Digital marketing service agencies head for recovery in 2024

In the year ahead, European marketing services agencies are more likely to bounce back than businesses in other areas of the digital services market according to new research. Optimism driven by the advent of AI is also leading to companies becoming more willing to dip into the M&A market, to boost capacity.

Macroeconomic uncertainty and increased competitive pressure resulted in a challenging 2023 for digital marketing firms. With rampant inflation eating into the margins of businesses across the industrial spectrum, there was a huge amount of pressure on advertising budgets for many firms – especially US technology companies, which have been a core client base for digital marketers. In the UK, one eMarketer poll found that every industry except travel would see very limited digital ad spending growth.

As a result, struggling larger agencies were more frequently forced to compete for smaller new business contracts increasing competition for challenger agencies. This caused dramatic repercussions for firms further down the food-chain – and sentiment in the industry to plumet. However, a new study from M&A specialist JEGI CLARITY and growth strategy consulting firm CIL Management Consultants suggests that the sector may be on the brink of more positive results in the year ahead.

In 2023, only 12% of the 28 digital marketing executives polled told the researchers they had felt trading conditions in the digital marketing sector had been ‘good’. In contrast, while 67% said things were ‘neutral’, 21% said things were ‘very poor’. In 2024, however, there has been a change in emphasis – with just 4% feeling things were ‘very poor’, while 42% believed things were ‘good’ or ‘very good’.

Importantly, expectations for growth of individual firms have also bloomed. Last year, a majority of firms said they expected growth no higher than 5%, while a sizeable minority felt they were heading for shrinkage of as much as -5%. This year, though, all respondents expect some kind of positive growth – with a majority predicting growth of more than 5%.

While there is still uncertainty around the elections taking place in various key markets – including the UK and US – this positive sentiment is being driven by improving economic conditions with inflation slowing, as well as optimism around the implementation of AI. Among the digital marketing experts polled, 42% expected it to positively impact the sector – while just 16% thought it would be negative. Meanwhile, 60% are actively implementing AI into their workflows

This is buoying M&A sentiment in the sector, as more firms feel confident enough to take a risk on expansion through deals. Over the next 12-18 months, the researchers anticipate that several scaled platforms will also take advantage of the M&A environment to come to market, expand into new geographies, add capabilities, or develop core competencies.

This is backed up by 67% of respondents expecting 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. And an 89% majority 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.

Luke Rowell, a director at CIL, commented, “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.”