21 August 2003 17:17
Breaking the Waves
Russian advertising’s exclusive focus on big-name clients is impeding its development. In 2000-2002 it made household names of several major companies. But there are no new big advertisers on the horizon.
Maksim Borisov
 In the next two to three years, the market for advertising will basically stop growing, or so worried ad execs have predicted after looking over results for the first half of 2003. At first glance, this prediction seems unjustly pessimistic. Last year, the advertising market grew by a little over 50%. This year, there is no denying that growth has slowed, but it has only fallen to 25-30%. The share of advertising in Russia’s GDP is around 0.7%, while it averages around 1% in other parts of the world. Macroeconomic logic dictates that advertising has 2-3 more years of rapid growth to look forward to, growth that will outstrip Russian GDP growth by several times.
This is only the way things look at first glance. The advertising market, focused on clients like Coca Cola and Samsung, faces a major local crisis, as the big advertisers driving the market have already promoted their brands. And new advertisers, companies that are a bit smaller, despite their desire to advertise cannot yet afford the advertising prices set by the big guys.
Divorced from reality
The advertising market in any country reflects its general economic development. As a rule, the ad market and the GDP usually grow at similar rates. For example, in the last two years the ad markets in Western Europe and the US have stagnated along with their economies.
Advertising in Russia after the 1998 default has outpaced overall economic growth. While Russia’s GDP grew by 4-9% a year, the advertising market saw growth in the tens of percent. Experts attribute this growth to the increasingly brutal competition among producers of beer, fruit juices, and household cleansers, and mobile communications providers.
The market for advertising in Russia is defined by large companies working in rapidly developing markets, but there aren’t a lot of them. They are mostly transnational companies such as Procter & Gamble, L`Oreal, LG Electronics, Henkel Group, Nestle, Samsung Electronics, Beiersdorf AG (BDF), Mars-Russia, Unilever, Japan Tobacco Inc., and Coca Cola. For the last few years, they have stayed in the so-called “top 30.” There are also big Russian consumer product companies like Wimm-Bill-Dann (WBD), Mobile Telesystems (MTS), Baltika, Vympelkom, Krasny Vostok, Transmark, and Ivan Taranov Breweries. They became top 30 advertisers later in the game, but by 2002 they were already putting noticeable pressure on the transnationals. VBK and MTS moved into third and fourth place in terms of advertising budgets.
However, experts are now worried that the leaders are increasing their budgets at a slower pace than previously, and there are no signs of any new group of significant advertisers coming to take their place in the near future. Importantly, the Russian advertising differs substantially from Western markets. The Russian market lacks certain types of advertisers common in the West, such as the government and the financial sector. They don’t seem prepared to enter the market any time soon. The recent boom in ads from the auto industry also seems to have passed Russia by.
However, the main peculiarity of the Russian advertising market is that its structure seriously limits any new advertisers entering the market.
Focus on the big guys
The entire advertising market caters to the top 30, as proven by the constantly rising prices for ads and advertising services. On one hand, media companies have taken advantage of increasing competition to raise their prices significantly. On the other hand, the limited number of media companies also leads to higher prices. As a result, the size of a “passing” advertising budget has grown. The reasonable amount of money that used to be enough to conduct a national campaign to promote a new brand has become useless on today’s market.
This tendency relates mostly to television, without which it is impossible to establish a full-fledged brand. The situation is further complicated by the fact that 80% of television advertising is controlled by a single company, Video International. Its strategy is to raise prices that are still far below world levels, as company representatives constantly remind us. While major companies were introducing their brands to the Russian market, Video International didn’t prevent the market from expanding. However, according to various specialists, today the rate of media inflation is outstripping the rate of ad market expansion.
Television companies are not the only ones who prefer to work with big clients and who aren’t lifting a finger to expand the market. Other ad agencies are doing the exact same thing. They are also endlessly raising their prices, as 75% of companies’ ad budgets go to the ten biggest agencies.
The end of the big client
Who all of Russia’s ad carriers, creative teams, and salesmen are going to work with in the future remains a complete mystery. This year the market can expect only two new big advertisers. Aeroflot International Airlines is prepared to spend $10 million to promote its brand. The other serious newcomer is Rosgosstrakh, which announced an ambitious promotional budget of $10-17 million (an unprecedented amount for an insurance company in Russia). This spells the end of the big client, and everyone in advertising understands. “Obviously, the market’s once rapid growth is slowing,” says Igor Lutts, Co-President and Creative Director at the BBDO Advertising Group.
The lack of new major clients is not advertising’s only problem. Its usual big spenders have stopped increasing their budgets and in some cases are even cutting them. The majority of these companies have already passed the stage of establishing their brands, when most advertising spending takes place. “The ad market today is only living in hopes of getting money from insurance `wave’. The beer and juice `waves’ have already reached their peak. There won’t be any more battles for market shares, only work to keep the shares they already have. The situation with cellular providers is similar,” believes Lutts.
Make way for the little guy
In the West, nationwide small and medium-sized advertisers make up the bulk of the ad market. In Russia, this group of advertisers is practically nonexistent.
Smaller and medium-sized Russian companies have different ideas of what their future in media holds, but the majority point to their limited possibilities for brand promotion. Some companies, due to ad price inflation, have to limit themselves to regional markets.
Vladimir Yeremin, Head of the Advertising Division at Ekonika, states directly that as prices rise, the possibilities for brand promotion shrink: “The rise in advertising prices means that we are forced to advertise less frequently. According to our estimates, in order for a company of our size to establish its brand effectively on today’s market, prices would have to be about 30% lower.” Even those at Benetton have noted the dramatic increase in ad prices: “Prices for ads in Moscow have gone up dramatically,” says Andrei Grigovyev, head of Benetton’s representation in Russia. “There are a variety of big companies on the market with unlimited ad budgets, but limited advertising opportunities. They include alcohol, tobacco, and beer companies that for the most part can’t advertise on TV and have practically taken over the market for outdoor advertising. Everyone else has to compete for the remaining space, which keeps prices high.”
Clearly, the advertising market in its current configuration is close to its saturation point. This is nothing shocking. Almost every market works with rich clients at first and when it reaches its limit, it changes. It looks like the Russian advertising market can expect some major restructuring soon.
More likely than not, the changes will begin at the heart of the industry: television. TV channels will have their own companies selling ad time. New channels will appear and it seems very possible that ad price increases will slow or stop. This means that the number of advertisers will expand.
Ad agencies in turn will also be forced to work with more limited budgets, making the market less highly concentrated. The largest agencies will no longer have deal with a substantially greater number of projects, and they will no longer be able to attract all the best execs. This means that a wide variety of agencies with strong reputations will appear on the Russian market.
This is what the next two to three years hold in store for Russian advertising. Meanwhile, ad execs appear to think the next big wave of clients is about to roll in. Ad prices continue to rise.
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