Business

Sorrell: "The UK is a league one team"

BBC business editor Robert Peston on WPP chief's world view

There is an interesting analysis of the plight of the mature economies of the West, especially the US, in the results statement from WPP, the advertising, PR and consumer research conglomerate - whose profits before tax rose 28.5% in 2010, to £851m.

This year's motor of growth has been the US, where advertising revenues bounced back much more sharply than WPP's founder and chief executive, Sir Martin Sorrell, had expected.

On a sequential quarter-by-quarter basis, US revenues increased 9.8% in the last three months of the year and by 9.9% in the penultimate quarter. Which is a multiple of the underlying growth in the US (where there are signs of recovery, but not at a rate that is yet making meaningful dents in the high unemployment rate).

So what's going on. Well part of it is simply what Sorrell calls the "dead-count bounce" from recession-induced levels of advertising in 2009 that were lower as a proportion of GDP than at any time since the mid-1970s.

And for those who worry about the undue influence of big business, especially the banks, over US legislators, it is striking that Sorrell identifies a particular positive factor as "heavy political spending around the mid-term congressional elections, especially following the United States Supreme Court decision permitting freer lobbying".

But what I think is most significant is what Sorrell has to say about the advertising behaviour of the biggest companies. It is worth quoting his remarks:

"Most importantly, post-Lehman and the several corporate crises, we have seen a concern, or even fear, amongst Chairmen and CEOs and in the boardroom about making mistakes and a consequent emphasis on cost containment and unwillingness to add to fixed expenses or capacity.

"Western-based multi-nationals are said to have over $2trillion in cash on their balance sheets, but unemployment remains at stubbornly high levels, with only increases in temporary employment and limited expansion of fixed capacity in Western markets. Hence, a willingness to invest in the brand and maintaining or increasing market share, rather than increasing capacity and fixed expenses."

In other words, the recovery in advertising reflects nervousness, caution among corporate bosses about what the future has in store. They would rather advertise to sustain the position of their existing brands, than make big investments in new productive capacity or new products.

Unless and until they are prepared to increase investment, the growth prospects for the US - and by extension for the UK too - will remain relatively subdued.

It is worth pointing out that there was also a significant recovery for WPP in revenue generated in the UK.

In fact, by region, the UK produced the second fastest revenue growth for WPP of anywhere (after the US), of 5.9% in so-called like-for-like or underlying terms. This British recovery was also evident in yesterday's results from ITV.

That doesn't however mean that Sir Martin Sorrell has changed his mind about the UK and US becoming less and less important to WPP over time.

In fact, with the contribution to WPP's revenues from new markets (ie the likes of China, India and so on) and new media (advertising and marketing on the net, mobiles, social networks et al) each approaching a third of the total, WPP is raising its target for income from these sources to between 35% and 40%.

Again it is worth quoting him at some length:

"The world continues to move at very different speeds, both geographically and functionally. By means of explanation, perhaps an English football analogy is helpful.

"First, The Premier League consists of the BRICs (Brazil, Russia, India and China) and the Next 11 (Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, South Korea, Turkey, Vietnam) or CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey, South Africa), along with new media (personal computer driven, mobile, video content, social networks).

"Second, The Championship, the United States, because of its size, immigrant, entrepreneurial culture and human and natural resources, along with an economically well-run and high value-added manufacturing export-led Germany and free-to-air television; third, League One, Western Europe, primarily the United Kingdom, France, Italy and Spain, along with newspapers and magazines; last, League Two, Japan, which has been stagnant for almost twenty years.

"Perhaps the United Kingdom, with its Coalition Government's emphasis on deficit reduction and long-term growth will gain promotion to The Championship?"

So to extend the metaphor, Brazil, Russia, India and China are - for Sorrell - the equivalent of Chelsea, Man Utd, Arsenal and Man City. Iran is Bolton.

And as for the poor UK, well for Sorrell it's Colchester or perhaps MK Dons, on the cusp of possible promotion, if George Osborne, David Cameron and Vince Cable manage the team properly (as per Sorrell's analysis of what's needed - which, of course, isn't every fan's prescription).

Ouch.

You can keep up with the latest from business editor Robert Peston by visiting his blog on the BBC News website.

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