Omnicom grows 5.2% organically in Q1 but caution abounds

Omnicom kicked off the marketing services agency holding company groups’ Q1 2023 earnings reports on Tuesday with 5.2% organic growth, ending the quarter with $3.4 million in revenue. The holding company grew 11.3% organically in Q1 2022 but revenues were flat.

The holding company grew in every market except Asia, where it continued to be impacted by regional challenges in China.

Growth was driven by the continued comeback of experiential marketing globally, as the discipline grew 8.4% organically in the quarter (but struggles to rebound in the U.S.) It was followed by precision marketing (7%), public relations (5.8%), advertising and media (5.1%), healthcare (4.8%), execution and support (3.6 %) and commerce and brand consulting (3.3%). Public Relations was particularly strong over double-digit growth in Q1 2022.

On an earnings call with investors on April 18, CEO John Wren said the economic outlook for the rest of the year remains uncertain as the U.S. Federal Reserve Board continues to raise interest rates.

“The Fed hasn’t stopped,” he said. “[I and other leaders] expect there is still going to be a lot more uncertainty until the Fed and its partners around the world think they’re done.”

Clients, however, continue to invest in marketing as they are “looking to create flexibility without abandoning the commitments they’ve made to grow their brands,” Wren said.

Rather than cutting budgets preemptively, clients are “trying where they can to avoid long-term commitments and create as much flexibility in their spending as possible.”

As a result, Omnicom is maintaining its guidance of 3% to 5% organic growth for the balance of the year, but Wren referred to the latter figure as a “stretch target.” He added that, in the U.S., Omnicom will start to see the benefits of the $1 billion L’Oréal win on its balance sheet in Q2.

“We'll know more, certainly, by the time we get to the second quarter call in July,” he said. “In my experience, it's just common sense not to fight the Fed. So we’re not going to fight the Fed.”

Back to the office

On the call, Wren detailed Omnicom's new hybrid working framework, which includes a mandate for staff to return to the office three days per week.

The plan, which includes clear criteria for remote workers, new satellite offices around high-cost commuter cities such as New York and upgraded offices with new hybrid work technology, also involved exiting over 1.6 million square feet of office space globally.

Real estate reductions incurred a $119 million charge in the quarter, and upgrading current office space will require additional investment. But less office space will result in lower rent and occupancy costs over time, said CFO Phil Angelastro.

“There's a bunch of moving parts just within the rent and occupancy line, but we do expect it to be a benefit in [20]23 and beyond, for sure,” he said.

As part of its efforts to manage costs amid wage inflation and economic uncertainty, Omnicom has ramped up its offshoring operations, particularly in India, where it will build campuses in Chennai, Gurgaon and Hyderabad as its workforce grows in the region.

“We're doing a much more professional job with offshoring than at any point in the past,” Wren said.

As for being the first holding company to formalize a three days per week office requirement, Wren said he expects Omnicom to benefit from the end of the “Great Resignation” and layoffs in the tech sector, and noted that in Europe and Asia employees are working in person at least three days per week.

“Naturally, there will be individual cases where people won't want to come back and we'll find other places, but in the scheme of things, it's not going to be significant,” he said. “So we believe we'll be just fine.”

AI investments

AI is central to Omnicom’s vision for the future of work, and the holding company has set up a dedicated environment in Azure for company-wide access to the latest ChatGPT models in what Wren described as a “unique deal” with Microsoft.

“We were the second company, I think, Microsoft entered into such a relationship with,” he said.

The partnership involves creating access to ChatGPT through Omni, Omnicom’s company-wide data platform, and giving it access to Omnicom’s historical data. “For clients that want to participate in this, they’ll add their data and we’ll create new models on how we do things to identify consumers,” Wren added.

He said Omnicom is currently running more than 20 projects with ChatGPT, about five of which are focused on back-office functions.

While AI has “a lot of potential to impact the business,” Omnicom is being careful about how it deploys the technology as it works through ethical and privacy implications.

“There’s a lot that this incredibly powerful look can do, but you have to get guidelines and rules in place before you can use it efficiently,” he said.