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Este informe no está disponible en español. CARIBBEAN BUSINESS Election-year spending; Tax savings to boost consumer spending; Economic recovery finally here; TV ad rates up substantially After a modest 2% growth in 2003, the local advertising industry is heading for a full recovery this year By ROSSIE CORTES May 6, 2004 Ad-vantage 2004 Elections, the Olympics, and local television’s 50th birthday will drive the local advertising industry’s recovery Despite lukewarm early forecasts by industry experts, Puerto Rico’s advertising industry began to recover in the second quarter of 2003. Advertising spending, including media buying through advertising agencies and direct local and nonlocal media buying by advertisers, increased 2.2% to $1.82 billion in 2003 from $1.78 billion in 2002, according to market research firm Mediafax. These figures don’t take into consideration discounts resulting from rate negotiations, discounts for advertising frequency, or media-to-media trade-outs. History tells us that the actual figure for media spending after discounts could be as much as 60% less. That would bring the actual advertising expenditures to approximately $728 million in 2003, a modest improvement over the $712 million in 2002. According to Mediafax figures for 2003, television was the largest advertising segment with 56.4% of the total media-spending pie, followed by newspapers with 30.3%, radio with 5.5%, cable with 4.7%, and magazines with 3.1%. Based on Mediafax numbers, however, growth in the television segment remained almost flat (down 1%) in 2003. Radio registered the sharpest decline (down 16%), while cable grew by 16.5%, newspapers by 8.2%, and magazines by 10%. In the second half of 2003, the advertising industry was preparing to recover as consumers began to spend more money and companies began investing more of their budgets on advertising. Although the first six months of last year proved a trial for companies in the advertising, media, and marketing industries, the upturn of the second half gave them hope for 2004. "Advertising spending numbers had been increasing in 1999. That went downhill in 2000 because of the slowdown in the economy, which was further aggravated by 9/11," said William McKenna, president of Mediafax in Puerto Rico. "It continued like that in 2002 but started to increase slightly in 2003. Now, spending is expected to increase further in 2004." Overall, the island’s total advertising or media spending has grown by 8.2% since 2000, making it one of the largest industries in Puerto Rico. Advertising agencies have benefited significantly from that growth, as they handled the largest share (65%) of the total ad spending in 2003. According to Mediafax, however, ad spending for the first three months of 2004 (1Q04) was almost stagnant compared with the same quarter last year. After discounts, the amount spent in 1Q04 was about $146.4 million. However, first-quarter numbers aren’t a good prediction of full-year performance, as more than half of advertising agencies’ spending is done in the third and fourth quarters. "Agencies usually start slow in January and then pick up a little in February and March," said McKenna. "Usually, the fourth quarter is the most successful. Since 2004 is an election year, however, the third quarter may see the highest media spending." Actually, in our survey of advertising agencies and direct clients, the second quarter is already looking as if it will have bigger growth than in the same quarter last year. What’s in store? As a result of the healthier economy, now that the stateside economy is improving and the municipal and central governments are increasing their spending for the upcoming elections, the advertising industry is expected to be on its way to a full recovery during 2004, which is expected to continue into 2005. For this year, industry insiders project nearly 7% growth, driven in part by extraordinary events such as the general elections, the Summer Olympics, and the 50th anniversary of television in Puerto Rico. Spending by ad agencies is projected to increase some 4% from 2003 to 2004. "We expect advertising agencies to grow by $20 million in 2004," said Julio Toro, media director of MediaNet, a subsidiary of advertising agency Badillo, Nazca Saatchi & Saatchi. "This includes alternative media as well as all the media not included in the Mediafax numbers." According to McKenna, we are already seeing the growth of Puerto Rico’s advertising industry in thicker newspapers, an indication that there is more advertising. "It would be hard to find somebody saying that 2004 isn’t going to be a good year," he said. According to Juan Arteaga, president of Arteaga & Arteaga Advertising Inc., an evaluation of the numbers for media spending reveals that the advertising market hasn’t grown that much. However, several factors must be taken into account. "For instance," said Arteaga, "you must consider that television now has fewer commercial minutes per hour, meaning the ads are sold at higher rates and with fewer discounts than before. Thus, spending is increasing, although it isn’t revealed in the analysis." Arteaga added that tax reforms in 2003 will generate savings for consumers, which will be reflected in higher spending. According to the Department of the Treasury, consumers will see approximately $500 million in savings from lower tax contributions. Most of the advertising experts interviewed by CARIBBEAN BUSINESS are also optimistic about 2005, though they note that it won’t have the benefit of extraordinary events such as the general elections and the Summer Olympics. When there is a change in government administration, they say, the market usually waits for things to settle down. "The results in 2005 may be uncertain as they will follow an election year, and we are unable to say what this change of government is going to do to the economy," said McKenna. "Typically, people wait to see what is going to happen in the first 90 days of the new government, but then things should pick up," added Hector Ortiz, president of WING Group. Advertising