It comes as something of a pleasant surprise that amongst the chaos and uncertainty of a 2016 that was, for many, an annus horribilis that the results of the Kingston Smith survey show that collectively the sector managed to produce one of the better sets of financial results that has been seen for a number of years.
Of the eight sectors surveyed all eight saw their profit margins increase despite modest declines in revenue in the Advertising and Marketing and Sales Promotion sectors and significant uncertainty hanging over the industry and indeed the whole country in the second half of the year.
Despite the challenges of 2016 we have seen the sector accelerate the growth in income that had been seen over the previous couple of years and, as a result, deliver a remarkable improvement in profit margins.
After the surprise of the Brexit vote the realisation that there would be a period of business as usual before any real change seems to have allowed brands to press on with projects and campaigns that were planned. The real question is whether in 2017 and now going into 2018 that confidence is maintained or whether we start to see income stagnating and it is not just client spend that is a challenge for agencies at the moment. Attracting and retaining key talent has always been a challenge and with London and the UK arguably less attractive as a destination to live and work this remains one of the key challenges facing the sector.
In the Kingston Smith annual survey, we reviewed the financial performance of eight distinct sectors: six individual disciplines: advertising; brand and design; digital; marketing and sales promotion; media buying; public relations, as well as the UK quoted and independent marketing services groups (whether individual or mixed discipline).
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The accounts that are reviewed are those that were filed at Companies House on, or before, 30 September 2017 and, in the majority of cases, cover the calendar year to 31 December 2016.
Across the Top 50 independent groups, spend on staff costs remained extremely high at 62.7% of fee income
Six of the eight sectors managed to grow total fee income when compared with the results of the same agencies last year with Advertising flat year on year and MSP declining slightly. Even more encouragingly growth in 2016 was, for the same six sectors, at a faster rate than it had been in the previous years.
Once again specialist digital agencies led the way with fee growth of over 15% with the PR and media buying sectors backing up good growth in the previous year with another year of double digit increases in fee income.
Top 10 digital agencies
One of the key ratios for any agency to monitor is the proportion of fee income spent on staff costs. The Kingston Smith target ratio has historically been 55%, although a more realistic target in the current climate including freelancers, would be 60%. The amount of fee income spent on staff costs actually reduced by half a percentage point from a record high across all the sectors surveyed of 60.7%. That even this modest improvement was possible is more of a reflection of businesses being able to add revenue at a faster rate than staff costs have increased rather than any easing up of the upwards pressure on salary costs caused by on-going skills shortages.
Across the Top 50 independent groups, spend on staff costs remained extremely high at 62.7% of fee income. However, they were not alone, as this was once again a key theme across many of the individual disciplines with six out of the eight sectors surveyed spending 60% or more of their fee income on staff costs albeit with only two sectors spending a higher proportion of their income on talent than they had in the previous year.
The picture looked particularly bleak for the advertising agencies surveyed who exceeded the post recession record for staff costs that they set last year. When the additional cost of freelancers is added in the position only looks worse.
Across all the sectors as a whole this small reduction in staff costs was accompanied by a significant fall in the percentage of revenue that businesses were spending on non-staff expenses. Keeping a tight control of overheads while revenue is growing is a sure-fire of improving margins and this appears to have been combined with judicious use of freelancers to deliver a significant improvement in the average profit margin reported across the sector to 12.2%.
The margins of digital agencies rebounded to 9.1% after slipping below 5% last year but even these improved results left digital, once again, as the least profitable sector in the industry. The design sector posted much improved results at 14.3% which is the highest margin in that sector since 2001 but still not quite enough to dethrone media buying from its position as the most profitable of all of the sub sectors.
Highest paid agency directors
The Top 50 independent groups, which all have fee income of over £10m, saw margins improve from a record low last year to a slightly more respectable 9.7% thanks in no small part to a reduction in the heavy losses suffered by a couple of the bigger agencies in the previous year.
As always the quoted sector is dominated by WPP and although the margins appear to have improved further to over 15%, this is in fact mostly reflective of WPP’s results. If WPP is excluded this gives an average profit margin of 7.2% for the 22 remaining smaller quoted groups, which is the lowest level seen since 2010 and even WPP is not immune with billions being wiped off the value of its shares in 2017.
The financial data available suggests that industry was able to ride out whatever storm was initially created by the Brexit vote and the US election. Continuing uncertainty about what a post Brexit relationship with Europe and the rest of the world will look like allied with what will surely be a continuing shortage of talent ought to suggest that it will be tough for results not to slip back in 2017 but if the last 18 months has taught us anything it is surely that we should expect the unexpected.
Maybe keep the champagne on ice, for now.