WPP PLC shares fell more than 12% Wednesday after the world's largest advertising company reported an unexpected slowdown in demand from big advertisers of consumer goods that traditionally drive its growth.
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The company--considered a bellwether for the health of global companies by investors given its large client base--lowered its full-year forecast for net sales growth to less than 1%, blaming belt tightening at packaged-goods giants that produce everything from beer to shampoo. WPP already rattled investors in March when it set a 2017 target for net sales growth--a measure used to judge the company's underlying performance--of just 2%.
Chief Executive Martin Sorrell said advertisers in the packaged-goods sector, which make up a third of the company's sales, are struggling with a low-growth, low-inflation environment, while some are contending with activist investors and technological disruptions.
"In volume terms these companies are flat or falling," Mr. Sorrell said in an interview. "When volumes fall in packaged-goods companies that's a big wake-up call: It means you have less consumers and that's the beginning of serious problems."
Despite the slowdown in underlying revenue growth, the group reiterated its target for a 0.3-point improvement in its operating margin. It also raised its dividend to 22.7 pence from 19.55 pence in the first half.
Investors, however, were focused on the lower 2017 outlook, which showed the troubles of the consumer-goods sector spilling over the an already-weakened ad industry.
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For years, the advertising world has strained to deal with the shift from traditional advertising platforms, such as print and TV, to digital. That is now being compounded by austerity among major advertisers that are core to growth.
Procter & Gamble Co., Nestlé SA, Unilever PLC and Anheuser-Busch InBev NV have all struggled to boost growth. Those factors are leading companies to put additional pressure on ad firms to reduce the fees they pay for services.
Woes across the consumer-goods industry have given rise to the practice of "zero-based budgeting," in which finance managers plan each year's budget as if starting their department from scratch--contrary to the prevailing method of adjusting the previous year's spending.
Unilever, a huge proponent of zero-based budgeting, said last month in its first-half earnings report that it plans a "step-up" in brand and marketing investment in the second half of this year. Earlier this year, the company had said it planned to cut the number of ads it created by 30% and reduce the number of creative agencies it works with by half.
Mr. Sorrell said the weakest performance came from the group's North America operations, pointing out that the uncertainty around the economy and the Trump administration's ability to carry out its legislative agenda.
"The enthusiasm has waned," Mr. Sorrell said, adding that businesses are concerned about the administration's ability to push through tax reform after the failure of its health-care bill last month.
WPP's slowdown comes as its closest competitors face similar headwinds. Publicis Groupe SA is navigating a rare leadership transition and reported sales growth of just 0.2% in the second quarter, far below its historical average. Omnicom Group Inc. reported better-than-expected earnings, but sounded a cautious note regarding the U.S. economy.
Elsewhere, Japan-based advertising company Dentsu lowered its full-year net sales guidance by 1.5% earlier this month saying "the movement by clients in industries such as consumer packaged goods to review their global marketing budgets has continued to impact business results."
Last month, Interpublic Group, a U.S.-based holding company that owns agencies including McCann Worldgroup and IPG Mediabrands, said spending cuts by consumer packaged-goods clients reduced its revenue in its latest quarter by 1%.
U.S.-based equity research firm Pivotal Research Group reduced its long-term organic revenue growth expectations for ad companies such as Omnicom, Publicis, and WPP. Ad companies were able to generate 4% organic growth annually between 2010 and 2015, but Brian Wieser, a senior analyst at Pivotal, now expects annual growth rates of about 2.5% for the ad firms moving forward.
Among the challenges cited by Mr. Wieser were marketers experiencing slower growth, companies continuing to cut the fees they pay agencies, and growing competition from consulting firms. A further challenge has been advertisers cracking down on nontransparent practices in the ad-buying sector--practices that had helped drive up agencies' margins in recent years.
WPP on Wednesday said profit before interest and tax rose 15% to GBP882 million ($1.13 billion) in the first half. Reported revenue rose 13% to GBP7.4 billion for the period, lifted by favorable exchange rates to the Brexit-weakened pound.
The company said the cyberattack on June 27 that crippled computer systems at some of its agencies including GroupM and Y&R Group didn't cause a significant loss in revenue and couldn't be blamed for the weaker performance in June and July.
Write to Nick Kostov at Nick.Kostov@wsj.com
(END) Dow Jones Newswires
August 23, 2017 06:15 ET (10:15 GMT)