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Thursday, December 15, 2011

No Advertising; Not Much Media

Very recently, I was in a library doing some research. On the table in front of me I had several books out with topics including branding, growth of media, social media, and advertising history. A young man perhaps in his early thirties walked by, stopped for a minute and said, “Are you some type of ad guy.”

I smiled, stood up, offered my hand and said, “Guilty.” We shook hands but he then asked me “don’t you feel guilty about it.” If you were expecting me to get upset, forget it. No one can spend decades in advertising without at some time being referred to either directly or subtly as a huckster, immoral/amoral, snake oil salesman, exploiter, and other names not fit to print. Even David Ogilvy said that Queen Elizabeth was not excited at his knighthood ceremony when she found out his occupation. So I simply let the young fellow fire a few verbal bullets.

But then he said something that did annoy me. He stated, “What I hate about advertising the most is that it has ruined the media”. Well, that was a bit much even for me. As he walked away, my mind began racing at the breathtaking ignorance of his statement.

Simply put, without advertising, there would be very little media as we know it in existence. Woodward and Bernstein were able to bring down the Nixon White House because Katharine Graham’s Washington Post was an enormous advertising cash cow and she could therefore afford to pay a few young reporters to track down a story over many months and pay travel expenses for the young team as well. Without advertising revenue, most media, as we know it, would go kaput pretty fast.

About 40 years ago, as a student, I came across an amazing book by David Potter. Written in 1954, it was out of print when I found it in a used bookstore. There is a passage which sums up my feelings beautifully. In PEOPLE AND PLENTY: ECONOMIC ABUNDANCE AND THE AMERICAN CHARACTER he writes: “Students of the radio and the mass circulation magazines frequently condemn advertising for its conspicuous role, as if it were a mere interloper in a separate, pre-existing, self-contained aesthetic world of actors, musicians, authors, and script-writers; they hardly recognize that advertising CREATED modern American radio and television, TRANSFORMED the modern newspaper, EVOKED the modern slick periodical, and remains the VITAL ESSENCE of each of them at the present time.”

Amazing! He published those words in 1954! Just the year before, 1953, we crossed the threshold where 50% of American households had television sets. Yet, in many ways, I could argue that no one has articulated the role of advertising in the media world better than Potter did in the 57 years since then. He understood the symbiotic relationship between advertising and virtually all forms of mass communication very clearly.

Think about today. Everyone talks (rightly) about Google being the game-changer in the communications world. But how can it afford to continually innovate or buy existing companies? It is pretty simple. Much of their projected $40 billion in revenue comes from advertising. Without advertising dollars, Google could never have been Google. And virtually every little website in existence is looking for ways to monetize via some form of advertising revenue.

So if you are ever accosted as I was this past week, let the naïve ill-informed bozo talk but do not let him raise your blood pressure. Without advertising, the media choices that we have in abundance here in the US and on the Web would simply not exist.

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

Friday, December 9, 2011

The Mirage of the Global Middle Class

On October 31st, the United Nations announced that the global population was projected to be at seven billion people. Right after that, many of us began to see and hear financial prognosticators talk about how, due to economic growth, some 850 million people were now middle class. So, in other words, 12.1% of the world in late 2011 could be described as middle class.

A recently released book puts these and other relative wealth factoids in sharp perspective. It is entitled THE HAVES AND THE HAVE NOTS with the subtitle “a brief and idiosyncratic history of global inequality” (Basic Books, 2011). The author is Branko Milanovic who is the lead economist at the World Bank’s research division. He also does double duty as a professor at the University of Maryland.

Milanovic breathes life into global demographics, which, if not handled adroitly, can be a breathtakingly boring subject. In the book’s best chapter, he questions the concept of a global middle class. Oh yes, it exists but not necessarily in terms that a U.S. marketer or private investor would see it.

The problem is that middle class is a term that tends to be defined LOCALLY. Most nations use it as plus or minus 25% of the countries median income (to refresh the memory of some of you 40 years away from a statistics course, the median is the 50th percentile; approximately half of the population is above that statistic and half below).

So, India has a median income which is somewhere between one 15th and one 17th of the United States. Middle class in India, thus, would translate to dire poverty in the U.S. Adding more fuel to the demographic fire is that the cost of living, especially housing, varies widely across the globe.

Milanovic makes a marvelous point about many in the financial world who use superficial analyses to measure a middle class lifestyle. He rails against those who look at cell phone penetration as the silver bullet to determine entry into a middle class existence. I am told that in parts of West Africa, for example, many have cell phones. But, their villages have no electricity. So, when the phone runs down, they have to travel to a city to re-charge it. They do not have the $100 to buy a solar phone charger. They are hardly middle class.

