How to win in the rapidly evolving marketing services industry
Keep creative and carry on… how to navigate the choppy waters of uncertainty and constant change in a competitive market
For 33 years, Moore Kingston Smith has reported on the financial performance of marketing services agencies in the UK. To do this, we use a robust methodology involving analysing the most recently filed financial statements. We combine this with a client survey and industry data to provide a clear and up-to-date picture of the challenges, sentiment and optimism within the creative industry.
When we work with clients, we combine this analysis with our value driver insight which considers what makes an attractive agency investors and acquirers, and what agency owners can do to drive performance.
Challenging macroeconomic landscape
Undoubtedly, and after completing over 30 deals in the media and marketing services industry in the last three years, I can say that 2023 has been challenging. High interest rates, the cost-of-living crisis and tough new business environment are expected to have squeezed margins, or slowed the growth trajectory of agencies this year.
More worryingly, our analysis shows that there has been no improvement in real productivity since the turn of the millennium, a trend that needs changing. However, investors are hoping that creatives will harness AI to enhance their offering in the future, rather than being replaced by it. We believe that this will help increase productivity and the best agencies are already seeking to do this. The recent sale of Vixen Labs to House 337, part of Next 15, that we advised on is one such example
This year’s survey saw the financial results dividing the industry into winners and losers. AI could result in a further exaggeration of this trend as poor performers are commoditised by it, with the winners in the industry harnessing it.
With the stabilisation of interest rates and recent positive news about lower inflation coupled with the creativity and dynamism of the industry, we are optimistic for 2024 and beyond.
Figures and trends to maintain hope
- This year’s survey shows overall strong revenue growth of 15.7%. However, when it is adjusted for inflation, it is only 6.7%. There has been no real growth in gross income per head in the last 23 years. Agencies will need to find solutions to this in the next few years, especially with the AI impact coming down the tracks.
- The results can be split into winners and losers: half of the companies in the survey have recorded negative real revenue growth, with the other half showing reasonable to strong real revenue growth.
- The top 50 independent agencies have experienced strong revenue growth despite the macroeconomic conditions, with two consecutive years of +20% growth.
- The operating profit margins are the best of the last 15 years, a post-Coronavirus boom.
- There is a strong correlation, as mentioned in previous surveys, between low staff cost % and high margin. We recommend that the cost should be maintained at 55%/60% maximum to achieve a good (15%+) margin.
- Average freelance spend was 5.52% in 2022, below the pre-Coronavirus average of 8%, but an increase on 2021, a trend to watch closely to see where this rebalances post-Coronavirus.
- Sustainability of the margins depends on how wage increases can be passed on to clients. This trend only started to take effect towards the end of 2022, meaning there is a lag on the impact. Our spring outlook survey suggested it was again split close to 50:50 between those giving inflationary pay rises, and also increasing charge-out rates, and those that aren’t. 60% of agencies report challenges in passing these on to clients. The winners over the next few years will be those agencies that can do it without losing clients.
- 52% of the top 50 independent agencies are now backed by PE ownership, a significant change from ten years ago when only 22% had PE involvement. Over that period, the total size of the top 50 in revenue terms has trebled as a result of both organic and inorganic growth. This is only going to continue. Additional average margins have improved by 3%. Of the seven companies within the top 50 that delivered margins over 20%, five of these agencies are PE-backed and one has been acquired, which demonstrates a further link. We expect this trend to continue too.