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New research forecasts single digit recovery for digital marketing service agencies in 2024

In the year ahead, marketing services agencies are more likely to bounce back than businesses in other areas of the digital services market, according to new research conducted by M&A specialist, JEGI CLARITY and growth strategy consulting firm, CIL.

The findings reveal cautious optimism with strong single digit growth expected in 2024 following a challenging year last year. M&A activity appears to be the key driver for growth in the European digital services market.

The qualitative research that took place in March 2024 was the result of in-depth conversations with 28 executive leaders at independent digital marketing agencies across Europe and the UK including DEPT, IDHL Group, MYTY and Team ITG.

The findings cover three key areas:

Market Conditions

2023 was a challenging year for many digital services agencies as they faced macro-economic uncertainty and increased competitive pressure. Larger agencies, struggling amidst these conditions, found themselves pursuing smaller new businesses to stay competitive. Looking ahead, cautious optimism prevails for the upcoming year, with expectations of steady single-digit market growth amidst improving economic conditions.

Sentiment is most positive among those in the marketing services space, with 55% of respondents feeling optimistic and an expectation of clients’ budgets bouncing back faster and being deployed more rapidly. This contrasts with view of technology services players (e.g. digital transformation “DX” and e-commerce), where sentiment remains suppressed, due to poorer revenue visibility as clients’ budgets are delayed or paused particularly for larger transformational projects. Nevertheless, visibility is starting to improve.

With elections unfolding in several key markets worldwide, a degree of political uncertainty emerges. However, there is an expectation that the economic environment will trend towards stability, helping to drive growth. Respondents anticipate a positive effect on marketing spend as a result.

M&A outlook

While M&A activity was 20% lower in 2023 than 2022, valuations remain robust. The outlook for 2024 is more positive as a combination of more stable macro-economic conditions, improving business performance and increased availability of capital.

Over the next 12-18 months, it is anticipated that several scaled platforms will also take advantage of the improving M&A environment to come to market, expand into new geographies, add capabilities or develop core competencies.

The majority (89%) of respondents are considering near-term M&A activities to support geographic and operational expansion, with a particular emphasis on penetrating the US market as a key driver of growth. Therefore, expansion into the US through M&A remains a top priority for many European companies due to its scale, with a focus on leveraging existing client relationships. For those originating from outside the UK, entering the UK market via M&A is often viewed as a strategic step toward accessing the US market.

Over two thirds (67%) of respondents expect M&A to play a key part in their future growth strategy, albeit noting that the M&A market remains competitive for quality businesses coming to market.

Industry trends – integration and AI

Of the senior executives surveyed, 59% expect a shift towards creating a unified brand with divisional sub-brands as the key to integration. This integration aims not only to drive top-line growth but also to unlock back-office synergies.

Artificial Intelligence (AI) remains front of mind among respondents as a key disruptive trend. Feedback on its likely impact is mixed, with many focusing on the potential for efficiencies, while uncertainty persists regarding whether these efficiencies will benefit agencies or just increase financial pressures from clients. Nevertheless, respondents recognise the potential for AI disruption, with 60% actively implementing AI into their workflows. Key applications include automated creative processes, A/B testing and targeting, data collection and analysis, as well as internal project management tools.

‘Our research shows that 2024 will be a year of acquisition in the digital services sector with M&A activity driving growth. We already know that there is latent appetite to buy or invest in high quality agencies from private equity, though the quality threshold has certainly risen. Gone are the days of high-volume deals replaced by high quality ones,’ comments Jonathan Davis, Partner, EMEA of JEGI CLARITY.

Luke Rowell, Director at CIL said: ‘The outlook for the European digital services sector is positive after a challenging year in 2023. Businesses must navigate the influence of AI and the challenge of consolidating brands to help drive topline growth and increase operating efficiencies. M&A remains a dominant value creation lever and will underpin most growth strategies as businesses seek to add capabilities to their offering and expand into new geographies, particularly the US.’

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