agencies performance Although total media buying in Puerto Rico grew 2.2% from 2002 to 2003, media buying from advertising agencies dropped by 1.7%. According to Mediafax, advertising agencies spent $1.18 billion for their clients’ campaigns, down from $1.2 billion in 2002. Of course, after heavy discounts the sums would be closer to $480 million in 2002 and $472 million in 2003. "We also have to take into consideration the fact that [Mediafax’s] figures don’t include the money invested in outdoor media, movie theaters, promotions, and other alternative media," said MediaNet’s Toro. He added that these investments could represent up to 10% of total media spending, which in 2003 would have amounted to another $47.2 million. In addition, media buying by ad agencies doesn’t reflect the revenue they receive from subsidiaries such as public relations and production firms, which may not always purchase time or space in the local media. These subsidiaries could generate 15% to 20% of an ad agency’s total income. "It is hard to say how much of the money generated by public relations firms is reported as part of advertising agencies’ earnings. Therefore, it is hard to keep track of how much money the public relations industry is contributing to the growth of advertising agencies," said Juan Rafael Arguelles, president of the Puerto Rico Association of Public Relations Professionals. Most of these new subsidiaries were created when agencies started to add services for clients. This was the typical reaction to the trend toward becoming full-service providers in a market that wanted less expensive, more efficient ways to promote brands. "People needed to do more with less when budgets started to get cut," said Carlos Carbonell, general manager of Young & Rubicam Puerto Rico. "Strategies had to yield the same results or better, but with less money." With the reduction in advertising budgets, many companies chose to purchase time for television spots directly from the media, forgoing the assistance of advertising agencies. As a result, direct media spending from local customers grew 10.2% from 2002 to 2003, compared with 1.9% growth from 2001 to 2002. The opposite was true for direct nonlocal media buyers, which purchase time for television and radio spots through adverting agencies on the U.S. mainland or from their marketing departments outside Puerto Rico. Spending by this segment dropped 44.8% to $5.9 million in 2003, compared with 11.5% growth to $10.7 million in 2002. Many experts consider that direct local and nonlocal media buying represents lost revenue to Puerto Rico’s advertising agencies. In 2003, the amount of direct media spending by local and nonlocal buyers was 35% of the industry total. Budget changes by advertiser category Industry experts say advertising budgets from existing agency clients have generally increased, in some cases up to 7%, since 2003. Nevertheless, many clients are still cautious about significantly raising their advertising budgets until consumer confidence in the economy has been demonstrated. These clients have increased their budgets by a more moderate 4%. Part of the reason for the increased spending is that many companies saw the damage inflicted by cutting advertising budgets. "Many advertising clients cut budgets without having a plan B," said Carbonell. "Then, they realized the benefits advertising meant to their earnings. Today, clients are more confident about advertising, and this is making the industry grow." "Clients generally have been investing more in better [advertising] ideas," added Arteaga. "They have been approving more advertising special projects and campaigns. More campaigns were launched in 2003 than in 2001 and 2002 combined." The advertising budgets of food & beverage distributors, restaurants, automakers, and health companies have increased. "Food & beverage distributors had found themselves significantly cutting their advertising budgets because of agreements with supermarkets," said Carbonell, who explained that such agreements require distributors to invest in the supermarkets if they want their products to be on the stores’ shelves. "Now, however, these products are again being advertised. The distributors have been increasing their advertising budgets and launching new campaigns to aggressively promote their brands." "A good example in restaurants is Outback Steakhouse, which increased its promotions in 2004 and saw higher sales from the first week of the advertising campaign," said Edwin Miranda, president of locally owned ad agency KOI Inc. "Fast-food restaurants in particular have always used advertising as one of their primary promotional tools," added Carbonell. "Carmakers, meanwhile, are still heavily promoting their products, although the significant increase in their advertising budgets started several years ago." Miranda noted that the health industry was among the first to begin spending more on advertising. "The health industry started to invest in advertising before other clients even began considering the possibility," he said. "Today, the health industry is advertising more than ever. This is also promoted by the increase in Medicare reimbursements to hospitals." The increase by pharmaceutical companies has come about because of federal legislation enacted a few years ago allowing pharmaceutical companies to advertise directly to consumers. The advertising budgets of financial institutions, meanwhile, have remained flat overall, with lower investments in advertising for individual retirement account (IRA) products, but higher spending to promote mortgage loans. Arteaga said many financial institutions invested huge sums on advertising their IRA products in 2002–without getting a good return on investment. "Many institutions hoped to attract consumers to their IRA products and then sell them on other financial products, which would end up generating more money for the institutions than the IRAs ever could," said Arteaga. "IRA products alone aren’t profitable enough to give the institutions a good return on their advertising investments. In many cases, the strategies to use those IRA