Ad-agency employment is at its highest level since 2001, agency stocks have hit all-time highs and U.S. ad spending this year is forecast to grow at its fastest clip since 2004. It's a good time to be in the agency game -- as long as you're connected to digital or a thriving discipline like experiential.
U.S. agency revenue increased 3.7% to $39.1 billion in 2013, record revenue but the slowest growth since the ad-market recovery began in 2010.
The growth rate is based on Ad Age DataCenter's analysis of more than 900 agencies in the Agency Report. It's in the range of stated U.S. organic growth of 2.9% at WPP; 3.7% at both Omnicom Group and Interpublic Group of Cos.; and North American organic growth of 4.7% at Publicis Groupe, which said U.S. organic growth was "above 5%."
(Organic growth adjusts for the effects of acquisitions and exchange rates. Ad Age's figures adjust for the effects of acquisitions and apply average annual exchange rates to U.S. operations of non-U.S. companies.)
Agencies are on track for another year of moderate growth in 2014.
Digital work accounted for more than a third -- 35.3% -- of U.S. agency revenue in 2013 vs. 32.5% in 2012, according to Ad Age DataCenter. Digital revenue surged 13.8%.
Digital continues to grab share from non-digital work. Publicis, for example, said its 2013 organic growth of 4.7% in North America reflected a 13.1% jump in digital offset by a 3.1% decline in "analog" (non-digital) work.
For first-quarter 2014, Publicis said non-digital organic revenue in North America was flat rather than down, mirroring global results where analog work's rate of decline was slowing. Publicis Chairman-CEO Maurice Levy essentially predicted this on a February earnings call.
"We believe that there will be in 2014 a strong increase in ad investments, and therefore, there should be a lower decrease in analog" as some non-digital media see growth, Mr. Levy said on that call. "Television will certainly increase … but [ad spending in] the press has now reached such a level that it will be difficult to decrease it further. We will see the disappearance of quite a number of written media, written newspapers. This is unavoidable, and we'll see quite a number of media that will totally disappear. And therefore, analog will play a much-reduced role [going forward], and the digital sector will play an increasing role. Digital media have considerable assets, and this should be quite successful. I believe that this polarization will remain."
To be sure, it's getting harder to parse digital vs. non-digital, because internet-related work is a component of everything from TV campaigns to PR efforts. Randall Weisenburger, exec VP-chief financial officer at Omnicom, told analysts in February: "Virtually all of our agencies are aggressively taking advantage of new technologies and communications platforms to broaden the scope of services they're offering to their clients."
U.S. digital-media employment last year jumped 12.5% and now stands at a record level (149,100 jobs), according to figures from the Bureau of Labor Statistics.
Ad-agency employment (190,600) is at its highest level since 2001, though far below its 2000 dot-com-bubble peak (207,400).
U.S. ad agencies have hired 30,000 people since agency employment hit a nadir in early 2010. Back in the dark days of 2009, ad agencies in aggregate were cutting an average 41 jobs a day. Last year, agencies added about 18 jobs a day.
U.S. public-relations-agency employment this year is on track to break a record, reflecting strength in a discipline that is finding new revenue and growth through social media.
Long-established agency companies face more competition from the worlds of technology (IBM Interactive Experience, ranked by Ad Age as the world's biggest digital agency) and professional services (PwC Digital, new to the Agency Report). But investors are bullish on the future of agency giants.
Shares in Interpublic last month hit their highest price since 2002. Publicis in February reached an all-time high; Omnicom, its merger partner, that month scored its highest adjusted closing price to date.
WPP rose to its all-time high in January. Dentsu Inc., the fifth-largest agency firm, in December traded at its highest price since 2006.
U.S. revenue growth by discipline
All major U.S. agency disciplines grew last year, with the exception of media agencies' non-digital operations, in which revenue was flat as relative strength in TV and out-of-home media offset declines in newspapers.
Ad agencies grew just 1.8% as they continued to make a digital transition.
Customer-relationship management and direct marketing grew 5.2% in 2013. Health-care agencies advanced 4.9%, recovering from a weak 2012.
Promotion-agency revenue rose 4.0%, strongly influenced by gains in experiential/event marketing. Promotion and experiential rankings are topped by two industry players new to Agency Report: IN Marketing Services, an integrated-marketing agency with roots in shopper marketing, and Freeman, a major provider of marketing services for live events.
PR-agency revenue increased 2.4%; the sector was hurt by weakness in Washington public-affairs work during a non-election year.
Media agencies generated big revenue gains from digital work, reflected in Agency Report's 13.8% digital growth. Publicis attributed its 2013 North American growth mainly to media and digital businesses. Publicis and other agency companies are generating more revenue from digital-media platforms; WPP's digital platform, Xaxis, last year grew 24%.
Omnicom President-CEO John Wren voiced optimism about the year on an earnings call last week. "2014 is off to a very good start," he said, with the U.S. among the markets "showing consistent forward momentum." On Interpublic's earnings call last week, Chairman-CEO Michael Roth said marketers appear "committed to investing behind their brands."
U.S. ad spending will grow 4.9% to $167.3 billion in 2014, the fastest growth since 2004, according to a forecast released this month by Publicis' ZenithOptimedia. Advertising this year gets the benefit of spending on elections and the Winter Olympics, but internet spending -- projected to jump 18.4% -- will drive growth. ZenithOptimedia expects 2014 worldwide ad spending to rise 5.5%, vs. 3.9% growth in 2013.
On Publicis' earnings call this month, Mr. Levy estimated 2014 global ad-agency revenue industrywide will rise in the range of 3.5% to 3.6%. That's based on a model in which Publicis has found ad-agency revenue increases at roughly two-thirds the rate of ad-spending growth. "It is a model which has proven to be right in the last five years that we are using it," he said.
Taking two-thirds of ZenithOptimedia's 2013 U.S. ad-spending growth rate (3.8%) would imply U.S. ad agencies last year grew 2.5%, not far from the 1.8% growth that Ad Age DataCenter calculated for ad agencies in the Agency Report. Doing the same calculation on ZenithOptimedia's 2014 U.S. growth rate would suggest revenue for U.S. ad agencies will increase 3.3% in 2014 -- hardly a surge, but at least growing in the right direction.
See profiles of World's 50 Largest Agency Companies in Agency Family Trees 2014.