Monday, May 18, 2020

15018: Orwellian Mull Of Darwinian Cull Is Sorrellian Bull.

Campaign published a painfully plodding interview with S4 Capital Chief Sir Martin Sorrell, who opined the advertising industry will experience a “Darwinian cull” resulting from the COVID-19 crisis. Um, Armageddon was transpiring long before the global pandemic arrived, fueled by the greed and mismanagement of chimps like Sorrell. The diminutive simian went on to proclaim holding companies are “too big” and “lack focus”—predicting the enterprises will ultimately fail. Is Sorrell senile or just stupid? If he hadn’t been ousted from WPP, wouldn’t Sorrell still be expanding the too big and focus-lacking model? For the architect to dismiss his own erection is pretty pathetic. Sorrell, however, took delusion and denial to greater heights by remarking, “The forces are keeping the costs high in the traditional business when the revenues are declining quite rapidly”—a cautionary critique of humongous salaries within advertising agencies. Really?

Martin Sorrell: Coronavirus will trigger ‘Darwinian cull’ of ad industry

By Jessica Goodfellow

In wide-ranging interview, S4 Capital chief discusses how Covid-19 presents opportunity for some businesses and coup de grĂ¢ce for others.

Sir Martin Sorrell is remarkably optimistic about his advertising business during Covid-19, despite likening the impact of the global pandemic as “closer to a world war” than a recession.

That’s coming from the executive who steered WPP through the financial crash of 2008, among other events.

Indeed, Sorrell believes the virus outbreak — which has forced many countries into lockdown, resulting in dramatic shifts in consumer behaviour — opens up “tremendous opportunities” for his own company, S4 Capital.

“I think we will gain as a result of this, not necessarily in the short term, but in the medium-to-long term,” he tells Campaign Asia-Pacific.

The positive impact he details are threefold: a growth in the online consumer base, an acceleration of media shifting online and an acceleration of digital transformation projects at an enterprise level. These are all trends that stand to benefit his four-year-old company, which is “purely digital” and counts technology clients as half of its client base.

But others will not be so lucky. In fact, advertising’s big six holding companies — including the one he stewarded for 33 years before his controversial exit in 2018 — are in “deep doo-doo”.

In his view, holding companies are “too big” and “lack focus” — problems that he believes are fatal in the current economic climate.

“The six holding companies [WPP, Omnicom, Publicis Groupe, Interpublic, Dentsu and Havas] are really in deep doo-doo, because they can’t get away from their analogue businesses,” Sorrell opines. “If you’re an analogue business, you have to reposition yourself rapidly. You have to blow things up.

“It’s the old cannibalisation argument: if you don’t eat your children, somebody else will. In this case, if you don’t change your organisation, it’s going to change for you — it’s going to be out of your hands.”

Their hamartia is an imbalance of power at the very top, he believes, with traditional creative directors being paid far bigger salaries (he estimates a top New York creative director could feasibly be on a $4-5m annual salary package) than digital directors (he estimates $250,000 a year).

“The forces are keeping the costs high in the traditional business when the revenues are declining quite rapidly,” he suggests.

Sorrell has grown S4 by acquisition, in core specialties of content (MediaMonks, Caramel Pictures, BizTech, IMA, Firewood, WhiteBalance, Circus Marketing), programmatic (MightyHive, ProgMedia), and data and analytics (Conversion Works, Datalicious). Focusing on these core specialties is what makes S4 unique, in Sorrell’s eyes. He believes its only direct competitor is French holding company Fimalac, which bought a majority share in UK-based Jellyfish in November, a digital shop that he says he was considering investing in around the time when S4 bought MightyHive.

Holding companies may claim to offer these specialties, but their “execution is lacking”. Sorrell says the closest thing WPP could get to being a direct competitor to S4 would be an amalgamation of its digital agencies AKQA and Essence with its market research group Kantar (which it sold 60% of to Bain Capital last year).

Sorrell goes on to liken S4 to the Tesla of the advertising industry: “It’s a bit like saying: why is it that the car companies can’t compete with Tesla or why is it that the banks can’t compete with fintech companies? Often they’re so big, they can’t get out of their own way.”

With this in mind, he imagines the financial pressures of Covid-19 will lead to a “Darwinian cull” of the weakest links in advertising — with holding companies forced to either go private and break up, or break up publicly.