promotions to sell other financial products didn’t work." Mortgage companies, on the other hand, have increased their advertising spending to capitalize on the boom in refinancing from the historically low interest rates. "We have seen more aggressive campaigns among mortgage companies," said Arteaga. "Many consumers have been taking advantage of the low interest rates to refinance their mortgages so they can have more disposable income." The telecommunications industry’s advertising expenditures haven’t increased much, though it remains one of the biggest categories in advertising. Advertising spending by retailers, meanwhile, has declined somewhat since these have been focusing on publishing shoppers (sales circulars) rather than on media advertising. In many cases, in-house marketing departments produce the shoppers. "We aren’t expecting any drastic changes within any category of advertiser," said Carbonell. "There may be small changes within the categories, but certainly none to alter the local market." Ad agencies adapt In response to clients’ budget cuts, many advertising agencies sought to increase productivity and efficiency. For some, this required determining what was and what wasn’t working for them. "For many companies, this evaluation process meant they had to make personnel reductions and give more in-depth training to those who remained," said Miguel Escobar, president of McCann-Erickson Corp. S.A. in Puerto Rico. "Although painful, it was a necessary process for every agency. Now, as an industry, we find ourselves better prepared and capable of growing." Many agencies are also outsourcing some of the services they had on staff and have changed how they conducted their media studies. "Media professionals had become more demanding and assertive in their analysis by including all the existing media in the marketing mix, but the consumer market is more segmented and we have more media options to choose from," said Helga del Toro, media director of De La Cruz Group. "There is no preset plan that will apply to every situation because every situation is unique." "The consumer has changed so that companies can no longer assume success simply by putting an ad on television for a certain period," added Arteaga. "<I>Doña</I> Juanita who used to watch six hours of television a day now watches less. She now goes out, listens to more radio, and reads more newspapers or magazines, because now she has more media from which to choose." According to Carbonell, creative standards have also changed over the past few years. "Many advertising agencies had to be more creative and assertive in the production of campaigns with less money, thus raising the standards of creativity. This change can be seen in the local Cuspide awards, which even small agencies are winning for presenting outstanding creative campaigns." Television Mediafax’s McKenna said there were more opportunities for advertising on cable and satellite television in 2003, thanks to the rise in new programs for specialized viewer segments. "Advertisers are getting a lot of exposure since viewers are becoming more fragmented. Puerto Rico now has far more television sets per house than ever before," he said. A few years ago, said McKenna, 30% of the local population had more than one TV. Today, the majority of households have two or more TVs. "This means that people living together may not be watching the same TV show," he said. Another change in the television industry came from Univision’s initiative to reduce the number of commercial minutes per hour of programming and keep viewers from channel surfing, which of course hurts advertisers. This effort to cut back on the clutter, which local stations Televicentro and Telemundo duplicated, has improved the viewing experience and leveled the playing field. "Competition has evened out so that the three local TV stations are considered equal," said Carbonell. "Advertising budgets are being spread more equally among the three stations." To compensate for having less commercial time per hour, the television stations raised their rates by 15% to 25%. Radio According to Mediafax, Puerto Rico’s radio industry saw a significant decline in advertising spending in 2003. Although radio did benefit some from the television industry’s reducing the number of commercial minutes per hour, and charging more, it suffered the most of any media from companies cutting their advertising budgets. "Many companies chose to cut the part of the advertising budgets that went to radio," said Ismael Nieves, general manager of Spanish Broadcasting System, which owns five radio stations on the island. Advertising spending on radio went from $118.8 million in 2002 to $99.8 million last year, representing a 16% decline. Radio represented 5.5% of the total advertising expenditure in 2003, third behind television and newspapers, which had 56.4% and 30.3% of the total. "This decline in radio spending could have been the result of many companies going back to other media such as television," said MediaNet’s Toro. "It should be noted, however, that Mediafax numbers don’t account for the spending generated by the whole radio industry." He indicated that Mediafax’s analysis includes only the small number of stations owned by the major radio conglomerates. "Radio is the only medium in Puerto Rico that has a large captive audience every day of people who have nothing better to do than listen to the radio on their way to and from work," said Nieves. According to Arbitron, a company specialized in conducting media market studies, radio reaches up to 95% of the island’s population age 12 and over. Carbonell said it is this reach to which advertisers should be attracted, not the cost per radio spot. "Radio is a good medium that should be used because of what it brings to advertisers, not what it costs," he said. "Radio is the hardest medium to monitor because of the number of stations in Puerto Rico," added Carbonell. "However, radio is a vital medium and continues to be very active among all categories of advertisers." There are about 120 radio stations in Puerto Rico. Arteaga, however, is critical