Macroeconomic issues or a fall from grace? Explaining WPP's weakness in China

With WPP's 24% revenue drop in China among a revised guidance issued for the group, is the decline purely driven by macroeconomic factors or could wider issues be at play?

When WPP downgraded its FY organic revenue guidance at its H1 results—forecasting a -1% to 0% range as opposed to 0% to +1% as previously—the weakness in its Chinese business was cited as one of the driving factors for the move.

WPP's revenues in China declined 24% year-on-year in Q2, and with China being one of its top five markets, the magnitudes of such declines would always have a meaningful effect across the Group. So far, so obvious. Perhaps a more pertinent question is: How long will this weakness continue and will that depend on unearthing the actual root cause of the declines?

At first sight, the problems look essentially related to the macroeconomic situation in China. WPP CEO Mark Read mentioned in an interview with Campaign UK that "there’s pressure across the business in China—some of it partly in GroupM but actually more broadly across the business".

"We are seeing challenges in a lot of Western multi-national companies operating in China, [which are] finding a tougher environment, particularly in some of the sectors where we're strong—like automotive and luxury," he said.

There is certainly a lot of support for that argument. The Q2 results season has seen luxury brands in particular but also consumer-facing companies across the board highlight the weakness in demand from the Chinese consumer as a major factor weighing on their numbers. It is also backed up by the economic data coming out of the country, which remains mixed, as well as perhaps more structural factors such as the relatively high level of youth unemployment and the weakness in the property sector.

However, there is also some counter-evidence to question the view that the scale of WPP's Chinese issues are related solely to the weakness in the economy. The scale of WPP's weakness was not mirrored—in fact, rival Publicis pointed to its organic revenue growth accelerating to +10.5% in China in Q2. Nor is it necessarily being seen in other media. Global out-of-home group JC Decaux—which is the number one OOH business in China—posted 11% organic revenue growth in the country in H1 although it did allude to the weak consumer sentiment overall and revenues remain below pre-Covid levels. The point remains that the scale of WPP's declines do stand out and there has not been the scale of a slump from 2023 to 2024 that would explain such a fall in performance.

If it is not the macroeconomic situation causing such declines, then what is? One factor could be the arrest of GroupM China's chief investment officer Rycan Di and two ex-GroupM executives by the Shanghai Police in October 2023 on bribery allegations. Certainly, WPP's revenue performance has deteriorated dramatically over the months following the arrests. While Q3 2023 was down just over 4% and Q4 down just over 1%, Q1 2024 saw a 15.4% decline in like-for-like revenues. Not as much of a decline as Q2, but significant nevertheless. An argument could be made that, given the perceived close links between the judicial and the authorities, WPP has 'fallen out of favour' and therefore clients have decided to shift their money elsewhere.

All of this, of course, is conjecture. However, if the arrests are a factor, then it suggests that WPP's Chinese operations may see continued weakness for the next several months or at least, the possible perception that GroupM is seen as out of favour falls away (it should be noted that WPP fired the executive at the time). That may present opportunities for rivals to gain share although, over the long-term.

As long as the arrests are a one-off however, WPP should see a recovery coming through.

As usual, this is not investment advice.