Marketers in india are resorting to tighter ad budgets and far more stingy negotiations with advertising agencies. however, compromising on advertising effectiveness is myopic, more so during a difficult period
Call it the effect of a macroeconomic slowdown, a visibly negative consumer sentiment or apprehensions of a poor return on investments, growing advertising spends in the current scenario does appear daunting to businesses in general, especially the smaller ones with relatively shallow pockets.

The advertising industry is, therefore, seeing an impact in even the BRIC economies where long term domestic market potential remains robust. In a recently conducted interview with DJ FX Trader and The Wall Street Journal, Sir Martin Sorrell, founder and Chief Executive of British advertising giant WPP Group, admitted, “We see no significant change in the fast-growth markets in 2012, but it's a lower overall growth rate.” He further added however, on a positive note, that “advertisers in the so-called BRIC countries haven't pulled back on spending in the first five months of 2012”.

If we trace the patterns from the past, ad spends in the developing world have always shown a very strong correlation with GDP growth numbers. The Indian economy, which was looking set for an 8% plus growth in FY 2010-11 is now trailing well behind expectations at around 6.9% by the end of Q1, FY 2012-13. The impact is quite visible in ad spends by Indian marketers. In fact, growth trends for Indian adville are relatively modest compared to other BRIC economies. According to the latest forecasts by Warc, a globally acclaimed marketing intelligence service provider, ad spends in India in the year 2012 are expected to make a 9.3% growth on a yoy basis. This is only slightly better than the 8.9% growth expected in Brazil while it's nowhere near the expected growth in China (15.5%) and Russia (14%). To make things worse, inflation has played its role. After considering the inflationary effect, the same 9.3% yoy growth projection in terms of ad budgets comes down to a mere 1.1%. According to a FICCI-KPMG joint report, the Indian advertising industry clocked Rs.30 billion in revenues in FY 2011-12. It was earlier expecting a decent 12% yoy growth in FY 2012-13, but looking at trends, it had to significantly cut down its growth forecast to around 9.5%.

Jehil Thakkar, Partner and Head, Media & Entertainment practice, KPMG India, puts it thus, “Continuously rising production and distribution costs have narrowed down margins for companies. Hence, they are forced to cut down their expenditure on advertisements and will also look for alternative ways to reach out to their customers.” It's a given that if the current sentiment is turned on its head through improved economic conditions and a more liberalised policy environment sets in, marketers in India will step on the gas with ad spends once again. But in the current scenario, social media and mobile advertising are receiving relatively greater attention as low cost and high impact mediums. Rahul Lamba, MD, Prudential Advertisers and Media Planners, says, “Social media has emerged as a cost effective medium for advertisers. It aims at a highly targeted set of audiences. Hence, your chances to hit the bull's eye are much higher.” If we talk about overall media preferences, digital ad spends in India have grown by 54% yoy in 2011 to touch Rs.15.4 billion. While the base figure may be small compared to Rs.116 billion spend on TV advertisements last year, the impressive growth rate for digital media does indicate its growing relevance to the CMO. As per the KPMG-FICCI report, digital media is expected to register a 30% CAGR from 2011 to 2016.
Apart from this, marketers are now actively exploring new avenues to compensate agencies. The major change is a shift from a labor-based to a performance-based compensation approach. In simple terms, it means linking fees of agencies to product sales while cutting down on base compensation and margins. V. Subramaniam, General Manager, Adfactors Advertising, laments, “Due to a tough market situation, the 12-15% commission, which advertising agencies used to enjoy earlier, is now depleting very fast. Nowadays, clients negotiate very hard for every single penny they spend.” Performance-based compensation exposes agencies to greater financial risks if client goals are not met, but conversely, it also gives them the potential for a significant upside.

Moreover, as marketers go hyperactive, they are deploying multiple agencies for increased effectiveness, cost saving as well as for getting the best possible results. One recent and significant example has been Coca-Cola India appointing Lowe Lintas and Weiden + Kennedy along with their age old advertising agency McCann Erickson for their campaign. Coke's arch rival PepsiCo India proceeded on similar lines last year by appointing Taproot as its second ad agency apart from JWT, with which they share a partnership since over a decade. The move led to the highly successful “Change the game” campaign for the company.

Furthermore, some companies are now making another major strategic shifts in their approach due to tighter budgets. Giving up on multiple and regional brand ambassadors and appointing a single brand ambassador for pan-India campaigns is a case in point. South Indian actors are being increasingly used. It not just saves on the hefty fees given to different ambassadors (especially national celebrities) but also cuts down on production costs of multiple regional advertisements. So we have Telugu Superstar Mahesh Babu replacing Bollywood action star Akshay Kumar in the latest TVCs of Thums up, Parle Agro appointing Tamil-Telugu actor Siddharth as the first brand ambassador for Frooti and Tamil actor Karan sharing moments onscreen with Bollywood star Kareena Kapoor for the TVC of Mahindra's two-wheeler Duro.

These tactical initiatives are a clear indication of a sense of urgency among these marketers to make every penny count for more than ever before. V. Subramaniam, General Manager, Adfactors Advertising explains the impact of this on the advertising industry thus, “Client retention has become a very challenging job for agencies. Now they need to do every bit including special discounts, schemes, et al to keep old accounts going and also to get hold of new accounts.”

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Source : IIPM Editorial, 2012

An Initiative of IIPMMalay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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