February 1, 2023

Enterprise JM

Do the Business

Complexity for Marketers Has Meant Opportunity for Ad Agencies

Major advertising companies have enjoyed good business in 2022, repeatedly raising their forecasts for the year in quarterly earnings reports, even as inflation and economic disruption have roiled other sectors.

Their performance is striking compared with ad agencies’ plight five years ago:

Facebook

and Google had established direct relationships with marketers and were winning growing portions of their ad budgets before agencies could even offer their services. More consumers were “cutting the cord” with traditional television, pressuring the agencies’ income from making and placing TV commercials. And on top of it all, new competition emerged: Advertising-technology and marketing-technology firms were offering new data services for marketers, while consulting firms had set their sights on the advertising business.

Some major owners of ad agencies watched their growth slow or flatten in 2017 and 2018. 

Instead of being relegated to the sidelines, however, they have since been bolstered by the advent of new challenges for marketers. This includes the continued splintering of mass media, soaring demand for e-commerce during the Covid-19 pandemic, and moves by

Apple

that have undermined the effectiveness of ad targeting on Facebook and other platforms, analysts and executives said.

“The complexity and the fragmentation that has only increased in the ad market over the last many years has actually just fed into the capabilities and the expertise of the ad holding companies,” said

Tim Nollen,

a senior media tech analyst at Macquarie. 

Agency holding companies including

WPP

PLC, Interpublic Group of Cos.,

Publicis

Groupe SA, and

Omnicom

Group Inc. have overhauled their businesses to help clients with services such as managing first-party data—the information that marketers directly collect on consumers as opposed to the third-party data now under pressure from Google, which plans to eliminate third-party tracking in its web browser, and Apple.

Agencies are also helping with e-commerce as brands increasingly seek to sell directly to consumers. 

“Clients will come to us and say today, ‘How do I succeed on

Amazon

?’” said

Mark Read,

chief executive of WPP, which owns agencies including Ogilvy, Wunderman Thompson and VMLY&R as well as media-buying business GroupM. “‘How do I build brands on social media? How do I protect my reputation on the web? How do I build stronger employee engagement? What’s my mobile experience? How do I build directtoconsumer [offerings]?’ Those are all questions that they weren’t asking, and we weren’t answering, 10 years ago.”  

To help answer those demands, some agency holding companies made major acquisitions: IPG agreed to buy data-management company Acxiom Marketing Solutions for $2.3 billion in 2018, while Publicis Groupe acquired marketing-services firm Epsilon in a deal valued at $4.4 billion in 2019. Firms sharpened up in areas such as precision marketing to help businesses reach consumers directly through digital platforms, and bulked up their data and technology offerings.

To be sure, marketers take a broad range of approaches to their strategies and the way they work with outside players, with some major brands choosing to handle some marketing functions largely in-house. Agencies are also facing the possibility of reduced marketing budgets from some clients if economic conditions worsen in 2023.

But each new riddle for marketers gives agencies an opening, executives said.

The benefits of complexity

Facebook parent Meta Platforms Inc. and

Alphabet Inc.’s

Google are commanding smaller portions of ad budgets as marketers also spend on alternatives such as Amazon.com Inc. and ByteDance Inc.’s TikTok. 

Google took 34.7% of U.S. digital ad spending in 2017, while Facebook Inc.—now known as Meta—took 20%, according to research firm Insider Intelligence. By 2023, Google will collect 26.5% of U.S. digital ad spending and Meta will garner 18.4%, Insider Intelligence estimates. 

Agency companies have responded by building practices to help marketers on platforms like TikTok and Amazon. 

“It feels like the era of the Facebook-Google ad duopoly is over,” MoffettNathanson analysts wrote in a September note. “And that’s good for the agencies.”

Many marketers today need to spread funds across a broad range of platforms and navigate convoluted sets of data to reach the right consumers, MoffettNathanson said. “Every agency now has a lucrative ‘digital transformation’ business helping legacy companies collect, organize, and analyze that data,” the analysts wrote.

Marketers also are confronting a proliferation of advertising venues from retailers and other businesses with direct consumer interactions, often incorporating their own customer data.

Walmart

lets advertisers use its data to target ads to shoppers across the web, for example.

DoorDash,

Kroger,

Marriott

and

CVS Health

run data-driven ad networks as well. 

Net ad revenues from such retail media advertising in the U.S., which exclude some costs involved with traffic acquisition, will grow to more than $55 billion in 2024 from $37 billion this year, Insider Intelligence estimates. 

The more platforms that marketers want to use, the more likely they are to seek help from partners such as ad agencies, who can help spread their dollars, said

Andrew Lipsman,

a principal analyst at Insider Intelligence. 

Some newer agency specialties like IT implementation and business transformation may handle a downturn better than the core competencies of the past, since they don’t involve media budgets and are less susceptible to macroeconomic trends, said Mr. Nollen, the Macquarie analyst.

Macquarie forecasts on average that the ad holding companies will see a 1% decline in organic revenue growth in 2023, versus the roughly 5% to 10% decline they saw in prior recessionary periods of 2001-02 and 2008-09. 

Marketers navigate outside partners

Some major marketers still want to keep a close handle on some of their data efforts. 

“While I know agencies are providing more consulting-like work…I don’t want to be beholden to any agency necessarily,” said Brad Feinberg, North America vice president of media and consumer engagement at

Molson Coors Beverage Co.

But even large companies such as Molson Coors has partners like

S4 Capital

‘s Media.Monks to help with data capabilities and prepare for marketplace changes related to privacy, Mr. Feinberg said.

Jill Weiss, associate vice president of digital and traditional media at

Royal Caribbean Group,

said IPG’s Mediahub, which the company has worked with since 2015, has expanded disciplines such as programmatic trading, social media and advanced analytics and modeling. 

“I have seen them evolve and really expand certain disciplines,” Ms. Weiss said.

Write to Megan Graham at [email protected]

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8