Investor view: Investing in brand works, so why do agencies lack confidence?

Ian Whittaker
Ian Whittaker

Ian Whittaker is writing a regular column about the advertising landscape from a financial standpoint. This month, he says companies have rediscovered the value of brand advertising during the pandemic but warns agencies lack confidence about their own worth.

One of the more noticeable features of the last reporting season was the re-emergence of the importance of brand for advertisers.

Firms such as Procter & Gamble, Kellogg’s and Colgate all highlighted the strengths of their brands as a key competitive advantage when driving growth and meeting the challenges of greater competition.

While that may have always been the case to some degree, the emphasis placed by companies on the importance of brand certainly seems to have increased in recent quarters.

What is driving this? A key factor in the short term (at least) is the impact of inflation, which is forcing many companies to pass on these costs to consumers via price increases.

Input costs have risen extraordinarily high for many companies, not just in commodity prices but also areas such as logistics, distribution and (in some cases) staffing levels.

Take P&G: it mentioned that, for fiscal 2022, it faces a $1.8bn (£1.3bn) cost headwind in terms of rising commodity costs, with a further $100m headwind from freight costs.

Some of these price increases have already come through, but the bulk are to come and will be punchy (this month is when many are due to take effect).

It has not been uncommon to hear companies talk about high single-digit, or even double-digit, price increases. If you are going to ask the consumer to accept those sorts of price increases, especially given the economic uncertainty, investing in your brand is key.

The importance of trusted brands

There are also more fundamental shifts going on which favour the growing importance of brands. One key takeaway from the FMCG reporting season is consumers have shifted back to trusted brands during the pandemic.

That may seem strange but makes sense. In a time of uncertainty, consumers are more likely to play safe by returning to brands they trust. Also, for many consumers, the pandemic has had little – or even a beneficial – impact on their balance sheets.     

Several other more fundamental factors are likely to drive increased interest in brand advertising, such as the rise of new firms, which need to make their products known about in a noisy environment (ironically enough, the tech sector seems to be among the strongest categories when it comes to this type of spending).

The growing importance of ecommerce, and changing consumer behaviours more generally, is also acting as a catalyst, as is the rise of issues such as ESG (environmental, sustainability and governance) and diversity/equity, which also require a strong brand message.

All this suggests the momentum for advertising spending may be stronger, and longer-lasting, than expected.  

What does this mean for the agencies and the advertising industry? The obvious answer is more advertising money, which leads to more fees.

Global advertising growth forecasts have been consistently pushed up throughout 2021 and that is reflected in the agencies’ results for the first half of the year, all of which saw a better than expected performance and, for most, upgrades to full-year top-line growth forecasts, with a generally smaller bounce to full-year margin expectations.

Are agency holding groups the best places for creative agencies to sit?

However, there is a deeper point here. It is clear from advertisers’ results that brand advertising is delivering real tangible benefits and, for many, is critical to both their future success and meeting their commitments to investors.

Put simply, it delivers a lot of value to companies. However, the agencies themselves seem to lack the confidence to argue to clients that their work has a fundamental value and, subsequently, should be seen as an investment, not as a cost.

As a result, the agencies’ creative businesses suffer from low margins (typically single-digit at best for most), with the agency holding groups, in most cases, relying on their media businesses to prop up forecasts.

This feeds into the holding groups’ valuations. Probably the single biggest reason why agency holding group valuations (ex-S4 Capital) remain subdued and below historical levels – lower double-digit levels than the high teens or even low 20s price-to-earnings multiples that you would have expected in “olden” days – is that investors do not see the creative parts of their businesses as fundamentally attractive.

To a large degree, that is a message that has been somewhat propagated by the holding companies themselves, as they emphasise their data, analytics and (in some cases) media offerings over creative. Yet, until agencies can persuade advertisers and investors that their creative businesses deliver meaningful value and therefore are valuable businesses in their own right that deserve to charge a premium for the service they offer, this situation is unlikely to change.

This leads onto my final point. Are agency holding groups the best places for creative agencies to sit?

There is an argument that the holding group structure is a product of a 1980s conglomerate-style strategy and that it might be better for creative agencies to be spun out and “set free” rather than sit with groups that seem to view their existence rather begrudgingly and as a necessary evil.

For both shareholders and all involved, that might be the better long-term solution.

Ian Whittaker is founder and managing director of Liberty Sky Advisors. For further insights and articles, subscribe at

Read his Campaign Investor View column from August: Where now for agency groups after pandemic bounceback?


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