Agencies: Top 25 Privately-Held Agencies Decelerated from Double-Digit Growth in 2022 to 4% In 1Q23

By Brian Wieser

The agency industry saw faster-than-normal growth in the immediate aftermath of the pandemic. I’ve already written about how the largest holding companies grew rapidly through 2022, but for the past couple of years I have observed with fascination how many of the biggest independent, privately-held agencies grew even faster.

To make this assessment, I have performed an extensive analysis of data on Linkedin, which I have found to be a generally reliable source of information on companies within the advertising industry, especially for businesses whose revenue bases are generally directly associated with headcount as agencies are. Looking at two years of data for a group of 25 of the largest privately-held agency-focused companies(1), and applying some industry-standard multiples, I can identify that this group of companies had approximately 40,000 employees(2) with around $6-7 billion of revenue during 2022.

From this data I can see that growth for this group of companies was particularly rapid in the first part of last year, slowing as the year progressed. Growth amounted to 19% in the first quarter, with 16% in the second quarter, 12% in the third quarter, 9% in the fourth quarter and an average of 14% for the full year 2022. First quarter 2023 growth amounted to 4%, and over this entire period median growth was not particularly different from the mean. For reference, the four largest agency holding companies grew by 12% in the first quarter of last year, 11% in the second, 6% in the third and 7% in the fourth.

While it’s difficult to be certain about what caused the rapid slowdown growth for the independent agencies, I think their trends more closely mirrors what we saw in ad revenues generated by Alphabet, Meta and Amazon (which I estimate at 19%, 11%, 8% and 4% in constant currency terms from the first through fourth quarters last year) than what we saw from the big holding companies. While the 25 large independents are not solely media-focused, their activity is disproportionately focused on digital media and there is likely more of a middle-market skew to the customer base for many of these agencies. Consequently, their headcount growth might provide a better proxy for growth in the largest digital media platforms than for large agency groups.

Source: Madison and Wall

Does this mean that their future growth is tied to the fate digital media alone (which for 2023 might mean mid- to high-single digit growth, with the first part of the year depressed because of difficult comparables and negative sentiment, reversing as the year progresses)? I don’t think so, or at least it’s not necessarily going to be true for everyone.

• There are several ways agencies can grow faster-than-average on an organic basis:
• Take share of existing customer spending on services for existing products
• Expand to include new segments of market
• Include managed services, bundling media inventory with services
• Expand geographic footprint
• Identify high growth areas for new products and services which existing clients buy or influence and execute on developing and selling those offerings

In a world where digital media converges towards industry-average mid-single digit levels for advertising in 2023 and beyond, I think the default expectation for agencies of all size should be for a similar or perhaps slightly softer mid-single digit growth level (as there is a general long-term trend among marketers to reduce spending on so-called “non-working” spending, even if it helps drive superior results). The investments that agencies choose to make – internal or external, as acquisitions eventually contribute to organic growth – will go a long way towards determining whether or not they can outperform this level.

Importantly, the large independents are not generally lacking capital to make meaningful investments – at least half of the largest 25 recently secured new private equity sponsors in the past few years – and neither are the large agency groups, who implicitly believe they have all that the resources they require (as evidenced by dividend payouts to shareholders).

However, more important than access to capital, I think it will be the agencies who are best at managing people who will be best positioned to grow the fastest relative to peers, regardless of their current size. No matter how much of the industry involves digitization and automation, agencies are fundamentally centered around people and the services they can provide. Every decision that impacts growth in this business – including the intelligence around where capital needs to be deployed – follows from the choices individuals make to impact client relationships. Consequently, attracting, utilizing and retaining superior people will undoubtedly remain the industry’s key driver, and metrics related to each of those variables when compared with peers at the business or group level are likely its best leading indicators.

(1) This group includes, in order of size on a pro forma basis, accounting for all transactions completed or announced to the best of my knowledge, The Brandtech Group, Dept, Plus Company, Horizon, Bounteous, Wieden+Kennedy, George P Johnson, VaynerMedia, RPA, PMG, Tinuiti, Finn Partners, Work & Co, Brainlabs, Power Digital, Sideshow Group, Barkley, The Mars Agency, Merge, Webfx, Wpromote, Croud, CMD, Fingerpaint and Hero Digital. This group is almost certainly skewed towards North American and western Europe, and so may miss comparably-sized entities based in China or other markets.

(2) Note that methodology is important to consider here: this analysis is based upon Linkedin data which, in my experience, provides a good, if imperfect basis for relative sizes and trajectories of individual companies. Companies included in my composite only include companies whose primary businesses are focused on services provided directly to marketer-clients rather than to other agencies, although some will bundle media or offer managed services. Equally important: I have accounted for acquisitions wherever they could be identified. Also worth noting: individual agencies may post negative numbers as they shift strategic or financial priorities and so not all declines are involuntary.