So, what does this mean to you? If you are brand manager and your boss wants you to go hell bent for leather in Latin America, be careful where you place your media dollars. If the product has broad appeal such as Tide, you may do fine. But, if you are selling dishwasher detergent, the odds are good that a Brazil or Chile, for example, will generate per household sales five to seven times most other countries on the continent. Should you be a private investor, just be careful period. Yes, the middle class is growing and certainly faster than in the United States these days. Just keep in mind that there is no way that one eighth of the world is what we consider to be middle class yet. Caveat emptor!

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

Friday, December 2, 2011

Are Companies More Powerful Than Countries?

Lately, many of us are seeing and hearing people comment on how big multi-national companies are simply too powerful. Some are said to have bigger revenues than the Gross Domestic Product (GDP) of some fairly large countries. Recently, I have seen that McDonald’s $24 + billion in sales is larger than the Latvian economy. Exxon Mobil with over $35 billion in revenue is larger than Thailand’s GDP and would be the 30th country in the world were it a sovereign economy. Finally, Wal-Mart with over $42 billion in sales is larger than oil rich Norway and would be the 25th largest economy in the world were it a free standing nation.

Does it really matter? Some say yes; others no. Companies have influence but they do not carry weapons and, other than a handful of security guards, they do not have anything resembling a standing army. One difference is that of leadership—if people in a free society do not like a leader’s positions or policies they can vote him or her out of office. Most CEO’s tend not to be subject to a similar democratic mandate. Yes, they answer to their boards and shareholders but, if they keep earnings and a stream of dividends growing, most can have pretty long tenures on top.

Capital always has and I believe always will move to where it can earn the best return. That is why developing countries often work very hard to make themselves attractive to foreign investment. Money truly talks and many a non-democratic regime has been “told” to establish a more stable government, encourage rule of law and have accounting practices that are transparent and honest. In short, the country should be a place where international businesses can operate and are comfortable doing so.

So, why do big companies continue to get bigger? Is it because they are all sinister? I feel that the power often attributed to them is really not there. Today, we have a globally competitive economy and companies are constantly and ruthlessly pursuing efficiency. As they improve their performance they reward thousands with jobs and benefit stakeholders with higher dividends and eventually rising share prices. This focus on constantly striving for efficiency is significantly different than most governments around the world.

Governments, on the other hand, are often at the mercy of the tyranny of various special interest groups and to keep their political lives intact, many representatives vote the way the special interests want them to lean. Yet, big companies are often largely where they are due to the power of consumers—they got big by listening to customer needs and meeting their wants at a competitive price.

There is no question that corporations have had their way with Washington, DC in recent years. And, the rants of the Occupy Wall Street crowd make a wonderful criticism of “crony capitalism” and institutions that have become too big to fail. If they are too big to fail, then they are simply too big in an authentic free market model.

For a moment, let us look at two huge multi-national companies, not in energy or finance where influence can be outsized, and see how they have grown.

Henri Nestle was a pharmacist in tiny Vevey, Switzerland. In 1867, he came up with an infant formula. With steady even plodding growth it is now the largest food company in the world. After several decades of slow growth, they merged with the Anglo-Swiss Milk Company in 1905. During World War I, they provided canned and powdered milk to troops. After World War I, flush with cash (Switzerland had been neutral), they branched out into chocolate. World War II was rough on business but by then they had invented instant coffee that became wildly popular.

After World War II, they bought British company Crosse and Blackwell. They then added Libby’s, Carnation, Ovaltine, and Dreyer’s Ice Cream. Water became a hot item and they scooped up Perrier, San Pellegrino, Poland Springs and dozens of smaller players. They continue to buy up companies around the globe and now that the west has an aging population, they are looking at “wellness” as a big growth area.

Several years after Henri Nestle got started, Dr. John Pemberton, an Atlanta physician known for selling patent medicines began selling Coca-Cola (Coke) out of his drugstore. Sales were slow for a few decades and several people sold different versions under the same name. A local businessman, Asa Candler, saw big potential in the product and bought out all parties and consolidated all claims on the product, the name, and the now magic formula. Sales took off and they began a slow steady build across the U.S. For years, they fought back competitors who tried to ape the name. They won most of the suits but lost one against an upstart called Pepsi-Cola.

Today, Coke is sold in over 200 countries. Recently, I read an interview with a financial analyst who said that Coke even makes money in Zimbabwe, arguably the world’s greatest economic basket case. How do they do it? I am not sure but one reader of the blog tells me that they probably deliver to retailers in Zimbabwe who pay with an American Express card issued from a foreign country. They get their money instantly and the local retailer then takes responsibility for making money in a country with the highest inflation rate in the world.

I do not own shares in either of these global giants and have no plan to do so. My point is simply that private companies that are focused on growth and efficiency will likely continue to get larger no matter what happens to the American or European economies. They are not as powerful as some alarmists say but many will likely get a lot bigger as many Asian countries and Latin America emerge as economic powerhouses.

As an old acquaintance one said to me, “Conservative investors, you will sleep well.”

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