The advertising world is reeling under the impact of the cash crunch in the market
THE Goddess of wealth has not blessed the advertising industry this Diwali season. The slowdown that started in March 1996 has peaked now. Financially debilitated, the industry doesnt expect relief too soon. The severe cash crunch facing manufacturers and marketers is making them turn to their favourite scapegoat, advertising. Ad budgets are being slashed mercilessly.
While product advertising has seen a negligible increase in volumes, corporate advertising budgets are down to a fifth. With an all-time low in the equity markets, financial advertising is virtually absent. From an average of 160 issues per month, there were about 47 in October. Many medium and small companies have chopped budgets down to about 20 per cent of their previous years figure. If the large, fast-moving consumer goods companies havent cut budgets they are definitely holding back releases substantially. Even typically cash-rich industries, like pharmaceuticals, are cutting back on spending. A prominent pharma advertiser has cut its budget from Rs 16 crore to less than Rs 5 crore. Clients are known to be borrowing money from financial institutions to pay up their advertising bills.
This is leaving small and medium-sized agencies gasping to keep afloat. The larger ones too are taking stock. Says Mike Khanna, chief executive of the countrys largest agency, HTA (1995-96 turnover Rs 601 crore): "Though we are not facing a crunch at the moment, we are definitely more cautious."
This is, in turn, adversely affecting media. Even leading publications are bending over backwards to attract the advertiser. The venerable Times of India (TOI) group is slashing rates in Mumbai. Its Marathi daily, Maharashtra Times, has offered packages at a fourth the price. Says a mediaman: "The rate actually includes even the processing costs of the ads." This has brought down the total costs to just about a fifth. Says an advertiser: "Even if the TOI Group isnt offering discounts overtly on its flagship English paper, it is wooing the clients indirectly by offering package deals which may include its other publications."
Television is worse off as many satellite channels face the acid test. Unlike newspapers which have formidable niches that makes them compulsory media options, satellite channels can offer little difference. All satellite channels reach the same homes, the same audience. With little original programming doing the rounds and negligible funds to make more, viewerships are dithering. Advertisers are trusting television rating points (TRPs) as indicators of viewership lesser than ever. And the cash crunch is only compounding the problem. Take Big Brother Zee TV, which is reportedly stuck with over Rs 100 crore in outstandings.
Independent producers of TV pro-grammes get a particular amount of air time to sell for advertising. This can be collected over the year and used when desired. Producers who had been banking on air time with DD to make a killing during the festival season from October to December are now in a spot. "Business isnt coming in," says one, "and we have to continue paying Doordarshan for the slots." Air time is on sale really cheap. Zee TVs prime time can be negotiated for even Rs 25,000 for 10 seconds against its earlier rates of Rs 60,000-Rs 90,000. Sony TVs lead serial Jai Hanuman came for Rs 30,000 for 10 seconds. Today it goes for not more than Rs 8,000.
The agencies claim they are suffering the most, being rammed from either side by the client and the media while trying to smile bravely on a wafer-thin net margin of 3 to 4 per cent. Typically a client gets a 60-day credit period to pay its agency. The agency, in turn, pays the publication where the ad is released after a 45-day credit period and takes a commission of 15 per cent of value of the relase. With clients not paying up in time, the margins are down to a half in the past few months. "The small and medium-sized agencies are hit the most," laments a senior adman preferring anonymity, "because the Indian Newspaper Society (INS), which arbitrates on matters such as non-payment of dues, is targeting them first as it can hardly touch the larger agencies." Ad agencies are now trying to negotiate longer credit periods with publications.
Lower rates from media may be good news for the advertiser, but they are affecting agency commissions. Again, in a desperate bid to keep up advertising volumes, even leading publications are side-stepping the agencies and approaching clients directly. While this saves the client 15 per cent, a further 10 to 15 per cent discount often makes the package 25 to 30 per cent cheaper on the whole. "The agency is burdened with the infrastructure and expensive work-force invested in a client but can hardly afford to complain," says an agency head. Most prestigious clients use the services of two or three agencies and there is cut-throat competition to grab more business.
Where this isnt working, some publications are offering the agencies even upto 25 to 30 per cent (breaking the golden rule the Indian ad industry follows of taking a fixed 15 per cent commission) to get more business.
The worst hit, financial advertising agencies, like Clea Advertising (turnover Rs 50 crore), have pared their staff. Clea has relieved nearly 80 people, a third of its strength, in the past year. The other top financial ad agency, Pressman, too, has none of its former glory left. Says P. Venugopal, director, Clea: "Having identified the trend earlier, we have already diversified into product advertising and public relations." Today Venugopal hopes to depend on financial advertising to contribute just half of the turnover.
THE larger agencies claim to be unscathed. "Things are not as bad as they are being made to sound," counters Khanna. Concurs Prem Mehta, chief executive of Ammirati Puris Lintas, the second-largest agency (1995-96 turnover Rs 450 crore): "The impact on large agencies will depend on the profile of its clients." Both heads claim that there have been no defaults on the part of all leading clients like Hindustan Lever. While HTA has grown by 43 per cent this half-year over the corresponding period last year, Lintas expects a growth of not less than 30 per cent in 1996-97.
On the flip side, the slump in consumption is making industries like telecom, real estate and computers to advertise more, thus generating new business. Claims Mehta: "While changes in media rates impact our margins, our business growth has absorbed these." Again, others like consumer non-durables are almost steady. Says Khanna: "This recession is the right time for industry leaders to step up their advertising and increase their market share." Much of this share can be retained even after the worst is over.
Emerging a winner is also the public relations industry. Advertising is far more expensive. If releasing an ad in a leading daily can cost a couple of lakh of rupees, a company gets the services of a PR firm for a month in half the amount. PR work (direct mail, contact programmes) also gets immediate results to tide over short-term crises. Says N.S. Rajan who heads Sampark, a fast-growing PR shop: "The business is growing very rapidly and margins are far higher than advertising." Typically, PR outifts make profits of anywhere from 25 to 50 per cent of billing. Charges and retainers have been doubled in the past few months and payments are being taken in advance. Little wonder then that most leading agencies have already opened up PR divisions.
The majority of the industry, however, fails to share this enthusiasm. "Even where the clients are wooed to advertise and large agencies claim healthy growth rates, theres not enough hard cash changing hands," says a leading media buyer. Busting the 60-day credit deadlines is on the increase. Some advertisers have not paid up for three months to even a year. Financial advertising agencies often arent getting paid at all if the issue bombs. An insider explains that these "healthy" growth rates that some agencies are proclaiming are inclusive of all allied businesses which includes divisions like PR and market research.
The best of clients are defaulting. The mighty Hindustan Lever is known to have owed Zee TV more than Rs 18 crore beyond its regular credit period until recently. ACC, reputedly a prompt payer, had not paid up its dues of about Rs 2 crore to its agency. The INS can do precious little to change the situation as the cash crunch is too real to be solved by serving notices alone.
The industry sees relief coming at the earliest only by March 1997 when the next Union Budget is announced. Some expect the situation to continue even beyond. If it does, then the titans who seem to sit back with a semblance of comfort may start feeling their feet getting wet too.