“The world is being re-shaped by the convergence of social, mobile, cloud, big data, community and other powerful forces. The combination of these technologies unlocks an incredible opportunity to connect everything together in a new way and is dramatically transforming the way we live and work.”
Chairman and CEO, Salesforce
Mr. Benioff made that statement a full decade ago and it’s more true today than it was then. It’s also applicable to most sectors but particularly at the interface of consumers and marketing in the UK, which has seen a continuing shift towards data-driven initiatives in response to changing demographics and a consequent change in demand, not just for products, but also for personalised customer experience. The ability to collect, analyse and act upon large volumes of data, closer and closer to real time, is increasingly mission critical for marketing campaigns. The risk of not getting it right, is alienating rapidly changing demographics and relevant customer segments, and nobody wants that.
Why miss out on the opportunities to be embraced within an innovative and constantly evolving growth story?
Continuing Growth in UK Marcoms
The marketing, communications, and advertising sectors in the UK comprise of dynamic and competitive elements that the Advertising Association estimates will be worth over £36 billion in 2023. As one of the most digitally receptive consumer markets, eMarketer estimates that almost 80% of that UK advertising spend will be digital this year and grow 9.8% compared to 2022. Non-digital delivery, by comparison, is anticipated to be up just 2.5%.
The Marcoms industry has traditionally experienced marked fluctuations based on economic conditions. Client companies tend to adapt their advertising strategies during recessions or ahead of anticipated potential downturns. While reducing advertising spend is a common approach during times of limited economic growth, there is a growing recognition that advertising during a recession can offer significant value at a lower cost. In spite of the current and persistent cost of living crisis, issues around inflation, sourcing of raw materials, access to, and the cost of labour and a host of other realised and potential headwinds, UK companies, as a whole, appear to be recognising the advantage of maintaining and even increasing advertising spend during 2023.
The fact that digital advertising spend has stood up so well is testament to a universe of creative and increasingly technology-receptive businesses. The ONS estimates there are over 23,000 advertising and market research related businesses operating in the UK. Needless to say, most of these companies are relatively small, with less than ten employees, but there are nearly two thousand companies operating in the growth engine that is the mid-market and some 85 companies each with more than 250 employees. The number of businesses in each of those segments grew in 2022, through the pandemic and since the UK’s decision to leave the EU.
Investors See Value in Marcoms, Particularly Those Led by Tech and Data
As technology and strategy consultancies continue to invest in the space once only occupied by what were formerly just advertising agencies, private equity investors have also become demonstrably more comfortable with investing in creative-led businesses.
The M&A market for marketing and communications businesses has continued apace with more than 90 UK marketing services companies changing ownership in the first quarter of 2023, in addition to a record-breaking 2022, when over 300 UK deals were completed. In addition to core advertising, brand advisory and creative agency acquisitions, we’ve also observed significant continued investment activity into companies offering advanced data analytics and social marketing services. We wrote about Customer Relationship Marketing Services in 2021 where we highlighted the record-breaking valuations being reported for those two specialisms in particular.
Although median valuations have corrected somewhat, those two areas continue to attract higher valuations than most other services within the “mad-tech” space, and there are some eye-watering outlier valuations. To those segments, we can now of course add AI businesses that are helping marcoms groups improve customer insight, personalisation and other business functions. WPP acquired, UK-headquartered and UCL AI technology spinout, Satalia, in late 2021, for example. More recently, Grafton Capital acquired London-based ProQuo AI brand tracking and consumer intelligence platform.
WPP and the other five incumbent transnational companies continued their investment into UK Marcoms services companies in 2022, with a particular emphasis on investing into some of those added-value services. So too did large consultancies and financial investors with Capgemini acquiring creative agency, 23red in November, for example, and Deloitte completing its acquisition of Belfast-based AI and data specialists Etain, in April.
Our estimates indicate private equity firms accounted for over half of all investment activity into UK Marcoms-related M&A in 2022, and now own over 12% of the entire pool of UK advertising and Marcoms related businesses. Previously shy of investing into once considered unpredictable creative-led businesses, the asset class has become increasingly receptive to this sort of investment, and the type of value-adding services frequently associated with those businesses.
One case in point is Bridgepoint’s investment into digital marketing agency MiQ in September 2022, which it acquired from its previous long-term private equity investor ECI Partners. To emphasise the point, as well as the activity, global buyout group, Advent International, sold Tag to Dentsu and UK-focused Inflexion exited the Goat influencer agency to WPP in the first quarter of 2023, both having accelerated those businesses growth before passing them on to strategic acquirers.
