Agency groups anticipated that 2008 budgets would be met ?but there is, to say the least, less confidence over 2009. Groups approach the future with "cautious optimism".
As last year, the fastest-growing ?regions were Asia-Pacific, Latin America, Africa and the Middle East. The slowest-growing regions once again included the UK and Spain.
According to the most recently filed accounts, spend through the top 50 ?UK advertising agencies as measured by turnover grew by just 3.7 per cent.
Gross income grew by nearly 7 per cent and increased for 70 per cent of the companies reviewed.
Just two companies reported an increase in gross profit of more than 50 per cent: The Gate Worldwide grew by 74 per cent and new entrant into the top 50 Albion Brand Communications increased by nearly 80 per cent.
Strong growth at The Red Brick Road of 21 per cent resulted in its ?top 31 ranking and two other new entrants, Beattie McGuinness Bungay and Lawton Communications, grew by 47 per cent and 42 per cent respectively. A significant fall was reported by St Luke's.
A Profitable Industry
Pre-tax profit grew by 13 per cent overall. Operating profit increased by 26 per cent compared with a 7.7 per cent increase last year. Operating margin (operating profit as a percentage of gross income) increased to 12.3 per cent on average.
Given the economic climate, it's interesting to draw comparisons to 1991, before the last significant downturn, when operating profit margin for the largest agencies stood at 9.8 per cent. In the three subsequent years, they recorded overall operating losses.
Forty-five of the top 50 reported an operating profit. Young & Rubicam and M&C Saatchi reported the most significant increases of 34 per cent and 63 per cent respectively. Young & Rubicam generated the highest operating profit overall of £17.3 million.
Agencies suffering the biggest decline in operating profit were Saatchi & Saatchi Group, where operating profit fell by 32 per cent, and Leo Burnett, where profit dropped by 26 per cent. Grey reversed recent improvements with a 45 per cent fall. DraftFCB London reported the biggest operating loss of £4.3 million while its ?merger partner, Draft London, suffered an operating loss of £1.3 million.
A well-run profitable agency should be able to generate an operating profit margin of 15 per cent or more. Of the top 50 agencies, 18 beat this benchmark and five generated an operating margin in excess of 20 per cent. Albion Brand Communications generated the highest margin of 39 per cent.
Of the 21 agencies which kept staff costs below 55 per cent or less, 11 generated operating margins in excess of 15 per cent. This year, staff costs absorbed 56 per cent of gross income - a further improvement over the 58 per cent reported in the previous survey.
The highest-paid director at an ad agency was at Bartle Bogle Hegarty, earning £649,000. However, the agency generated a 7 per cent increase in gross income and a 5 per cent increase in profit.
Directors' pay for ad agency directors was generally small compared with that for directors heading the listed groups.
Sir Martin Sorrell again heads the table with a remuneration package of just under £4 million.
The Great Divide
Independently owned agencies grew gross income by 13 per cent, compared with 6 per cent reported by the group-owned companies.
Independent agencies increased operating profit by 22 per cent, but group-owned agencies' operating profit went up by 28 per cent. Golley Slater Group and Lawton Communications Group reported a rise of more than £1 million.
More than half of the group-owned agencies reported operating profit increases of more than 25 per cent, with the Cello-owned Tangible Financial (formerly cchm:ping) reporting an ?increase of 446 per cent.
The differential in salary between group-owned and independent agencies increased again this year, with group-owned agency staff picking up an extra £10,600 per employee on ?average compared with a differential of £10,100 last year.
Rising Figures
Productivity, as measured by gross ?income per head, grew on average by 3.8 per cent to £105,106 per head.
Operating profit per head reflects a combination of productivity and how effectively an agency converts revenue into profit.
This increased by 22 per cent to £12,802 per head. Miles Calcraft Briginshaw Duffy increased its operating profit per head by 73 per cent to £23,000 per head.
Operating profit grew by 22 per cent but pre-tax profit by only 13 per cent. One of the reasons was that exceptional costs increased to £12.9 million from £9.1 million.
Twenty-four agencies recorded exceptional costs and only two, McCann Erickson Communications House and Tangible Financial, reported net exceptional income of £1.7 million and £476,000 respectively.
TBWA\Manchester wrote off ?£4.87 million from its investment in Tequila\ Manchester, which was in ?liquidation. This followed write-offs ?in previous years.
Financial Performance of Marketing Services Companies 2008 is available from Kingston Smith W1 (020 7566 3850), priced £460.
Feature
Agency performance league 2008
The results of this year's Kingston Smith W1 survey Financial Performance of Marketing Services Companies portray a sector which is growing and generating good profitability.
