PR agency and holding company executives blame the same challenges facing creative firms for a slowdown in growth in the second quarter. However, they contend communications shops are in better position to recover than other types of agencies.
The big five holding companies – WPP, Omnicom Group, Interpublic Group, Publicis Groupe, and Havas – collectively recorded organic growth of 0.7% in the second quarter, a significant dropoff from 2014 and 2015, when growth was at least 4% in every period. Performance was bleaker in North America, where organic revenue growth contracted by 0.5%. The region had not seen a collective decline in any quarter between 2010 and 2016.
Several PR firms within the major holding companies have made staff reductions, including Omnicom-owned Ketchum and WPP's Hill+Knowlton Strategies, where several senior execs departed amid a restructuring of the U.S. business under a single P&L.
Experts are mostly blaming budget cuts by legacy marketers for the tough period. Earlier this year, Unilever vowed to run "30% fewer ads as a part of a cost-cutting drive" and Procter & Gamble disclosed that it had cut $100 million from its digital marketing spend.
"Large brands are not growing by much, as they are commonly losing market share to smaller, upstart brands or disruptors," said Brian Wieser, senior research analyst for advertising at Pivotal, in a research note. "While this has been true for some time, what is new is the use of zero-based budgeting (ZBB) processes by some of the impacted marketers. ZBB is having a disproportionate impact on spending by these companies on agency services."
Weiser tells PRWeek, "I don’t think PR agencies are exempt [from this client pressure to cut costs]."
Omnicom’s PR firms experienced a 0.3% organic revenue dip in the second quarter, with mixed results among its communications shops. "Some of our PR firms are having a stronger year than last, while some are seeing softness in revenue," notes Omnicom Public Relations Group CEO Karen van Bergen. "As with any portfolio of companies, there is variability."
However, van Bergen, whose stable of PR firms at Omnicom includes FleishmanHillard, Ketchum, Porter Novelli, and Marina Maher Communications, adds that she believes the slowdown in client spending is short-term.
"There’s no doubt that the revenue challenges of quite a few major companies are affecting their spending in marketing communications, as they seek to control costs and deliver their own earnings improvement," she says. "I would describe it as tentativeness on the part of some brands and companies, and I see it as temporary."
There are several factors for why some PR firms are performing better than others, but agency leaders who spoke to PRWeek on the condition of anonymity provide some clues. One reason is competition: while PR firms are making investments in paid media, digital and social media capabilities, so too are other kinds of firms. So if clients are failing to see results they expect, they’re quickly looking to other service providers. Experts also say ad agencies are making inroads in earned media.
Another executive says the nature of PR contracts is hurting some shops. One large agency CEO notes PR work remains largely project-based, so when corporations tighten the purse strings, these contracts are among the first to be axed or delayed.
"That is changing a bit as PR secures more sustaining, bigger budgets, but still a decent percentage of PR business is project-oriented," says the CEO.
Scott Kauffman, chairman and CEO for MDC Partners, says large companies are more willing to veer from historic patterns in selecting their agency partners, which is bad news for legacy networks. His holding company, which has a stake in PR firms including Allison+Partners, Hunter Public Relations, and Kwittken, saw an organic growth rate of 11.7% in the second quarter, though that was in comparison to a flat Q2 2016.
"Whether the CCO, CMO, or CEO, I think the C-suite is fed up by the status quo. They just can’t afford to sit on decades-long legacy decisions that got made about who their preferred partners should be, and we see that trend across all aspects of the communications business," Kauffman explains. "That puts us in a good position. We only have about a 1% share of the global market for agency fees, so if a new marquee piece of business comes up for review, chances are it is a new opportunity for us."
Edelman global president and CEO Richard Edelman says PR firms will be better able to weather difficult headwinds because they have diversified client rosters, whereas much of the advertising cuts are coming from CPGs.
"Thirty percent of WPP’s revenues come from CPG companies like P&G, Nestlé, and Unilever, but I don’t think that is the case for most PR firms. Most PR firms have a lot of tech, a lot of healthcare, and, yes, consumer products clients," says the boss of the world’s largest PR firm. "I think it is a three-legged stool rather than one. Our big clients are Samsung and, yes, Unilever, but also Microsoft and Nissan, and so we’ve got a more diverse client list."
The firm has also benefitted from current events, he explains.
"Given the turmoil between government and business, there is a lot of work to do in corporate reputation and public affairs. We were deeply involved in a couple of companies related to the U.S. president’s advisory boards, to stay or not to stay, and this was right at the CEO level," says Edelman. "We are truly important to the CEOs, and that doesn’t necessarily mean huge marketing spend, but we are a strategic partner, and I feel that incredibly now more than ever."
Edelman is on track for 2017 growth of between 5% and 6% after a disappointing 2016 "when we hardly grew in the U.S. and now we are," he adds.
Be ready for increased accountability
When P&G disclosed in July that it had taken $100 million out of its digital marketing spend, the company also raised eyebrows by saying the reduction had no impact on sales. "We didn’t see a reduction in the growth rate," said Jon Moeller, the CPG giant’s finance chief, according to media reports. "What that tells me is that the spending we cut was largely ineffective."
"When I read that, I thought, ‘Holy cow,’" says Edelman of the P&G disclosure. "PR has got to do a better job of proving that what we do sells stuff instead of just changing opinions of influencers. That’s why we’ve been making important investments in research and measurement."
Van Bergen agrees that those investments are particularly important in digital and social media, which is a growth area for agencies and a space where firms must optimize dollars spent.
"Clients are more interested than ever in research and measuring, using these tools to help them assess, in real time, what is working and adjust plans accordingly," she says.