Outlook for 2014 continues to be demanding

2014 looks to be another demanding year, as a strong UK pound and weak faster-growth market currencies continue to take their toll on our reported margins.

The pattern for 2014 looks very similar to 2013, perhaps with slightly increased client confidence enhanced by the mini-quadrennial events of the Winter Olympics at Sochi and the FIFA World Cup in Brazil (which will re-position perceptions of Russia and Latin America, just like the Beijing Olympics did for China, the World Cup did for South Africa and London 2012 did for the UK) and the mid-term Congressional elections in the US.

New markets, new media and Data Investment Management account respectively for 30%, 35% and 23% of the Group’s revenues of $17.3 billion, demonstrating the success of our strategic focus

Forecasts of worldwide real GDP growth still hover around 3.6%, with inflation of 2.1% giving nominal GDP growth of around 5.7% for 2014, although they have been reduced recently and may be reduced further in due course. Advertising as a proportion of GDP should at least remain constant overall, although it is still at relatively depressed historical levels, particularly in mature markets, post-Lehman. Advertising should grow at least at a similar rate as GDP, buoyed by incremental branding investments in the under-branded faster-growing markets.

Although both consumers and corporates seem to be increasingly cautious and risk averse, they should continue to purchase or invest in brands in both fast- and slow-growth markets to stimulate top-line sales growth. As the former leading chief investment officer of one of the largest investment institutions said perceptively, companies may be running out of ways of reducing costs and have to focus more on top-line growth. Merger and acquisition activity may be regarded as an alternative way of doing this, particularly funded by cheap long-term debt, but we believe clients may regard this as a more risky way than investing in marketing and brand and hence growing market share.

In 2014, our prime focus will remain on growing revenues and gross margin or net sales faster than the industry average, driven by our leading position in the new markets, in new media, in Data Investment Management, including data analytics and the application of technology, creativity and ‘horizontality’ – the increasing opportunities for coordination and co-operation between activities both nationally and internationally, and at a client and country level. New markets, new media and Data Investment Management account respectively for 30%, 35% and 23% of the Group’s revenues of $17.3 billion, demonstrating the success of our strategic focus.

At the same time, we will concentrate on meeting our operating margin objectives by managing absolute levels of costs and increasing our flexibility in order to adapt our cost structure to significant market changes and by ensuring that the benefits of the restructuring investments taken in 2012 continue to be realised.

The initiatives taken by the parent company in the areas of human resources, property, procurement, IT and practice development continue to improve the flexibility of the Group’s cost base. Additionally, as noted earlier, flexible staff costs (including incentives, freelance and consultants) remain close to historical highs of around 7.5% of revenues and continue to position the Group extremely well should current market conditions change.

The budgets for 2014 have been prepared on a cautious basis as usual (hopefully), but continue to reflect the faster-growing geographical markets of Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe and faster-growing functional sectors of Advertising, Media Investment Management and direct, digital and interactive to some extent moderated by the slower growth in the mature markets of the US and Western Europe. Our 2014 budgets show like-for-like revenue and gross margin growth of over 3% and a target operating margin and gross margin or net sales margin improvement of 0.3 margin points before the impact of currency.

Incentive plans for 2014 will continue to emphasise revenue, gross margin or net sales and operating profit growth in conjunction with operating margin improvement, although objectives will continue to include qualitative Group objectives, including coordination and co-operation, talent management and succession planning.

At the time of writing, we have revenue and profit data for the first two months of 2014. The Group has had a good start to the year, with like-for-like revenue growth up over 6% in the first two months and gross margin or net sales up over 4% on the same basis, again reflecting the divergence in revenue and gross margin or net sales in the Group’s Media and Data Investment Management businesses.

All geographic regions were up, with growth in North America, the UK and Latin America up well above the average. All sectors, other than Branding & Identity, were up, with Advertising and Media Investment Management and direct, digital and interactive particularly strong.

These trends are in line with our budgets, which also indicate a broadly steady rate of growth throughout the year, albeit with the usual conservatism in quarter four. Operating profits and margins were above budget.

Revenue in faster-growing markets 2010-2013 $bn

  • WPP
  • POG
  • Omnicom1,2
  • Publicis1
  • IPG1
Bar chart for Revenue in faster-growing markets 2010-2013

1 Peer data sourced from annual results translated at average exchange rate for the year.

2 Assumed non-Euro countries in Europe are 3% of revenue and Canada is 1.5% of revenue.

Chapter 6 of 13

46%