“This challenge from C19 is going to unleash tremendous energy,” he continues. “It’s a bit like pruning a tree. I mean, it’s a terrible analogy, because there’s a tremendous human cost here, but there’s a Darwinian cull… that I think is going to happen.”

How Covid-19 has affected S4

Having a technology-heavy client base means S4 may not be feeling the same pain as other ad groups. While many brands have dialled back adspend during Covid-19, some of S4’s technology clients are “spending more money” now, Sorrell claims.

“The tech companies are much more solid in terms of their budgets. There is some switching from H1 to H2, money is being moved because there’s pressure — I think it’s the small-to-medium business pressure,” he says. “But, so far, I would say, marginal actions.”

Non-tech clients are cutting budgets, he acknowledges, but cuts have been targeted at “traditional” advertising such as linear TV, while more money is being spent on digital to drive short-term sales, Sorrell claims.

“The sales side is being delivered by more measurable, cheaper, more effective CPMs and performance on the digital side,” he says. “That’s the big shift that we’re seeing.”

With programmatic, data and analytics purportedly representing 30% of S4’s business (content makes up the remaining 70%), Sorrell is confident it is well-positioned to capitalise on these shifts in client behaviour.

“I think we’re in the fortunate position that we can describe [to employees] a future which has got promise in it,” he said. “Others may have much more difficulty in doing that, but because of the way we’re positioned, I think we will gain as a result of this.” He caveated this with an acknowledgment that the “human cost will be huge”.

S4 has also been “pitching aggressively” during Covid-19 and “getting some very good results”, including winning a major FMCG account and pharmaceutical business last quarter, Sorrell said. The two accounts were previously with holding companies, he added.

Consequently, S4, which made £215.1m in revenue in 2019, has so far seen its financials “marginally affected” by Covid-19.

“We have no leverage, we have good liquidity, and we are well-breached from a facilities point of view,” Sorrell said. He claims the group had a “very strong January” but began to see “a little bit of effect” from February. Liquidity and payment terms are among the chief financial concerns he has.

As the first region hit by Covid-19, Asia-Pacific took the biggest revenue hit in the first quarter, but this region represents just 10% of S4’s business (although Sorrell hopes to up that proportion to 40%). North and South America are its biggest regions, representing 70% of its business, with western Europe making up the remaining 20%. The pandemic only began to take hold of these regions from March, so this will likely weigh down the second quarter for many businesses.

Indeed, Sorrell predicts the second quarter is going to be a “disaster” for the industry, but remains “bullish” it will see a recovery “if not in all, in many segments” by the fourth quarter.

Changes to working practices

Sorrell reveals he is one of eight leaders within S4 to have taken a 50% salary cut from 1 April “as a strong signal to the organisation what we’re prepared to do”. No other members of staff have been given pay cuts at this stage and the business has “reduced but not frozen” its level of hiring.

The eight senior leaders formed a “coronavirus crisis group” in February and have been meeting daily to discuss how to handle the management of staff, clients and finances (in that order, Sorrell assures) during the crisis. His strategy as a leader has been to “over-communicate” to staff by updating them weekly on health and safety and how the business is faring.

It has been “extraordinarily lucky” to have recorded very few internal cases of Covid-19 — Sorrell recalls four cases out of a 2,500-strong workforce.

Working practices have not been impacted by the transition to working from home since the business is “purely digital” anyway, Sorrell says.

“I get physically affected when people start to waffle on about how amazing it is that people are working from home,” he says. “For digital natives, working from home is part of their work.”

In fact, Sorrell says the company has dealt so well with the shift that it may become a permanent fixture — with the company beginning to cut its property leases.

“We’re already cutting our leases, not just because we want to reduce those costs in C19, although that’s part of it, but because we see a distinctive change in the pattern of working, and our people are saying that they prefer working from home,” he says.

He envisions being able to reinvest the $35-40m it currently spends in property back into its people, “which is, after all, our business”.

Pandemic ‘will not stop us expanding’

Sorrell is still aiming to double the size of S4 organically excluding deals within three years. Inspired by Facebook’s recent investment in India’s Reliance Jio, he said the pandemic is “not going to stop us expanding the business” and is eyeing expansion in its data and analytics capabilities in Asia-Pacific and Latin America, plus an outpost in Germany.

“We’re not going to do things at scale, we’re going to do things which are manageable and which will not impact our balance sheet negatively as we think short-term financial strength and the balance sheet is critically important,” Sorrell noted.

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