WPP Sees Weak Growth As CPGs Pull Back Spend

WPP cut its growth target for this year from 3% to 2%, citing a tepid economy and lack of new business wins, the company said on its Q1 earnings call on Thursday. Q1 organic growth came in below expectations at 0.8%.

WPP is feeling the pricing pressure from CPGs as they struggle to compete with ecommerce giants like Amazon. WPP client Unilever, the second-largest global CPG, announced a shift to zero-based budgeting in January.

Procter & Gamble’s intention to cut $1.5 billion from its marketing budget and cull its agency partners will also hurt WPP’s agency business.

“It would be rash for me to say I see no impact from [P&G’s news] yesterday,” said WPP CEO Martin Sorrell. “Clients are faced with a difficult decision as to whether they continue to cut or put pressure on the supply chain or invest.”

Macroeconomic pressures such as low GDP growth, low inflation and little pricing power have led clients to focus on reducing costs, Sorrell said. And cuts aren’t just happening in the CPG vertical – auto and pharma are reducing marketing costs as well.

“You see a contradiction of clients wanting more sales growth and, at the same time, wanting to reduce cost,” he said. “This is putting pressure on legacy and established businesses. That is a significant negative.”

And new innovations, like a camera on Amazon’s Echo home device that allows shoppers envision their purchases through augmented reality, will continue to change traditional consumer shopping habits.

WPP’s opportunities amid these challenges, Sorrell said, include doubling down on ecommerce efforts and leveraging scale to win out against industry consolidation as the zero-based budgeting trend continues. Xaxis’ acquisition of ecommerce ad tech business Triad Retail Media in October could help WPP achieve its ecommerce goals.

“The impact of ecommerce is giving us the opportunity to expand our services,” Sorrell said. “Zero-based budgeting can be regarded as a threat, but small and medium-sized agencies are being constricted. When that pressure intensifies, the six holding companies do have opportunities for consolidation.”

Sorrell also pointed a finger at Nielsen, which said CPG company sales declined 3.5% between January and February. This statistic, Sorrell said, magnified CPG concerns around slowed growth, though the number was incomplete because it didn’t measure the impact of ecommerce sales on overall industry growth.

“We have a measurement issue, just as we had in TV, that the new channels were not captured by the traditional means of measurement,” he said. “That has made waves in the packaged goods category.”

Still, client business models are changing, and the agency world has to change along with them. For example, WPP launched an agency developed in response to the zero-based budgeting trend, Sorrell said, and the holding company now operates 48 teams – accounting for a third of its revenue – as interdisciplinary units focused on specific clients.

“Just like clients are reorganizing themselves internally, we have to reorganize ourselves internally,” he said. “These shifts taking place are very significant and we have to react to them.”

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