• by Steve McClellan , August 23, 2017

WPP shares dropped 12% in Wednesday morning trading after the firm reported a first half organic net sales decline. It also downgraded its full-year organic growth projections for both revenue and net sales to between flat and 1%.

At the same time, the firm downgraded its global ad spending forecast for the year, cutting it by more than a full percentage point to 3% from the 4.4% increase it had forecast at the start of the year.  And 2016 full-year spending was lower than the company estimated earlier. The final growth estimate for last year WPP now says is 3.7% versus the 4.3% it estimated at yearend.  

For North America WPP cut its ad spend growth forecast to 2.2% from the previous 2.6%.  The first take estimate for 2018 is worldwide growth of 3.4%.

WPP’s  July numbers were also in negative territory with a 4.1% organic revenue decline and 2.6% drop in organic net sales, “behind budget and the quarter 2 revised forecast. All regions, except the United Kingdom, Latin America and Central & Eastern Europe showed lower revenue than the prior year and all sectors were down, with advertising & media investment management and data investment management the most affected. Cumulative like-for-like revenue growth for the first seven months of 2017 is down 0.9% and net sales down 0.8%”

On a call with analysts WPP CEO Martin Sorrell cited packaged goods pull backs—in some cases the result of pressure from activist investors—as a key reason for the firm’s revenue and net sales “deterioration.”

Sorrell noted that among the company’s top-30 clients, 14 posted net sales declines for the first half with an average decrease of 2.5%. The bulk of the slippage and resulting spending cuts came from package goods companies, he said. Some financial service and telecom clients also reported slower sales in the half.

In essence, the declines were “driven by cheap money driving activist investors and zero-based budgeting,” Sorrell told analysts.

Ironically, Sorrell posited, the solution to packaged goods company woes—or at least part of the solution—would be to spend more aggressively on advertising and marketing to spur sales.

Sorrell ruled out speculation from some quarters that part of WPP’s problem was competition from Google, Facebook and consultancies.  That’s just not the case, he insisted. Consultancy impact was perhaps greatest in advising their clients on costs—in part impacting agencies—in what he called a “non-transparent way,” effectively limiting the ability of agencies to offer reasoned counterarguments. The upshot: client cost cuts presented as a take-it-or-leave-it proposition to agencies, Sorrell suggested.

There is “incontrovertible proof,” said Sorrell that companies that invest in innovations and then spend to brand those innovations achieve “greater top-line same-store growth.”

Problems in the package goods sector aside, Pivotal Research analyst Brian Wieser noted that some big client losses—notably media assignments from  AT&T and Volkswagen--also contributed to the holding company’s less-than-rosy results.

That said, Wieser agreed that the results were “more critically driven down by zero-based budgeting exercises and weak general media spending trends from large FMCG marketers.”

The research team at Liberum issued a note indicating that “Crucially, 2018 should see an uptick from net new business wins.” WPP reported first half net new business of $4.2 billion, up more than 40% from the first half of 2016. And that streak has continued in the second half with the recent Sanofi consolidation.

This story has been revised with further input from the company.