'Big 4' Advertising Agencies, Part 1: Introducing The Companies And Industry

Summary

• The advertising world is dominated by the 'Big Four' agencies: WPP, Omnicom, Publicis Groupe, and Interpublic Group of Companies.
• In this series I compare and contrast them.
• Both the industry as a whole and these companies specifically look set for strong secular growth going forward.

We are immersed in advertising. I doubt few of us are able to travel more than a few minutes into a day before we are hit by one piece of advertising or another. Of course, behind every advert an individual or business which has designed and arranged the advert. Dominant in this space are the "Big Four" advertising agencies.

These four advertising behemoths are equally spread between the US and Europe. The US-listed ones are Omnicom (OMC) and Interpublic Group (IPG). The Europe-listed ones are London-listed WPP (WPPGY) and Paris-listed Publicis (OTCQX:PUBGY).

Growing ubiquity of advertising in emerging markets alongside growing complexity of the advertising landscape in developed markets have made these advertising giants increasingly well-placed for growth. Yet which are more attractive today?

I plan to compare the big four alongside one another. Don't worry, I am not going to load all this up into one article. Instead, I am going to provide this comparison over a series of articles. Here we will start with a general introduction leaving us with a better understanding of the attractions of the sector.

Later installments will look more fully at their relative performances across a number of metrics. Revenue, earnings and margins will be compared alongside cash flow and debt strength. Shareholders' return will also be compared before we take a look at their relative valuations. So, let's get started.

Who Are the Big Four?

The big four are made up of a complex of smaller businesses. Niche operators ranging from pure-play advertising or public relations agencies to data businesses. The sheer complexity of this network of smaller businesses can be seen from this excellent graphic I have adjusted (data from R3):

How Big are the Big Four?

Naturally, the big four advertising agencies are big. Yet it is clear that WPP and Omnicom are noticeably larger than the other two. Both Omnicom and WPP are about 50% larger from a revenue perspective than their next biggest rival. Yet it is British peer WPP which tops the revenue pile right now even with the strong USD:

If we take revenue figures in 2006 it is clear that the European companies have grown most rapidly (note I have used the 10-year average exchange rates here). Whilst the US companies-Omnicom and Interpublic Group-have hardly seen no growth, it is clear that WPP and Publicis have significantly outgrown their US peers:

Indeed, as a result of this, Omnicom and Interpublic have gone from first and third position to second and fourth in the last decade. It should be noted that, although all rely on acquisitions to boost growth, Publicis has done this to a much larger extent with its Sapient acquisition.

Is Advertising and PR Really Attractive?

Advertising spending is expected to continue to grow at a healthy pace over the next few years:

2016 is set to be helped by a series of advertising heavy events (the Olympics, US Presidential Elections, UEFA Champions League etc) hence the particularly strong performance. Nonetheless, there is reason to believe that the companies at hand will continue to grow ahead of the adspend market generally and GDP growth. Certainly, in recent years this has been the case:

I strongly expect the future will see a similar growth outperformance by the big four over GDP.

So what about ranking the companies here. Well, I think that ranking them by their size is fairest:

1. WPP
2. Omnicom
3. Publicis
4. Interpublic

Publicis may well have seen faster revenue growth in the last decade than Omnicom. Yet this very heavily relied upon the massive Sapient acquisition. The impact of this will become more apparent in later parts of this series. For now, this seems a fair ranking.

Where is the Growth Coming From?

Yet adspend growth is not expected to be equally spread across the globe. Indeed, some regions are anticipated to experience adspend declines:

Yet not all advertising giants are equally spread geographically. In fact, when it comes to geographical spread WPP wins hands down:

WPP is understood to have $1.2 billion in revenues from mainland China. With Taiwan and Hong Kong added to that they derive $1.65 billion from the region.

As it happens, it is hard to argue against WPP's attractions here. According to ZenithOptimedia data, the three biggest contributors to adspend in USD amounts will be the US, China and the UK:

This plays, rather perfectly, into WPPs revenue strengths. Its three largest markets are set to also be the three biggest growers in terms of USD spend. China is particularly interesting. It is already a fairly sizeable market. Yet rapid growth means that in USD terms, its expected to contribute new adspend in line with the US. It is clear WPP benefits here courtesy of its dominant position in China amongst the "Big Four" (R3 data):

WPPs Asian dominance amongst the "Big Four" is also reflected throughout the broader Asia Pacific region:

It should be noted, about 49% of Dentsu's revenues are from Japan where growth is expected to be much slower in coming years. The rest of the Asia Pacific region composes just 14% of revenues. WPP, in contrast, has extensive operations in a number of emerging growth countries. Historically this has helped them drive higher than Omnicom, this looks likely to be the same going forward.

Without more detailed knowledge of individual countries revenue contributions we are unable to see exactly how they fit together. Yet it is clear that WPP, in particular, has positioned itself strongly to be a chief beneficiary of growth catalysts in the sector.

So what about some rankings here? In terms of diversity, I think we need to rank them like this:

1. WPP
2. Publicis
3. Omnicom and Interpublic Group

My reasoning here is simple. Clearly WPP has the most compellingly diversified revenue stream and is well-placed in core ad spend growth markets. Publicis also has an attractively diverse revenue stream which edges it a little ahead of its US-listed rivals. Yet I find it hard to separate Omnicom and Interpublic leaving them in joint third.

