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Friday, September 30, 2011

Sizzling Singapore

If you follow world business at all, you are hearing and reading a great deal more about Singapore. This tiny city-state on the southern tip of the Malay Peninsula has been growing rapidly for decades. It covers a scant 253 square miles but packs an increasing financial wallop around the world.

There are 5 million people in Singapore with the great majority being of Chinese, Malay, or Indian descent. English is an official language but the majority also speak a Chinese dialect. It is something of a dream for entrepreneurs and businesses. There is no place in Asia where there is such ease of business registration, governmental support, plus all important favorable tax rates and incentives. And, perennially, the World Bank usually ranks Singapore as the easiest place in the world to do business.

Often referred to as the Switzerland of Asia, it is a pulsating financial center that holds it own with Tokyo and the increasingly powerful Shanghai. The savings rate is among the highest in the world so there has been extraordinary capital formation. After independence from Britain, lead governmental minister Lee Kuan Yew arranged for compulsory contributions in the 25% of income range to government controlled pension funds. While unappealing to American spending tendencies it was a big contributor in making the tiny nation rich.

With a shift away from the U.S. and U.K. in terms of media billing, I believe that in a decade or so Singapore may well become the world’s advertising hub.

Consider these facts—

Singapore is centrally located in Asia and as global billing tilts toward the east, they will literally be perfectly positioned.

Westerners are more comfortable in Singapore than anywhere else in Asia. Part of it is the ubiquity of English but also the appearance counts. The place is crammed with people but immaculate. It took Wrigley decades to get the government to allow them to sell chewing gum there! Senior management of holding companies would be comfortable here as the adjustment to Asia would be far easier than other choices.

Unlike other Asian powerhouses such as China or Korea there are no exchange controls. You may easily move capital in and out of Singapore or repatriate profits.

Advertising has made strides in Singapore. Arguably it is the Asian leader in outdoor, mobile and digital advertising. As the world moves to digital, the existing talent pool can help.

Many Singaporeans are of Chinese descent. As China grows, it might be easier for Singaporeans to deal with China than those from other nations.

So, we forecast confidently that Singaporean agencies will not remain as branch offices for the mega-shops much longer. By 2020-2025 they will be in the epicenter of global advertising and a few of the world’s top 10 holding companies will be headquartered there.

If you want to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Friday, September 23, 2011

Promotion Smothers Advertising

Over the years, there has been a quiet revolution going on in communications. It probably started in the 1980’s, but in recent years, with a weak U.S. economy, it has really increased dramatically. It is simply the growth of consumer sales promotion. From a total of about $56 billion in 1991 it could be as high as approximately $400 billion for calendar 2011. On top of that eye-popping amount, US marketers will also spend an additional $175 billion on promotional activity targeted at retailers and wholesalers. When you think of promotions, you generally think of activity by packaged goods companies. Look at it a bit closer and you see health care, consumer electronics, computer companies and even some service firms leaning on it.

The high water mark for conventional media advertising occurred somewhere in the 1980’s. After a lot of number crunching, that is as precise as I can get to it. Since then, many if not most consumer products companies have changed the way in which they market their products. Amazingly, for those of who have lived and breathed conventional advertising, approximately 50% of packaged-goods support in 2011 among my admittedly small sample of publicly traded companies is for trade promotion, a little more than a quarter for consumer promotion, and slightly under a quarter to what we would define as media advertising. Additionally, a fair amount of the media advertising is focused on promotional messages regarding rebate offers, contests, sweepstakes or games.

Why is it happening? Why is it a surprise to many of us in the advertising world? Will the pendulum ever swing back?

What are sales promotion activities? The list of types of consumer promotions would include: coupons, premiums, refunds, bonus packs, price-offs, loyalty programs, sampling, and event marketing. Trade-oriented promotions are co-op advertising, trade shows, point-of-purchase displays, trade allowances and dealer incentives and contests.

For years, those of us in the ad game believed that brands were built and maintained with media advertising. Promotion was an afterthought. Junior art people would grind out coupons. Sometimes the client had an internal group that handled promotions. Firms that only did promotions made inroads but many people were asleep at the switch and did not realize that ad budgets were not increasing due to the growth of promotions as a percentage of the total marketing budget.

