The top 30 media buyers’ operating profit margins improved from 12.8% to 13.9%, but this is still a far cry from the 20% or so that the Kingston Smith annual survey used to report only just a few years ago. While media agencies used to far outperform other marketing services sectors in their profitability this is no longer the case and the differential for the last couple of years has been much smaller.
Fee income across the top 30 media buyers continues to grow, increasing by 8.9% to £925m, being one of the top performing sectors in terms of growth across the marketing disciplines. This is encouraging given the continuing difficult trading environment for agencies in this sector in terms of competition to win and retain clients.
There are now only seven independent agencies left in the top 30, as ranked by fee income, with the largest from the previous year’s surveys, Essence Digital, having been purchased by WPP. The remaining independent agencies now contribute just 5.2% of the gross income of the top 30. The biggest, by some way, is the7stars with fee income of just over £13m. This continues to indicate that once media agencies reach a certain size, they are acquired.
Overall, operating profits across the top 30 increased by nearly 18% to £129m, a marked improvement on the 15% decrease last year. However, the total is distorted by the star performer Dentsu Aegis London, which turned a £1.3m loss last year to a £6.3m profit this year. If this company is taken out of the equation then the overall increase in operating profit is 11%, which still indicates a big improvement for the sector overall.
One of the most important factors continues to be the need to attract talented staff. However, it is also important that agencies retain and develop existing clients because, as a number of companies have reported, the effort and cost that goes into winning new work is immense. Talented staff are integral to building strong, enduring client relationships, so nurturing and retaining those individuals has never been more important.
In last year’s survey we reported that media-buying agencies continued to invest heavily in talent. This is borne out by the fact that staff numbers have increased by 739, or 9%, compared to the previous year’s results. The top 30 media buyers now employ over 9,100 people compared to almost 8,400 last year.
Average salary costs per head have stabilised, increasing by an inflationary 1.2% to £61,138. However, employment costs comprise over 60% of fee income for the second year in a row. Our benchmark is that employment costs should be a maximum of 55% fee income, and only 19 companies in our sample managed to contain staff costs within that threshold, which is a slight improvement compared to the 18 last year.
The net cash position of £452m is 175% of the net current assets this year, improving from last year. This indicates that the companies are focussing much more on working capital and cashflow management, and generally continuing to collect cash from clients ahead of having to pay media owners.
We recommend that agencies have enough cash to meet 60 days worth of operating expenses. Media buyers managed to far exceed these targets as usual. This indicates that media buyers are well placed to make the investment required to strengthen their future position in the industry.
The media buying sector is still in a period of significant change and transition as they and their clients move towards an ever changing digital media world. The top 30 companies have been investing to differentiate themselves in this new world, and the costs are mainly people costs.
For the past two years, employment costs have exceeded 60% of gross income – unprecedented in over 20 years of carrying out this survey – and that has severely impacted agencies’ ability to make the historically high margins.
We reported last year that significant investment was being made into programmatic and that this would bring work in the future with higher margins. We have already seen a small rise in margins this year so this appears to bear out, and it will be interesting to see if this trend continues in future years.