Over the past few days, an increasing number of Western companies have pulled out of Russia and, on Friday, WPP announced it was shutting down its Russian operations in response to the war in Ukraine.
At the time of writing, none of the other global agency groups have confirmed their intentions but, given both the number of advertisers pulling out of Russia and public and political pressure, it is likely they will follow a similar course of action.
From a global agency standpoint, Russia is, quite frankly, not that important in revenue terms, which is why most of the agency groups have not previously disclosed their exposure to Russia.
In the case of WPP, it revealed in its Russia shutdown announcement that the country generated 0.6% of global revenues less pass-through costs last year.
However, the matter of Russia raises a wider question about the importance of the BRIC countries to the agencies.
As a media analyst in investment banking in the 2000s, I remember the agencies waxing lyrical about their growth opportunities as BRIC economies expanded and their middle classes exploded.
The implicit assumption was that local advertisers would flock to the global agencies to adopt more “sophisticated” practices.
However, it hasn’t worked out like that. There is no doubt these countries have seen a massive increase in advertising spend overall.
According to Group M, China is the number two global advertising market while India and Brazil are number nine and number 10 respectively.
Yet, for the agencies, the BRICs probably make up between 10% and 15% of revenues together at most and that is somewhat helped by Greater China including Hong Kong and Taiwan, which probably have a disproportionate impact.
To put this in context, these markets combined are probably no more important (or even less so) for the agencies than the UK.
What has happened? Well, it’s probably not as uniform as it appears at first sight. Brazil and India, for example, are probably as important for the agencies as their advertising rankings suggest, if not slightly more. Russia has its own issues, not least declining demographics.
The main culprit has actually been China. While the advertising market has massively expanded, local advertisers have not flocked to the global agencies, whose businesses in China are overweighted heavily to international companies.
The fact the Chinese ad market is so heavily online skewed (over 75% according to Group M) has probably been the main factor, with the agencies disintermediated to an extent.
Moreover, the agency groups have not penetrated into the regional cities as much as they thought.
Finally, for their international clients, it’s probably fair to say that China has not met their expectations when it comes to growth, with the exceptions of a few areas such as luxury goods.
Will that change? To be blunt, the answer is probably not. Online in China is likely to remain dominant, although the crackdown by the authorities on the Chinese online giants may play out in unusual ways (a crackdown on “programming” at Chinese broadcaster CCTV was a major catalyst for online growth).
So, China, while important, is unlikely to become as important as the UK, never mind Western Europe or the US, for the agencies.
Sometimes the new doesn’t supplant the old.
Ian Whittaker is founder and managing director of Liberty Sky Advisors
He writes a regular column for Campaign about the advertising landscape from a financial standpoint. For further insights and articles, subscribe at: https://ianwhittakermedia.com/