Marketing.Media.Money

The world’s largest ad agency just had $2.6 billion wiped off its market cap

Martin Sorrell at the 2018 WEF in Davos, Switzerland.
Adam Galica | CNBC

Advertising agency group WPP has seen its market capitalization fall $2.6 billion after it reported flat results Thursday.

WPP's shares were down almost 13 percent and the firm's chief executive, Martin Sorrell, said there were several reasons for the lack of revenue growth.

"The major factors influencing this performance were probably the long-term impact of technological disruption and more the short-term focus of zero-based budgeters, activist investors and private equity than, we believe, the suggested disintermediation of agencies by Google and Facebook or digital competition from consultants," he said in an online statement.

Speaking to CNBC's Squawk Box on Thursday, Sorrell said 2017 was a difficult year and that WPP had to adapt in the face of disruption. "We have to simplify how we operate, we have to be faster and better and cheaper in a world which is obviously being disrupted by technological developments, whether you are talking about manufacturing, media or distribution, so we have to change the way we do things, simplify things," he said.

Rival agency groups are also suffering, with Omnicom reporting 2017 revenue down 0.9 percent while IPG had a sluggish 2017.

WPP's Martin Sorrell: Consolidation is 'inevitable' amid pressure from Amazon, Netflix
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WPP's Martin Sorrell: Consolidation is 'inevitable' amid pressure from Amazon, Netflix

Sorrell added that consumer-packed goods businesses make up a third of WPP's clients. "We have seen pressure on pricing in a low inflationary environment and volumes being under pressure too," he said of the sector. Companies such as Procter & Gamble and Unilever are reducing the number of agencies they work with, while drinks-maker Diageo said it is saving money across media buying and live experience marketing.

WPP's advertising and media investment management function was its strongest-performing sector, including ad agencies J. Walter Thompson and Grey and media agencies Mindshare and MediaCom. Revenue for the function was down 0.1 percent for the year, but up 1.8 percent in the fourth quarter of 2017.

WPP's public relations and public affairs businesses were up 0.7 percent like-for-like in revenue across the year. WPP announced Tuesday that it would merge PR agencies Burson-Marsteller and Cohn & Wolfe but Sorrell denied this was simply a cost-cutting measure.

"It's a step taken to try and improve the offer. If I looked at Cohn & Wolfe, for example, they had a very good year last year. Burson — a bigger business — had a tougher year. In terms of topline growth… that becomes increasingly critical, so bringing these two businesses together… will improve the prospects for the combined business. Obviously, there will be efficiencies," he told Squawk Box.

Broker Liberum Capital reiterated its buy position and stated: "While WPP has downgraded its longer-term annual targets, this is already priced in to both our forecasts and the consensus. WPP, like the other agency groups, has said 2017 was impacted by cyclical, not structural, factors and we fully concur with this view, with the structural concerns being overdone."