Conclusion

This article merely set out to introduce aspects of the sector we will be covering in time. Nonetheless, what becomes clear is that all four companies have had solid growth histories and the industry (and its big four leaders) look set to continue to benefit from robust growth in future years.

Yet right now WPP appears to have shown itself to be the strongest performer in recent years which has led it to become the largest agency in the world by revenues. With it currently the best placed of the big four in key growth markets this seems set to remain in coming years.

If you would like to read the next parts of this series when they come out, please do consider following me. They will come out in due course.

Note: Unless otherwise stated, all graphs and tables, and the calculations they contain, were created by the author. Image reproduced from Curated by Kiki.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I am/we are long WPPGY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[holbornnine]

As a shareholder in WPP I think it stands head and shoulders above the other 3 companies you compare it to. It has the best brands ... Ogilvy , J Walter Thompson, MindShare , Grey , Y&R, MillwardBrown ... the list goes on. Sir Martin Sorrell is a genius. The company is very shareholder friendly and pays great dividends as well , there really is not a lot not to like !!

A stock I plan to never sell.

[daveinthelakes]

My principal concern with this sector is the growth in web advertising being placed with relatively few operators such as Google and Facebook. What is to stop these companies offering a direct facility to advertisers? If a company is to place the majority of its adds on 2 or 3 websites why will it need an advertising agency?

[Dividend Drive]

Thanks, dave. Interesting thought. Certainly if Google or their like took to trying to set up their own ad agency that would be a very interesting development which would threaten the likes of these big four. Yet I wonder how likely this is. Most businesses look for advertising to cross a wide-range of media which still puts it almost exclusively in the hands of the above.

What is interesting is that the data aspect of these agencies is pulling in more customers who have increasingly been outsourcing their marketing work after many years of pulling it in. Clearly, Google etc. have epic amounts of data from that side. This is where they could provide a particularly strong USP over the above companies. That being said, WPP in particular has a very strong presence here already.

Also, I wonder to what extent businesses themselves would be comfortable allowing a Google etc. to control both a large part of their advertising design and distribution at the same time. Also, I would really like to find out how powerful the relationship aspects is in the advertising world. To what extent, I wonder, could a Google really pull apart these established partnerships. A really interesting question.

Do you know if any of these dominant web operators are currently operating or looking to operate an ad design-related side show?

[westendal]

Somewhat offputting when an "analysis" doesn't know the difference between an ad agency and a multi-agency holding company.

[Dividend Drive]

Haha, I sort of agree with you, westendal. However, all of them are generally known as the big four advertising agencies even though they are, all, really holdings companies. That is why I ensured it was made clear at the start that they are companies composed of many small agencies across a broad range of PR, marketing and advertising areas. It seems unnecessarily long-winded and (for some) confusing to replace "ad agency" with "multi-agency holding company" when the former more than makes clear what they do.

What do you think of the prospects in the sector? Do you think the big four are able to continue their sector-beating growth in the future? Do you think it is likely we will see some consolidation in the sector even after the failed Omnicom/Publicis merger? IPG seems, to me, a possible target though it is not clear what particular benefits any of the others would get from purchasing it other than scale. Be interested to hear your thoughts.

[westendal]

The sector will do OK; usually good but rarely great.
To oversimplify the case:

Most products in most categories are pretty much one like another (how good can a toothpaste (or a car, even) possibly be?). Therefore, they must compete on factors extrinsic to the product itself; price, packaging, image, brand association, whatever.

Even if you build the proverbial better mousetrap, the world will not beat a path to your door if it doesn’t know about the trap or doesn’t know where your door is.

Almost always, a breakthrough product will attract imitators, making it very tough to achieve a sustainable competitive advantage. Once again, the extrinsics will become important.

As the rest of the world catches up with the fully-developed parts, so the growth of consumer-centric economies will drive demand for marketing/communications services for quite a while. (Think China, India and Africa.)

As important as these extrinsics are, most companies spend less than 10% of sales on them – often much less, and they find it more economical to outsource much of the advertising and promotion work because even the biggest advertiser companies would have a hard time attracting and retaining the best ad crafters. These folks work best when they are amidst other ad people and when they have some variety in the their assignments.

As the media side becomes more complicated, it can also be advantageous to outsource. One advertiser, even a big one, after one year has one year of experience; an outside media specialist, working for, say 10 clients, has, after one calendar year, 10 experiential years. The specialists get smarter faster.

So, given these economic underpinnings the business, broadly defined, will do OK.

[Dividend Drive]

Thanks, westendal. That may have to count as the most thorough response to one of my questions in the comments ever. Much appreciated.

Outsourcing has grown in recent years which is also of interest. The advertising environment has become so increasingly complex that even businesses who previously had large internal advertising segments have found it more effective and efficient to hand it to specialised businesses. With their mix of data collectors, ad agencies and general PR agencies these companies seem well-placed to comfortably handle all their needs in one. It is a win-win for both, it seems. Personally I see the advertising world becoming increasingly more complex as time progresses, this can only play into the big players like these more.

Do you hold any of these, by the way, or other smaller peers?