’s leadership in North America also lacks oomph.

It doesn’t help that the US market has been a strong performer overall since the pandemic and WPP is underweight compared with rivals.

WPP generates about 35% of revenues from the US versus about 50% for Omnicom, 60% for Publicis Groupe and an even higher percentage for IPG.

WPP’s greater global geographical spread used to be seen as a strength but exposure to markets such as China is regarded in some quarters as a potential risk amid geopolitical and trade tensions.

'They are moving the ball forward'

There is no sign that investors are losing patience with WPP’s leadership, especially when some rivals such as Dentsu have been having bigger struggles.

Enders says: “Mark is a decent and wise CEO who has the confidence of the investment community and his senior managers. He’s kept it together calmly and quietly and not sought attention – unlike Martin Sorrell.”

Herro says: “As long as they keep making progress and can demonstrate that, we have to be patient with them. Given the situation – the pandemic, the structure of the business, et cetera – I think they have been able to move. They are moving the ball forward and I think if they stop moving the ball forward, then you have to question management.”

He wants to see annual revenue growth of 3% or higher and margin improvement. Harris Associates reduced its stake in WPP over time from 7.35% in 2018 to 4% last year but has increased it since then to a current level of 6.07%, according to the company.

There are some signs of movement inside WPP, which has been talking up the potential of artificial intelligence as a net positive for the business.

Andrew Scott, the chief operating officer since 2018, was recently promoted to be an executive director on the main board – with a focus on driving operational effectiveness – in September, exactly five years since Read became CEO.

The messaging from WPP is that this was a deserved promotion for Scott, who sits side by side with Read at adjacent desks in the company’s Sea Containers HQ. It also means Read has a close ally in the boardroom if things get tougher in the months ahead, one source observes.

There will be more change soon as WPP is in the process of recruiting a new chair to replace Roberto Quarta, who has held the job since 2015 and oversaw Sorrell’s exit.

Angela Ahrendts, the former Burberry and Apple retail boss, who is the senior independent director, is leading the search for the new chair, with an appointment due by next spring.

The big unknown is whether WPP will continue to control its own destiny.

Herro says: “If someone wants to buy it and break it up, that could happen. At this kind of price level, I think it might attract more of a corporate activist or a private equity fund because it's really selling at what I think is an unrealistically low valuation for what it is.”

WPP’s recent sale of FGS Global, created through the merger of three PR agencies, shows it can create value from its parts.

Meanwhile, one hedge fund is betting WPP’s share price could go lower. Marshall Wace recently increased its “short position” in WPP to 0.6% of the company’s stock market valuation or about £50m, according to a disclosure to the Financial Conduct Authority in September.

Marshall Wace’s short is not entirely new. The hedge fund has been shorting WPP for two years or more, based on prior disclosures, but it is the first time since March that it has revealed a position above 0.5% – the threshold that requires disclosure.

The challenge, then, is for WPP to keep pushing the ball forward in Herro’s words. The importance of good financial stewardship should not be underestimated, especially given a tough economic environment with higher interest rates or past accounting issues seen at some smaller rivals such as S4 Capital and M&C Saatchi.

But after five years of evolution, the question is: Does WPP need to be more radical?

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Gideon Spanier is UK editor-in-chief of Campaign