OK in the UK? What the agencies' Q1 results tell us about the fortunes of UK operations

The major agency holding groups have now reported their Q1 global results and the pattern has generally been the same as before when it comes to the overall results.

Publicis outperformed expectations and outlined a positive message, powered by the combination of its Media and Epsilon assets, as well as a generally strong all-round performance. Omnicom did fine, although the debate continues over its comparable like-for-like revenue growth when proprietary media is stripped out but, even adjusted for that, its results were ok, as were Havas'. At the other end of the scale, IPG showed some growth while WPP and Dentsu showed declines but all three pointed to what they hope is a recovery of trends in H2.

But what is happening in the UK?

It should be emphasised that the UK punches far above its weight when it comes to its importance to the global agency groups. Take WPP, for example. The UK was 14% of net revenues in Q1 and its second biggest operation. To put in context, China - which tends to get a disproportionate share of attention - was 4% and Western Continental Europe was 20%. For Omnicom in Q1, the UK generated virtually the same amount of revenues as the whole of Asia-Pacific (11.1% of sales vs 11.2% respectively). For IPG, the UK generated more revenue in Q1 than its Continental European or Asia-Pacific operations while, for Publicis, the UK is 9% of revenues (Dentsu and Havas do not report their UK operations separately).

Why this is the state of affairs could be a separate piece in itself, but what happens in the UK is important.

So what is happening? The overall message is sluggish growth, ahead of a UK general election, a date for which has now been set on 4 July.

Omnicom was the best performer of the major groups, with 3.2% organic revenue growth reported (again with the caveat of not being comparable with other agency groups). However, other agency groups did not fare so well. Publicis reported "slightly positive" organic revenue growth, while IPG and WPP posted 0.3% and 0.2% respectively. Dentsu did not give a specific number but pointed out that the UK operations saw a decline.

The picture that was posted, for Q1 at least, was not a positive one.

That may seem a surprise given the story from some of the UK's media platforms at the start of the year. ITV reported its Total Net Advertising Revenues (NAR) was up 3% YoY and that strength was continuing into Q2. Of course, online is now the most important facet of the UK advertising market (about 70%+ of ad revenues, although that will include the digital offshoots of 'analogue' media such as AVOD) and, while companies such as Alphabet (Google) and Meta (Facebook) do not split out UK ad revenues specifically, we know at least for Meta that EMEA has, as a whole, posted strong advertising growth, which would be impossible if the UK was not showing at least some level of (decent) growth.

Part of the weak performance seems to be due to a comparable effect i.e. lapping strong performances from Q1 2023: Publicis noted it had reported 24.1% growth in the UK in Q1 2023, which would be a very strong result by anyone's stretch. WPP had shown organic revenue growth of 7.4% in the same quarter, which is still a very solid performance. That was maybe less of a factor for Omnicom (5.9% organic revenue growth in Q1 2023) and IPG (2.9%). So, comparables do seem to play a part but cannot explain everything.

It is, of course, just one quarter's results but, looking at the qualitative comments, some themes do emerge. Creative actually seems to have held up well - Publicis pointed to double-digit growth in Q1 in the UK while IPG noted the strong performance of McCann and FCB. When it comes to media, again, the market seems to have had decent growth overall (Publicis again referenced double-digit growth), which would be in line with a market that was recovering. But some areas may have had more difficulties - IPG pointed to weakness in events and healthcare, while Publicis noted Sapient was negatively hit by comparables and the overall softness in IT spending.

However, there are two factors that make a unifying narrative difficult to sustain. The first is that, while there were overall similarities between the groups, the causes for that sluggishness seem to have varied between companies. Dentsu, for example, which has a notable UK media business, pointed out its UK operations were down. That would seem to go against the grain of the idea that media held up well across the board.

The second, and perhaps more important for the long term, is that the agency revenue model is becoming increasingly disconnected from the general performance of the advertising market in general as the agencies move more into technology-related areas and the importance of areas such as retail media grows, as well as the continuation of long-term trends such as the declining importance of commission.

It also reflects the fact that the UK is a very digital market and that most of Google's and Facebook's revenues come via self-serve. We should therefore think of the agencies - especially in a market such as the UK - as becoming somewhat more divorced from the pure advertising market. That is a trend that is likely to increase over time, not decrease.

As usual, this is not investment advice.