Structurally, several things have occurred in recent years that are making promotional activity more prominent:

1) Retailers have muscle today—40 years ago, the manufacturers such as the major soaps, P&G, Colgate-Palmolive, and Unilever, had the influence. The retailers were almost treated as distributors. The brands received heavy media support and the occasional promotion. On their own, the retailers were not into sales analysis. The scanner at checkout changed all that. At their fingertips, retailers now knew what was selling and how quickly each product turned over. Wal-Mart and Target got bigger and bigger and power shifted to the giant retailers. If a manufacturer would not provide trade support for their brand, they might get their shelf facings reduced or, in a few cases, dropped. Today Wal-Mart alone is 25% of the sales of some brands. A manufacturer has to meet their needs or they jeopardize their brand’s franchise.
2) Brand Loyalty is sagging—with a weak economy, people are looking at price and value more than ever. Some of us have certain brands that we will buy regardless of price or competitive promotion. But, with money tight, many now will buy brands that are close to parity at a nice discount.
3) Time Crunch—virtually all Americans say that they live under a time crunch. Working Moms and especially single Moms top the list. Some 70% of purchase decisions are said to occur in the store. Buying what is on special cuts decision time and usually saves money.
4) Promotional activity is accountable—for years, we have told people that advertising does not guarantee success. We know that it contributes to sales growth but it takes time and there are other factors (state of the economy, competitive action, etc.) that are part of the mix. Results from sales promotion activity are almost always easier to measure than those from conventional media advertising. Ad campaigns may hit their stride after a few months; a few well-placed coupons give you instantaneous sales boosts. Retailers monitor their scanner data and put pressure on underperforming brands to run more promotions. Results are often tracked daily.

Should the advertising industry be concerned about this move toward promotion? The loss of potential billing is and has been significant.

There are broader issues out there, which some agencies do not address adequately. If you wish to charge a premium price for your product you need to differentiate from the competition. Advertising helps greatly in maintaining a strong franchise by honing your image, maintaining brand loyalty, and talking up your brand’s benefits.

Yet, the world of 2011 is a short-term world. The average marketing director at a US company lasts under two years. I do not have a precise figure for brand managers but it is not much longer for sure. So, promotion is tempting for a short-term fix for the hired guns in the world of marketing. Also, and importantly, the compensation of many brand managers is based on quarterly sales data. So, dropping some coupons or doing price-offs or bonus packs can be irresistible for many. How many 28 year olds care about the long-term value of their brand’s equity when they can get their first nice bonus with a few successful promotions? Top management needs to work on this as promotions almost become like a drug to some staffers.

Increasingly, there is an analysis paralysis setting in. If you can look at daily promotional data, you lose sight of the long-term value that advertising can provide. And, Wall Street does not help as when quarterly sales are down a few pennies due to increased advertising investment, the stock gets hammered and you have disgruntled shareholders and maybe an unhappy board of directors who should know better.

Can advertising fight back and get a larger share of advertising dollars? With some firms it certainly will and, when the economy gets strong again (someday☺) it should claw its way back a bit.

But remember, technology might not help. Social media options like Groupon and Living Social are making coupon users out of young adults. In the mobile arena, the Cellfire’s and other fellow travelers are delivering promotions (largely coupons) to the 20 somethings and often highly successfully.

The power of brands has to be diminished under this scenario, as there appears to be very little residual advertising value to promotional activity. And, many of your loyal buyers love them as they get a discount when they cheerfully would have paid full price. This is impossible to measure accurately but hurts your bottom line.

A friend whom I interviewed for this piece is a very talented creative director. He e-mailed me back after seeing an outline of this post “do you mean to say that my team will have to do more crappy coupons and POP displays than we do now.” Well, yes in most cases. These days you have to find revenue where you can and if you stick only to conventional advertising, there will be no shortage of people who will siphon off the promotional projects and hurt your income.

For the moment promotional activity will keep growing in the U.S. Established brands might want to shift their advertising emphasis overseas where brands, especially American ones, have cache and growing power.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Sunday, September 18, 2011

Procter & Gamble and the Hourglass

On January 21, 2010 I posted a Media Realism piece entitled “The Gini Coefficient and The Future.” The Gini Coefficient is a means of measuring inequality in income or wealth in a country. I raised a mild alarm that American income distribution was beginning to look like the array one would see in a repressive regime or a developing country. The post generated a great deal of mail. A few people accused me of being a socialist (!) while left wing friends loved it. Well, this past week we received an unofficial update on the current Gini distribution.

The New York Times provided a very nice analysis of Census Bureau data that was released on Tuesday, September 12, 2011. Some 46. 2 million people or 15.1% of Americans were living below the poverty line. This is the highest number in the 52 years that the Census Bureau has been calculating it. Even more tragic is that some 22% of American children are living below the poverty line. Here are few factoids from the Times coverage and the Census Bureau itself:

--The top 1% of Americans control just under 25% of the country’s income. This is the highest figure since 1928.
--The U.S. ranks #3 among all advanced economies in the amount of income inequality.
--The top 5% of Americans by income account for 37% of all consumer purchases.
--Median annual income adjusted for inflation is at 1973 levels.

