Kingston Smith W1 report finds PR profit margins lowest for seven years

Agency profit margins have hit their lowest point in seven years, as fee income struggles to keep pace with rising staff costs.

Operating profit: fell by 12% for top 40 agencies (Rex Features)
Operating profit: fell by 12% for top 40 agencies (Rex Features)

Kingston Smith W1's Financial Performance of Marketing Services Companies annual survey reviews the most recently filed accounts of the top 40 PR consultancies, mostly to year-end 2010.

It found that the combined gross income of the 40 consultancies rose by almost five per cent, but agency margins were increasingly squeezed by a rise in employment costs of more than nine per cent during the period. This trend resulted in a widespread decrease in operating profit, with margins plunging to a seven-year low.

Overall combined operating profit fell 12 per cent to £67.4m, compared with £76.3m for the same firms in the previous year. Half of the 40 agencies showed a reduction in operating profit and six even went into the red during the period.

CMGRP UK (the holding company of Weber Shandwick) showed the largest drop in operating profit (-255 per cent), followed by Fleishman-Hillard (-219 per cent) - both, according to the survey, 'attributable to falling revenues largely as a result of the economic climate'.

The other agencies recording losses were Band and Brown (£604k), Metia (£169k), Hill & Knowlton (£158k) and Euro RSCG Biss Lancaster (£97k).

There is evidence that conditions improved during the year, as the increase in gross income of five per cent reversed the income decline of one per cent recorded last year.

However, the largest income increases were a result of intra-group reorganisations and mergers by companies such as DF King, Grayling and Pelham Bell Pottinger rather than organic growth.

Esther Carder, partner at Kingston Smith W1, commented: 'To enable recovery, PR consultancies need to react proactively to the ever-increasing pressure from clients for more work at lower fees. This needs to be coupled with improved control of costs.'

Within the past month Chime Communications and Huntsworth have announced they both intend to cut costs - a move that is likely to be mirrored across the industry as employment costs rise more quickly than income.

Employment costs climbed by 9.3 per cent and half of the top 40 consultancies continued to increase headcount during the period, resulting in an increase in staff numbers of 3.2 per cent.

Also read: Danny Rogers - Employment costs threaten agency profits

KEY FIGURES

  • Average operating margins for the top 40 agencies were down to 12.5 per cent compared with 14.9 per cent for the same companies in their previous year.
  • Kingston Smith W1 advises employment costs absorb no more than 55 per cent of gross income. The average figure this year was 62.3 per cent - the highest is Band and Brown at 86.2 per cent.
  • The highest paid director was at Finsbury, thought to be founder Roland Rudd, with £2.98m. Next was a director at Bell Pottinger with £1.14m.
  • Group-owned consultancies (increase in gross income of three per cent) performed less well than independents (increase of 11 per cent).

IN NUMBERS

23.8% Reduction in profit before tax of top 40 agencies
£335.9m Total combined employment costs, up 9.3 per cent
5,015 Number of people employed by top 40 agencies, up 3.2 per cent
14.4% Drop in operating profit per head, to £13,430

Source: Kingston Smith W1's Financial Performance of Marketing Services Companies annual survey.

RESULTS: TOP TEN AGENCIES BY GROSS INCOME, OPERATING PROFIT AND EMPLOYMENT COSTS


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