What do you do if you're Dentsu?

I wrote last year about the various strategic options facing Dentsu and its international business. As the only major Asian-Pacific global agency group, Dentsu occupies a unique position—split between its core Japanese business and its international assets, which were built around the Aegis acquisition more than a decade ago. Now, 60% of its 2023 revenues come from outside Japan. It's also the only one of the major global agency groups that has a major direct presence in Japan.

However, its financial year (FY) results also highlighted what is a growing divergence between the performance of the two parts—just as the results between the agency groups in general, has highlighted a growing divergence. Japan saw positive organic revenue growth of 1.6% for the FY, while the international assets saw organic revenue declines ranging from just over -7% (the Americas) to c. -11% (EMEA—although that included what was referred to as 'one-off issues' in the German-speaking region: Deutschland, Austria and Confœderatio Helvetica—DACH).

Looking forward into 2024, that divergence looks set to continue. Dentsu gave guidance of 0-1% organic revenue growth for FY24 for the entire Group. While no specific geographical guidance was given, the company suggested Japan should show “robust” growth, with EMEA also returning to growth, the Americas seeing a better second half than first half performance, and the Asia-Pacific operations (excluding Japan) seeing strategic transformation. To me, that suggest something like Japan at low to mid-single digit growth, EMEA probably in the +1% range, the Americas slightly down, and then Asia-Pacific (excluding Japan) down maybe mid-single digits.

The irony of this, of course, is that Dentsu bought the Aegis business to boost growth at a time when the economic outlook on Japan Inc was downbeat. Now, the tables have turned and certainly, there is more economic optimism about Japan’s economy—even if several structural issues remain. Which begs the question: Should Dentsu should be looking at whether to keep its international assets?

If I was the management team (to be clear, I have no knowledge or have had conversations with the senior management team on this matter) I would be taking a long look over the strategic ownership of the international assets. My view is that the days when the performance of the global agency groups rose and fell in tandem are coming to an end. There is increasingly a structural element to their different performances and when it comes to the media businesses, while scale always counts, it is likely to become increasingly so in a world of even more media complexity. In the latter, Dentsu has a good global presence, but it is not the strongest—including within the United States.

That is not to say the assets are poor. On the contrary, the Dentsu International business contains some real gems. The Customer Transformation and Technology (CT&T) business, with its consulting and transformation practices, is a key part of any future growth prospects—and now makes up 32% of revenues. That share will increase in the future. Yet the performance of that area in 2023 highlights Dentsu’s potential dilemma. The Japanese part of CT&T delivered double digit revenue growth, while the international assets were impacted by project delays.

The obvious question which will drive a decision over what to do will be how the Group views its current issues in International. Asia-Pacific (excluding Japan) obviously has deeper issues, but that only makes up 10% of Group revenues. The driver of a decision will be what the Group thinks about the future prospects of the Americas and EMEA. There is a clear argument for saying Dentsu should ‘grin and bear it’ and that things will ultimately recover, but as I explained above, there may be reasons why the agencies’ divergence in performance may be becoming more structural, and it may be better to at least consider whether now is the time to consider bowing out.

As usual, this is not investment advice.

Ian Whittaker is the founder and managing director of Liberty Sky Advisors. He writes regularly for Campaign about the advertising landscape from a financial standpoint.