An economist friend e-mailed me that the census data is unfair, as it does not include noncash assistance such as food stamps or the earned-income tax credit. So, in his opinion, poverty rates are overstated. He may be literally correct but the poverty line for a family of four is $21,340. Does it make sense to quibble over another $8,000 in food stamps being added to income? If a family of four is making less than $30,000 per year, they are struggling in ways that most of us cannot fully imagine.

While millions are struggling, top end retailers who cater to the elite portion of America are doing just fine. Tiffany’s and Nieman Marcus seem to be thriving. Internationally, the company with the unwieldy name of LVMH Moet Hennessy is doing great with their remarkable stable of luxury brands. Known as LVMH, this French purveyor of the world’s best owns Louis Vuitton bags and luggage, Tag Heur watches, Dom Perignon champagne, Emilio Pucci, Donna Karan and Hennessey cognac. The last quarter Hennessey sales jumped 24% in Asia (excluding Japan) as a large moneyed class is emerging on that continent.

At the other end of the scale, the "dollar stores" are gaining in volume and share while even Wal-Mart is seeing sales declines in the U.S.

Meanwhile, this past year nearly 3 million more Americans fell out of the middle class. The day before these data were released one of America’s premier marketers, Procter & Gamble, announced a marked change in their United States promotion efforts. The Wall Street Journal stated, “The world’s largest maker of consumer products is now betting that the squeeze on Middle America will be long lasting.” Today, P&G, as it is known, has at least one product in 98% of U.S. households, which equals the penetration of TV! P&G chief Bob McDonald is now adopting an “hourglass strategy” with products and marketing support clustered at high and low end consumers but not as much in the middle. This fundamental change recognizes that the middle class is struggling and that emphasis needs to be placed on the “dollar store” downscale market that is growing and the upper end of their market that is stronger than ever. Now, please be let me be clear. The upper end of the P&G market is not nearly as wealthy as the LMVH audience. Yet, it is still growing for P&G. The stagnant area for P&G appears to be that broad group in the middle that has always been the company’s bread and butter market in the United States (P&G is doing well overseas, particularly in Asia and Latin America).

It will be interesting to study the P&G media mix for 2012. Will there be a different mix of cable networks in their buys and what programming will they change? Will they cut back on online action for the low-end brands and beef it up for their more upscale products?

My main takeaway from this is simple. P&G is shifting marketing gears because they do not see a middle class rebound in the United States for the foreseeable future. When arguably the world’s most sophisticated marketer feels this way and acts on it, we should all take notice.

If you would like to contact Don Cole directly, you may reach him at doncolemedia @gmail.com

Friday, September 9, 2011

Globalization and Advertising

Back in March 2005, I was sitting in my office one nice morning grinding out a letter to a difficult client. I stopped to take a phone call and then noticed an update on my on-line news. WPP Holdings of London had purchased Grey Advertising. While publicly traded, Grey was largely considered to be the last of the great independent players. Financial analysts would often joke that their shares traded by appointment only as senior management controlled a huge amount of the stock’s float. The sale to WPP struck me as a watershed moment. Now, four holding companies, Omnicom, WPP, Interpublic and Publicas appeared to control the advertising world. Sure enough, the next time the data was published, those four mega-shops or holding companies controlled more than have of global advertising billing. Today, it hovers around 57-60%. Globalization has now hit our industry and there is no turning back.

To read the business press, you would think that Globalization is a new process. Yet some economic historians place its origins in 1492 when Columbus landed in the Western Hemisphere. Others argue that there was international trade between Europe and the Far East hundreds of years before that (re-read "The Adventures of Marco Polo" and you will see that they are correct).

Today, however, Globalization is beginning to gallop. Just what is it? Essentially, it is driven by two factors:

1) Comparative advantage
2) Economic specialization

Comparative advantage is the simple concept that some countries or effective elements within that country can do something faster, better or more cost effectively than those in any other place.

Specialization usually means that you are so good at something that you are a leader in that field. Computer programmers are expensive in the U.S. Go to India and there are thousands who speak English and work for a fraction of the cost of their U.S. counterparts. Much of Asia has an abundance of skilled and unskilled manufacturing labor. Taiwan has great heavy industrial foundries and first-rate semiconductor manufacturing facilities. So, those places keep growing.

