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Advertising Industry

The local advertising industry, a bellwether of the economy, didn’t do well in the first five months of 2004


July 1, 2004
Copyright © 2004 CARIBBEAN BUSINESS. All Rights Reserved.

Let the spending begin

Starting today, political campaigns will pump about $49 million into the local advertising industry during the next four months, fueling ad executives’ hopes for a genuine recovery

As dead as 2003. That is how most of the local advertising industry was in the first half of 2004.

Earlier predictions that a modest economic recovery of the local economy would start at the beginning of 2004 and fuel increased consumer spending, which in turn would generate increased investment in the advertising and media industries, have proved wrong.

Nor has the political advertising investment typical of an election year materialized. Because of changes in local campaign-financing laws, local media have seen very little political advertising.

But starting today, July 1, the floodgates of political advertising swing wide open, renewing advertising executives’ hopes that the turnaround in the local advertising industry will happen this year after several soft years.

The advertising industry has been primed for a rebound following a two-year freefall, but Mediafax’s latest Adtrack Report, released last month, shows the recovery just isn’t here yet.

Earlier this year (CB May 6), several leaders in the advertising industry agreed that, based on last year’s performance and the improvement in consumer spending that had been expected in 2004, it was safe to conclude that the local economy would recover and that the recovery would continue through 2004. Experts forecast increased sales and profits, which would be reflected in advertising spending and in advertising-related businesses.

Those forecasts gave hope to advertising executives, who predicted an aggressive 4% growth in advertising spending from clients this year and 7% growth in advertising and promotions spending in general.

Companies typically budget their advertising spending as a percentage of sales. That is one of the reasons the advertising industry is an industry bellwether to take the pulse of the overall economy. If store and service sales are up, advertising is up; if sales go down, so does advertising.

Also, agencies usually don’t have more than one account per industry in their portfolio, making them a true barometer of economic activity because of the diversity of sectors represented by their clients.

CARIBBEAN BUSINESS has followed up on those earlier forecasts and found that the first half of the year was slow for most of the agencies, which means the expected pickup in the economy hasn’t taken hold.

Overall advertising investment in Puerto Rico totaled $680 million in the first five months of the year (through May), barely 2% above the $666 million for the same period in 2003.

These figures are based on onetime rate-card rates. They don’t take into consideration discounts resulting from rate negotiations, discounts for advertising frequency, or media-to-media trade-outs. If such discounts are factored in, the total advertising investment through May 2004 comes to an estimated $430 million.

According to Mediafax, newspapers were the only category that barely achieved double-digit growth during the first five months of the year (year-to-date, YTD), with an increase of 11% compared with YTD in 2003. Television and magazines remained flat, with meager growth of 0.8% and 1%, respectively. The big losers were cable television and radio, which registered declines of 18.2% and 21.5%, respectively.

"There is another side to those numbers. Rate-card rates for TV haven’t increased significantly YTD versus 2003, and there has been a reduction in advertising minutes, which leads to the appearance of no growth for TV," said Hector Ortiz, general manager of Wing Group. "In reality, however, advertisers are paying close to double-digit increases in real dollars not reflected on the rate cards. Radio, as an electronic medium, may have been the loser since a portion of the media dollars that were shifted from TV to radio in 2003, when Univision entered the market with higher rates, has shifted back to traditional and tactical media."

Ortiz added, "I believe there is great potential for radio as TV advertisers reduce the clutter [content that isn’t part of the program] and agency executives and creative people discover the value of an uncluttered media environment. Newspaper investment has grown as newspapers Primera Hora and Vida Actual have gained consumer and advertiser acceptance."

"Actually, television’s own study shows aggressive growth of 10% already," said Julio Toro, general manager of MediaNet. "This growth will continue as we proceed further into this year."

Even though television seems to have thrived, other media outlets haven’t improved as expected. "Those media that maybe haven’t been improving will improve starting this month with all the advertising investment from political campaigns, which will probably benefit other media in addition to television," said John Raevis, president of De La Cruz Group.

Not all is negative

"The second quarter of 2004 showed improvements. Advertisers’ confidence keeps growing, and a lot of projects that had been on hold are now being developed or have been launched already," said Juan Arteaga, president of Arteaga & Arteaga. "Our numbers for the first half of the year [same client base] show double-digit increases over 2003. If we add new clients, there has been more than 25% growth.

"Consumers’ and advertisers’ confidence has grown. Interest rates have remained lower than expected, and retailers are aggressively seeking that available spending money," continued Arteaga. "There have also been a lot of changes in how consumers perceive and evaluate brands. Accordingly, now, more than ever, advertising needs to be striking, memorable, and relevant to the target market."

