Consolidation is coming

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The next wave of consolidation in the UK insight and business intelligence market is long overdue. We have a more fragmented supplier base than ever before – with over 500 MRS-accredited company providers – but with low net-growth rates overall, serving a very mature £4.8 billion UK market. While this is the second-largest globally, it is still relatively small compared to the UK e-digital sector (£118.4bn), PR market (£12.9bn), creative industries (£87.4bn) and management consultancies (£6.1bn). 

Our industry is also undergoing rapid change – mostly technology-driven – against a very uncertain worldwide geopolitical context. Consolidation will help us meet the global growth challenge.

The UK ‘research’ market is unusual in the size and distribution of its supplier base. According to MRS, the top 100 agencies generated approximately £3bn of UK revenues in 2015. As in most industry sectors, there are a handful of large companies at one end – Wood MacKenzie, dunnhumby, TNS UK, Ipsos Mori and Gartner, which account for 34% of total spend – and small/specialist businesses at the opposite end. 

What is notable about our sector is the large number – and significant market share – of the £7m-£20m players, who have more than half the market between them. Consolidation needs to focus on the bigger area of small and medium-sized enterprises (SMEs), as over-supply among these providers is impeding industry growth.

Consolidation is good for our industry and need not restrict the existence of the smaller specialist. Companies that acquire or merge achieve greater scale, and enhance their own third-party supply-chain buying power. 

Source: UK market research transactions, mergermarket.

This helps them price to clients/procurement more competitively, while offering a broader bandwidth of service offerings, often across an expanded international footprint. Economies of scale and restructuring help boost earnings, and this raised profitability allows for greater reinvestment, mainly in recruitment, skills training, and research and development. If done correctly, such a coming together also leverages management talent and makes the enhanced concern more secure – so, greater efficiency all round.

The above describes a ‘horizontal’ merger – as it is often referred to – and is typical of how most mergers and acquisitions (M&A) in our sector are concluded. More should really be happening now, at a time when mutually agreeable acquisitions can be consummated before the inevitable shakeout from oversupply happens. 

Further, it does seem that people/labour-centric businesses – the old ‘full service’ agencies – and the newer, MR technology and data-supply companies are increasingly misaligned.

Perhaps most significantly of all, consolidation increases access to capital markets – and at a lower cost of entry. Be it debt or equity finance, the truth is that most UK capital providers are only comfortable lending to research companies generating £4m-£5m-plus earnings before interest, tax, depreciation and amortisation (EBITDA), either before – or as a result of – an acquisition. 

This enhanced capital access is vital – we need investment to meet the global growth challenge, rather than ‘bootstrapping’. Our industry’s relationship with investment companies is lukewarm at best, given how mature our sector is, with corresponding low growth, highly people-dependent businesses, challenges around scalability of propositions, price pressure and the rise of automated/plug-and-play solutions. 

Consolidation – be it a standard buy-and-build platform, a stand-alone acquisition, or a merger creating a ‘branded house’ (GfK, Ipsos Mori) or ‘house of brands’ (Kantar) – helps us build mass and operational efficiency, and stimulates growth.

Mergers also have a role to play in turbulent times. It would not be a surprise to most if Omincom DAS was to merge its two MR brands – Hall & Partners and Flamingo – for example, creating a very compelling proposition for clients.

All the above are important benefits of consolidation when done the right way – with truly complementary businesses that have differing international footprints, synergy benefits and a compatible culture. Personally, having overseen my fair share of M&A deals since 2010, the role of a specialist integration consultancy – such as KPMG Boxwood – helps ensure an effective operational and cultural integration that starts before the sale and purchase agreement is finally drafted.

On the face of it, our industry looks OK, with the UK market growing from £3bn in 2012 to £4.8bn in 2016, according to PwC’s Business of Evidence report – a compound annual growth rate (CAGR) of 12.5%. Yet this disguises true like-for-like growth, driven as it mainly is by the recent inclusion of market intelligence companies, information service providers and technology enablers. Strip out the likes of dunnhumby, Teradata UK, Euromonitor, Mintel Group and Experian, and we have, I suspect, negative real growth – and all the baggage this comes with, such as price deflation, margin pressure and lack of investment – among the traditional full-service agencies. Associated or secondary businesses are also affected; the MR job-recruitment market, support services and external field operations are all finding it hard going.

Small is still beautiful

Niche or specialist offerings in data or qualitative research will always characterise our industry, and rightly so. Fifth-wave start-ups are more popular than ever; frequently personality-led and run as private, or even ‘lifestyle’ businesses, they benefit from an industry that has hardly any regulation and very low barriers to entry, often serving a small number of very loyal clients. They are part of what makes our sector so interesting – but, with respect, they will not create the mass required to get our industry growing globally. 

Consolidation helps diversify the industry by ‘bundling’ an array of products and services to cross-sell to clients. Another reason to do it, I would say – other than the benefits and capital-market-for-growth arguments – is that our industry has never consolidated properly, certainly not on a large scale. There have only been 14 acquisitions since 2011. We seem to have missed this chapter completely. During the most recent non-consolidation period, however, there has been a high rate of new agency creations. Market consolidation is required to re-set the balance (see table).

In 2002, Harvard Business Review published The Consolidation Curve, a study of 1,345 American mergers across 30 industry types, from 1989 to 2001, which identified the now widely acknowledged four stages of consolidation and their characteristics (see graphic). The research industry is only just entering Stage 2: Scale, in which: “Major players begin to emerge, buying up competitors. The top three players in a Stage 2 industry will own 15% to 45% of their market, as the industry consolidates rapidly. Because of the large number of acquisitions in this stage, companies must hone their merger-integration skills. These include learning how to carefully protect their core culture as they absorb new companies. Building a scalable IT platform is also crucial to the rapid integration of acquired firms.”

There are also elements of activity at Stage 3: Focus among technology and data analytics, with the larger players in this sector either emulating or acquiring start-ups. The difference with consolidation of this type is that it is a more tech-driven dynamic, rather than a consequence of a maturing market or over-supply. Large-scale panel provider mergers would also fall into this type of consolidation, with the top three companies controlling anything between 35% and 70% of the available market.

The Harvard article concludes: “Ultimately, a company’s long-term success depends on how it progresses through the stages of industry consolidation. Speed is everything.”

Indeed it is – and not just for a company’s long-term prosperity, but also for the industry’s success overall. 

To this end, we must actively consolidate as an industry and begin a new chapter in the growth of market research and business intelligence in the UK, to meet the global growth challenge. 

Jon Priest is chief executive officer of Future Thinking.