How the alternative holding agency groups are hitting growth spurts even during the downturn

As traditional agency holding groups flounder, their smaller rivals can’t stop growing — even during a pandemic-induced downturn.

So much so that those businesses are on an acquisition trail unburdened by the culture damage of having to trim headcount like WPP and Dentsu. 

S4 Capital acquired Amazon specialists Orca Pacific at the end of July, while You & Mr Jones bought influencer company Collectively earlier this month. JellyFish will also enter the M&A market before the year’s end. 

Marketing services firms aren’t meant to be making these sorts of moves, not when advertising is on the decline. In the U.S. ad spending is set to drop by 25% this year and won’t recover until 2023, per Forrester. But frugal advertisers haven’t been kryptonite to all marketing services firms in 2020, it seems. 

S4 Capital recently forecasted double-digit year-over-year revenue and gross profit growth for 2020. Similarly, You & Mr Jones appears to be in rude health in comparison to the traditional holding groups. For the first six months of the year, the marketing services firm grew organically by 20%, according to CEO David Jones. Conversely, Publicis Groupe’s organic growth was down 8% over the same period. It’s a similarly story at Jellyfish where the company’s revenue targets for the full year remain relatively unscathed. As CEO Rob Pierre explained: “We’re not going to do quite what we expected for the year, but it’s only going to be [down] a few percent.”

Granted, M&A activity isn’t the only barometer of a company’s stability. After all, the likes of WPP and Omnicom are still acquiring businesses. They will always have to because organic growth on its own won’t be enough to appease the stock markets.

But the recent flurry of M&A activity does reinforce, however, what the likes of S4 Capital and You & Mr Jones want to be, which is far more attuned to the growth of the largest ad tech and mar tech vendors than they are traditional media agency owners. There are around 20 tech companies including TikTok, Apple and Amazon that S4 Capital is forging closer ties with, while You & Mr Jones has shares in several companies including Pokemon Go developer Niantic. 

In fact, the two largest independent ad tech companies are now worth more than the four largest agency holding groups, according to investment bank Luma Partners. The Trade Desk and Roku have a combined market capitalization of $42.8 billion, while the same figure for Omnicom, WPP, IPG and Publicis is $35.1 billion.  

“Big disruptions like the coronavirus have a history of accelerating existing changes, not creating new ones, which is what’s playing out with agencies in 2020,” said Jones. “That model is totally challenged. You can’t reinvent the agency model in the same way you can’t reinvent CD-ROMs, photographic film or fixed lined telephony. No one has ever reinvented big legacy businesses and made a success of it post the revolution.” 

In fairness, agencies aren’t going away anytime soon. Advertisers have been generally satisfied with how quickly their agencies have pivoted and adapted to the vagaries of the coronavirus, according to interviews with the likes of Burger King and Anheuser-Busch over the last five months. They do, however, want more services beyond the remit of traditional agencies. And while that does involve some media buying, particularly online, its also hits areas like asset optimization, data consulting, e-commerce, in-housing services, cloud software management and technology reselling. 

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Unlike buying ads, advertisers have increased, rather than cut spending in many of these areas in order to find pockets of growth. These investments are reflected in how the pandemic has sped up digital transformation projects across several industries. Indeed, the pandemic has accelerated companies’ digital communications strategy by a global average of six years, according to a survey of 2,569 enterprise decision-makers conducted in June by cloud communications firm Twillio. 

“All these services, from asset optimization to data management, mean we’re not so reliant on advertisers having to spend media for us to make revenue,” said Pierre. “We’re effectively the service layer between our clients and the technology platforms they use to reach and understand consumers.”

Therefore, the marketing services firms that fare well in the second half of the year are going to be the ones that can truly navigate how owned, earned and paid lead to sales. But there’s no one-size-fits-all agency model for offering this service, which is why S4 Capital, You & Mr Jones and JellyFish have made flexibility a focal part of how they work with marketers.

In the post-coronavirus world, all bets are off when it comes to how advertisers structure and align themselves and it’s just as likely that more advertisers will bring parts of media in-house as it is there will be more pitches. 

“As the walls in the walled gardens have got higher clients to want to exert more influence over their marketing,” said S4 Capital CEO Martin Sorrell. “They’ve lost control and now CMOs want to take back control from outsiders. Clients are seeing the benefit of developing first-party data.”

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