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Amazon's next victim: World's biggest ad agency lowers sales outlook

Key Points
  • WPP PLC's report of a much bigger-than-expected decline in advertising by consumer product companies sends a chill across rival ad companies and the entire media industry about some of its biggest core of advertisers.
  • WPP stock was down more than 10 percent, and other advertisers moved with it, like Omnicom but media names also were weaker.
  • WPP CEO Sir Martin Sorrell says WPP is investing in more digital services, with Facebook and Google the top two destinations where WPP is directing more ad spending this year.
WPP CEO Martin Sorrell: 'It’s been a tough first half'

WPP PLC's report of a stunning slowdown in ad spending by consumer product companies hit other advertisers and sent a chill across the stocks of traditional media companies.

The world's largest advertising company lowered its full year forecast for net sales growth to 1 percent or even less, blaming the pull back on lowered spending by packaged goods companies.

The packaged goods sector has become a battleground between online shopping giant Amazon and other e-commerce sites and traditional brick-and-mortar grocery stores and discount retailers. Price wars and changing consumer tastes have turned some of the once mainstay brands into virtual commodities, with less supermarket shelf space and now less marketing clout.

WPP CEO Sir Martin Sorrell told CNBC that consumer products companies are not seeing volume growth.

"Anybody who runs a packaged goods company, or has been involved in it, knows when the volume starts to slide that's where their issues are," Sorrell said. Consumer staples companies have also been challenged by activist investors to cut costs. "They are going to have to invest more in innovation and branding," he said.

WPP CEO: Digital disruption means growth needs to come from online

Weakness in advertising spending by major U.S. consumer product companies rippled through the global media industry on Wednesday, hitting stocks such as Berlin publisher Axel Springer and British broadcasting company ITV PLC. In the U.S., shares of CBS, CNBC parent Comcast and News Corp were lower.

The advertising industry tends to grow in line with GDP, said Art Hogan, chief market strategist at Wunderlich Securities. But it is also a business in transition, where more ad spending is being done on cheaper digital sites, which cuts into revenue growth for advertisers and media companies.

"The online spend on ads is much cheaper," Hogan said. "WPP is really speaking to global ad spend. You think about global ad spend as a function of global GDP growth. ... It probably cast a pall over the media companies that are depending on global ad spend."

WPP stock fell more than 10 percent, and shares of rival advertising companies like Omnicom and Interpublic also declined sharply, down 5 percent and 4.3 percent, respectively, in afternoon trading.

Sorrell, in comments in late July, said WPP is investing in more digital services. Facebook and Alphabet's Google are the top two destinations where the firm is directing media spending this year. In the first half of the year, 41 percent of WPP's revenue came from digital, he said.

Shares of consumer product companies like Procter & Gamble and Campbell Soup were flat.

"When you think about the largest ad spend folks, it's the Cokes and Pepsis, then the consumer staples guys like P&G," said Hogan.

WATCH: Sorrell says Google ranks number 1 in media investments

WPP CEO: Google ranks number one in media investments