Globalization, in brief, takes advantage of whoever can do something the best. Capital has always moved where the returns are the largest. Globalization has saved businesses and consumers trillions Vis a Vis the old model where technology and trade were largely restricted within a single nation.

At the same time, increased Globalization has caused problems. Certain industries in the U.S. face chronic unemployment and several million workers have been displaced.

Why has Globalization grown in recent decades? We have identified five reasons:

1) The growth of free trade—over the last 25 years, countries across the globe have lowered many barriers and/or tariffs on imports or exports. The most famous and far reaching was China, which continues to move away from its communistic model. China and some of its Asian neighbors have flooded the world with cheap goods due to their low wage for local labor.
2) Outsourcing—many UK and US firms have saved billions by shifting production facilities to Mexico, China, or Malaysia, Indonesia, and increasingly, Vietnam. Service companies have tended to migrate to India. If you have a problem with an appliance, the odds are good that a peppy and very well educated service rep based in Bangalore province in India will try to help you. Both manufacturing and service workers in the developing countries accept lower wages than American or British workers. The controversy beyond lost jobs at home is that many say working conditions are poor especially in the industrial sector.
3) Containerization—I bet that you did not think of this one! Most goods are now transported across the globe in standard sized containers. This has tended to speed up delivery times; eases customs issues, and, of course, cuts costs.
4) The Internet—as things blew up in the dot.com boom in early 2000, many start-ups went bust. However, the billions spent on international fiber-optic networks were not all wasted. The networks remained in place and brought inexpensive connections to a few billion people. Some small and savvy marketers took advantage of this. Many business units exist now in a very narrow niche space. The Internet allows them to advertise GLOBALLY to the several thousand people who are prospects for the service. With the old model, you could never afford to advertise because even if you could come close to identifying your prospects you could never pay the freight to reach the majority of them. Not so any longer!
5) Legal Agreements—increasingly, but not always, more countries are recognizing patents from other nations. The same is true of intellectual property. This can stimulate trade significantly.

So, there have been big gains for people across the globe. The BRIC (Brazil, Russia, India, China) countries have seen exports boom although Russia’s are largely tied to energy and other natural resources.

Does Globalization have any critics? You bet! I greatly admire Nobel Laureate Joseph Stiglitz. His analysis of the 2008 financial crisis is the best and most lucid that I have seen. He, a bit surprisingly, is not a big fan of Globalization. Reading some of his work and tracking down interviews on the topic, he has three big issues with Globalization:

1) Culture—in past posts, we have identified that American Pop Culture travels well. Stiglitz agrees but argues cogently that as Western brands become more dominant, indigenous cultures lose some of their identity. Is this a bad thing or simply progress? We remain on the fence on that one.
2) Inequality—yes, Globalism is creating wealth but it is not shared evenly. Across the world, inequality levels are getting higher (see Media Realism, The Gini Coefficient and the Future, January, 2010). Also, many of the poor remain desperately so in 3rd world countries even as their countries expand. There will always be inequality in a free market environment. His point is that it appears to be getting more extreme as Globalization expands.
3) Human Rights—most glaringly in apparel but it other industries as well, it seems that big multi-nationals use sweatshops staffed with young people (and some children) who work for peanuts in horrible and unsafe conditions.

Others argue that, while it is imperfect, many are better off. Each year, some 30 million Asians join the middle class; 20 million in China alone. Tom Friedman in his book THE WORLD IS FLAT argued that no two countries with a McDonald’s have ever been to war. His thesis is that if you build up economic links, hostilities will not break out very easily (Russia did invade former satellite Georgia in 2008 but I give Tom a pass on that one).

So where does this leave us in advertising? The dynamic global growth over the next few decades will come from Asia, Latin America, and perhaps a few nations in the Middle East. The big Mega-Agencies are beautifully positioned no matter which countries come out on top. Long term, I feel that China will face big problems due to weak demography. Other Pacific Rim nations are very young in terms of average age and have robust futures.

Increasingly, U.S. brands will focus their advertising dollars on their overseas growth and stay in maintenance mode in the US and Europe. This will harm the middle-sized ad agencies in the US but really help the major holding companies.

Undoubtedly, some nationalistic pride will raise its head and there will be more major local agencies emerging in the BRIC countries and other explosive growth areas. Nevertheless, the mega-shops are in a good spot with their financial resources, management depth and decades of experience. And, they will find a way to buy some of the stronger local shops.