The ability to grasp those changes and adapt to them has given a few advertising agencies the opportunity to flourish this year, while others haven’t started to pick up yet. "Things have changed during the past few years, and the agencies have adapted to that change," said Raevis. "We now see the use of more media outlets than before."

"Consumer consumption of media in general is different today from five years ago," added Wing Group’s Ortiz. "Locals are being exposed to the Internet; they spend more time talking on cellphones, thus increasing their mobility and making them less susceptible to stationary media."

"When we talk about how the industry is growing, we have to take into account that advertising agencies invest more and more money each day in nontraditional media, for which there is no investment report," said Ortiz.

Industry experts say that even though no company is studying how much money is being invested in nontraditional media, Internet ads, or radio ads, what studies are available indicate the industry is growing.

Political ad spending freed up

Many in the industry had been relying on the advertising investments by political campaigns in 2004, but these hadn’t loosened their purse strings in the first half of the year. Based on other election years, political campaigns were expected to have begun investing in media buying to promote their candidates by now.

For the first time in Puerto Rico’s history, however, advertising budgets were held up in anticipation of private monetary contributions piling up so they could be matched by the government under the Clean Money Law of May 2003 after July 1. The law restructured the way electoral campaigns are financed and set new rules for political advertising spending, including limiting the amount of money that can be spent.

The Clean Money Law (Law 115) allows gubernatorial candidates to participate in a shared campaign-financing fund to ensure the money spent by political campaigns during an election year comes from reliable, legal sources with no hidden agendas.

Under the law, each of the three gubernatorial candidates receives an initial donation of $3 million plus up to $4 million in matching funds. The government will match the private monetary contributions accumulated in the parties’ and candidates’ accounts after July 1. Accordingly, political campaigns have an incentive not to spend on advertising before July 1 so they can get the $4 million maximum in matching funds.

"Political campaigns have been relying more on public relations so they can save as much as possible and receive the matching $4 million. Any heavy advertising campaign has been waiting for July 1," said an advertising expert.

The flip side is that now political campaigns, especially for gubernatorial candidates, have more money to spend than ever in a shorter time frame before the elections.

In fact, the three local political parties together could spend up to $33 million on the gubernatorial campaigns for 2004. Add to this the $16 million estimated for the campaigns of mayors and legislators, which also includes government-granted matching funds, and the total potential spending on all political campaigns comes to $49 million.

All elected officials—governor, senators, representatives, mayors, and City Council members—are elected at the same time for a four-year period. This year’s elections will be on Nov. 2, and more than two million voters are expected to vote. About 85% of the eligible voters will turn out to vote.

Experts predict 37% of the $49 million total, or $18 million, will go to media placement. They expect at least $12 million to be released for media buying and advertising by July 1. And all of the $49 million will be spent over the four months before Nov. 2, Election Day.

"We will see more advertising from the parties and their candidates and less from political action committees," said Arteaga. "I hope this brings more positive messages about ideas and fewer insults and innuendos."

Experts are now speculating about the impact on investment of the no-clutter agreements between the three main television stations and Puerto Rico’s top advertising agencies.

"It will be interesting to see how the three TV stations manage the ads," said De La Cruz Group’s Raevis. "We all reached an agreement to which we must adhere. However, it wouldn’t be fair for the media to ignore those advertisers that for years have placed ads with them. Media managers will have to be creative to guarantee their clients receive what they need in the eventuality of clutter."

According to Raevis, the answer lies in planning and buying ahead of time. "We have advised our clients to reserve their ads before the July 1 date to guarantee they won’t be affected by any clutter," he said.

"If the TV stations keep their word, we won’t see a cluttered screen," said Arteaga. "Radio stations, newspapers, and the outdoor-media industry, however, have said nothing [about reducing clutter], so I suspect [they will see] a lot of use. I suggest everybody buy earplugs to protect themselves from noisy <I>tumbacocos</I> [roving vehicles with giant speakers]."

It is their silence on the issue of clutter that causes many to believe radio and other nontraditional media will receive heavy spending by political campaigns.

"There is no doubt we will see the use of nontraditional media during this year’s elections," said Raevis. "Even if the television stations don’t comply with the no-clutter agreement, there will be a lot of other media outlets benefiting from the campaign money now available."

Total Media Expenditures by Local Ad Agencies

January-May 2004

In Millions

Top 15 Agencies: $314

Other Agencies*: $95.8

*Includes 123 other local agencies.

Source: Mediafax Adtrack Report

CB graphic by Jorge E. Tous Beltran

This Caribbean Business article appears courtesy of Casiano Communications.
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