Getting Technology Right First Time
Whether your focus is getting that creative client campaign delivered on Facebook, Twitter, Instagram, Tik Tok, or whatever is the next iteration of shiny marketing platforms favoured by the next disposable income-advantaged and expectant demographic, or you’re looking for a strategic buyer or a new private equity growth partner, it pays to have some degree of advanced digital capability.
That goes beyond CRM delivering increased revenue from new and existing customers but includes integrating your additional service lines (such as data and analytics, personalisation, social marketing, automation and, increasingly, AI-related functions). It will also help to improve your own business’s operating functions. Finance, HR, compliance with proliferating regulations around privacy and sustainability regulations and flexible working arrangements can all be improved with technology that is rapidly advancing to make those services and operations easier, more efficient and more cost-effective and to ultimately contribute to your clients’ own return on investment. For example:
- Sales Pipeline Management
Maintenance of a strong sales pipeline is vital for advertising agencies, particularly during economic downturns. Agencies need to capture every potential opportunity and diligently follow up on leads. By nurturing relationships with existing clients and actively pursuing new prospects, agencies can secure new projects and sustain their business. A fully functioning CRM platform, well-integrated with other customer-facing applications and other business units is critical to Marcoms enterprises’ future success.
- Business Operations Efficiency
Traditional advertising agencies and associated businesses need to be extremely efficient, ensuring resources are utilised to a very high percentage and also allocated to the most profitable projects. Having a deep understanding of resource capacity enables agencies to respond promptly if a client wants to begin work immediately, thus capitalising on time-sensitive opportunities. That sort of efficiency also needs to be embedded across HR, finance and technology and equipment and integrated across a modern ERP platform. For example, it is essential for your finance function to be able to identify clients who are slow in satisfying invoices or those who may face financial difficulties due to any economic slowdown. Maintaining a robust credit control process helps agencies manage cash flow effectively and mitigate the risk of non-payment or client insolvency. By promptly addressing late payments and proactively assessing clients’ financial health, agencies can minimise financial risks and maintain a healthy business environment. Pragmatic application of the right sort of technology will help avoid this sort of inefficiency, maintain working capital and mitigate business operating risk.
- Project Profitability and Margin Management
In challenging economic times, agencies must be mindful of project profitability to safeguard their bottom line. Allocating resources to low-margin campaigns can reduce overall profitability. It is crucial for agencies to carefully evaluate the potential profitability of each project, considering factors such as the scope of work, client budget, and resource requirements. By focusing on high-margin campaigns and optimising operational efficiencies, agencies can enhance their profitability in spite of any significant adjustment to economic growth.
Capture Efficiencies and Minimise Risk – Integrate ERP, CRM, Internal and External Data Functions
Each of the above can be made to be more efficient and cost-effective with the most appropriate technology implementation and change management. This type of approach will deliver important opportunity to mitigate risks, as well as enabling better practices and decisions to explore, evaluate and act upon revenue growth and improved profitability. Access to data and the ability to control and analyse it in close to real time is increasingly key to Marcoms success. The capability for advanced data analytics matched to the right consumer has rapidly become the new essential to compliment what was once the sole differentiator: your business’s own creativity. As the technology rapidly advances, so too must its close integration with your creative services, to provide faster, better insights and unique customer experience.
This is important, since the prospect of growing advertising spend alone will not ensure business longevity. Robust advertising spend aside, operators in the Marcoms segments are, unfortunately, not immune to inefficiencies, adverse client sentiment and sometimes, just plain bad luck. For example, Harrogate-based telemarketing agency Amvoc, went into administration in March this year, with the potential loss of 450 jobs. Belfast-based AV Browne has recently suffered a similar fate. The enforced closure of Marcoms operators is not that uncommon, particularly of the smaller independents that lack the advantage of being part of a larger group entity, the backing of a private equity sponsor with the right operational improvement strategy, or the right IT support to deliver timely insights for better strategic decision-making.
The Next Step
The UK marketing, communications, and advertising sectors face unique challenges during periods of restricted economic growth. To navigate the threat and challenges of inevitable reduced advertising spend, at some time in the future, advertising agencies must focus on maximising efficiency and resource utilisation. By adopting streamlined processes, implementing project management tools, and optimising internal operations, agencies can improve efficiency, minimise wasted resource, and maximise the return on investment for their clients. It’s Panamoure’s belief that a digital approach offers the best means of navigating those challenges and to identify and realise previously unexplored business opportunities and operational efficiency.
As a business owner or manager, whether your strategy is to remain independent, match with a new growth investor or to improve your integration across your business units, Panamoure can help you identify what fundamentals might be missing and how to fill those gaps that are obstructing your digital excellence. If that reads like an attractive outcome, then do get in touch for a no-commitment discussion.
We’ll be happy to explain how we can help you with your company’s priorities and to show you how we have been able to help similar businesses successfully incorporate those important improvements.
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