A few people have expressed concern about working at one of the giants. I stressed resources and the great experience that you can obtain by a stint with one of them. But, as one young friend asked, “where do I go?” To put it in perspective, when I started at Ayer in the early 1970’s, Marshalk and Marsteller, both fair sized shops, were in the same building. People could sneak to an interview simply by taking a different elevator bank. Now, if you work for a major, can you shift easily within the agency family? Some one can look up your precise compensation and, if you do not get the new job, will your supervisor be notified or will your shop’s HR department? You may be stuck somewhere for a while but people will know that you are disgruntled. This may not be a major issue but more than one person has asked me about it.

On balance, I see Globalization as a positive despite some imbalances that will occur that are part of the fabric of any evolving market situation. British financial writer Edmund Conway describes Globalization as “the adrenaline of capitalism.” A great definition!

If you would like to contact Don Cole directly, you may reach him at docncolemedia@gmail.com

Saturday, September 3, 2011

Why Aren't Companies Spending?

In recent weeks, if you follow the business news at all, you have been pummeled with the statistic that for the first time in history U.S. corporations are sitting on over $1 trillion dollars in cash. Several of my friends at both advertising agencies and in media sales have asked me why companies are not investing some of that record cash hoard into conventional advertising.

Well, instead of looking at it from the perspective of an ad agency or media executive who would benefit directly from a spike in media spending let us take a look at it from the view of a CEO of a fairly large corporation.

The recession that began in 2008 was deeper and scarier than any since World War II. Generally, in our lifetimes, recessions have been V-shaped, meaning there was a sharp downturn with a quick and equally sharp recovery. This time it truly is different. We continue to bump along with a recovery so tepid that some observers say that we really never pulled out of the recession of a few years ago. This past week, revised figures for 2nd quarter say that GDP grew by a paltry one percent. So, there is a very real risk that we could slip into a double dip recession.

All this makes even the most successful CEO nervous and cautious. Historically, management often is guilty of fighting the last war when it comes to recessions. But, as this malaise drags on month after month, it is easy for me to see why many remain in the “bunker mentality” of 2009. Then, many were worried about survival. Now, some question if there will ever be a return to normalcy.

Where did this cash hoard come from? When things got tough in 2008 and tougher in 2009, companies engaged in layoffs, downsizing, and when possible, leaving marginal businesses. Productivity rose as frightened workers put in longer hours with no raises and often no complaints. So, companies began to operate more efficiently than ever. On top of that even loosely managed companies got into fanatical expense reduction and suddenly the balance sheets started sporting fabulous cash hoards.

This may be controversial but I feel that Ben Bernanke’s monetary policy is at fault as well. With interest rates at or only a tad over a corporation’s cost of capital borrowing makes more sense than drawing down your cash. So you often move to expand via these cheap external funds that were never available before.

As this goes on month after month, management faces several choices:

1) Keep building up cash in the event a 2008 calamity hits again. This is not prevalent but off the record some seem to admit it.
2) Increase dividends. This keeps shareholders happy and rewards them for sticking with you. This year, according to my rough and unofficial tabulations, over 240 companies have raised dividends while only three have cut them.
3) Buy back shares. This automatically lifts earnings per share as the number of shares shrinks. If you think that your shares are seriously undervalued and cannot find any other good opportunities, this can be a fine allocation of cash.
4) Wait for a market pullback and then pounce on opportunistic acquisitions or craft a merger. We are seeing much of this recently and likely will have more over the next year if things do not pick up.
5) Hire more people. Many say not yet. Workers are more productive than ever by some measures so few new hires and no raises only helps your financial position. At some point, many firms will reach a breaking point and have to add staff. But, no one thought that it would be this long.
6) Invest in advertising to build your brand(s). Historically, this was how Kellogg became the leading cereal manufacturer and Crest, for decades, the #1 toothpaste. There does not seem to be that type of boldness prevalent among marketers especially with consumer confidence levels weak.

Another reason that the conventional media are not seeing it is that many firms are shifting some funds to social media and other alternatives. Some are hard to track so it is not always clear what is going on. Also, promotion has eclipsed advertising expenditures for many firms and while it has a weak record on brand building it does provide fast sales which Wall Street wants to see at the end of each quarter.

Pulling it all together, we will likely not see advertising come roaring back until after we are in a strong recovery and we have no idea when that will be (the sooner, the better). You can bet that share buybacks will continue especially when share prices dip, dividends will rise nicely, and acquisitions may break records in terms of number and size. But the “bunker mentality” is hard to shake off and will remain in place for many for the immediate future. Remember, debt-encumbered nations with traditionally high incomes like the US and Western Europe all have economies that are very fragile. And, investors and advertisers appear to have next to no confidence in the ability of policymakers and politicians to resolve the challenges that these nations face. With that backdrop, why invest heavily in your brand?

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com