of the local radio industry. "Investment in radio has been increasing for the wrong reasons. It would be good to see more investment because the programming is better," he said. "Instead, we are falling into the trap of investing more in radio for bad programming." Newspapers and magazines After cable television, the medium with the highest percentage growth in advertising last year was newspapers and magazines. Newspaper spending went from $507.5 million in 2002 to $549.2 million in 2003, up 8.2%. Magazine spending went from $51 million to $56 million, representing a gain of 10%. Again, these numbers have to be discounted by at least 50%, for the reasons previously mentioned. "Advertising spending in the newspaper industry is expected to reach $300 million for 2004, which includes spending in regional newspapers," said Toro. "Advertising is more evenly spread out among the daily newspapers, such as El Nuevo Dia, Primera Hora, and El Vocero," said Carbonell. "El Nuevo Dia doesn’t have the absolute majority that it had." The Internet According to experts, the Internet as an advertising medium is growing at a faster pace as agencies and clients are realizing its attractions, including a wide audience. According to the Internet Society of Puerto Rico, the number of Internet surfers in Puerto Rico will pass the one million mark. This figure will continue to grow along with the proliferation of Internet service providers and Internet-related companies in Puerto Rico. "At the beginning of the Internet revolution, online advertising wasn’t very successful in Puerto Rico, but things have changed," said Carbonell. "We now have more Web surfers every day who are constantly exposed to Internet advertising. As more people go online, the Internet will become a more reliable advertising medium for our clients." Globally, the Internet has become an integral part of companies’ interaction with their clients. "Many clients realize that the tool that is going to transform their business is interactive media," said Arteaga. "Managers have begun to understand that the only way to increase their sales, in some cases, is going to be through the use of interactive media." While experts agree there has been significant growth in the Internet as an advertising medium, they say it still has a long way to go before it can compete with traditional outlets such as television, radio, newspapers, and magazines. A snapshot of Puerto Rico’s radio market In a 2003 study by media research firm Arbitron Inc., Puerto Rico was ranked, with 3.3 million people older than age 12, as the 13th most densely populated market (population per square mile) in the U.S. It was the 27th largest compared with other states. Radio reaches just about every age group in Puerto Rico; 95% of people over 12 are listeners. Women between the ages of 25 and 34 spend the most time listening to the radio on weekdays, followed by men age 35 to 44. The average time locals spend listening to radio is 24 hours per week. The segment with the most listening time is made up of men between the ages of 55 and 64, with more than 30 hours per week. Men age 45 to 49 spend 28 hours each week. According to Arbitron’s study, working women spend more time listening to the radio t than women who don’t work. The average listening time per week for the typical working woman between the ages of 35 and 64 is 27 hours. During weekends in Puerto Rico, more than half of the radio audience (76% of all men and 82% of all women) is reached at home. The hours with the most radio listeners are weekdays (with over 50% of the total weekly audience) from 6:30 a.m. to 9:00 a.m., midday, and from 3:00 p.m. to 5:00 p.m. The peak hours on Saturdays (with over 25% of the audience) are from 8:30 a.m. to 1:30 p.m. and on Sundays (over 20%) are from 10:30 a.m. to 3:00 p.m. The listening behavior of Puerto Rico changes from hour to hour and from weekday to weekend. Trends also change depending upon where the audience may be listening. There are about 120 radio stations spread out across all of Puerto Rico. One characteristic of the local market is that people tend to listen to the radio more often as they get older. Also, they seem to prefer AM stations more as they mature. The number of people who listen to AM and FM stations differs according to region. Arbitron divides Puerto Rico into six regions: San Juan metro, east, north, northeast, south, and west. The east has the biggest share of FM listeners, while the San Juan metro area has the biggest AM audience. Men seem to prefer listening to Spanish-tropical music, while women favor adult-contemporary music. The second most popular radio format among men and women is news / talk / information programming. Advertising doldrums give public relations a boost The public relations industry has grown by almost 40% in the last two years, and 20% since last year, according to several industry experts, even when the advertising industry in many sectors remained relatively flat. With around 40 public relations firms in Puerto Rico, the average local industry billing is approximately $45 million annually. "In the case of Edelman Public Relations Puerto Rico Inc., we saw growth of 50% last year and expect to see the same for this year," said Annie Bird, president of Edelman. Although some public relations firms were affected by the recession because they were collaborating on projects with advertising agencies, the majority haven’t felt any adverse effects during the last two years. On the contrary, companies that cut advertising budgets during the recession to reduce costs found they lacked the tools to sell their products and turned to public-relations firms to get their messages across to consumers. "With the recession, especially after 9/11, many people became aware of the need for public relations," said Bird. "Many companies became more receptive to including public relations in their businesses." With public relations booming, clients are now demanding more from their public-relations firms. "The public-relations professional is more prepared than ever," said Juan Rafael Arguelles, president of the Puerto Rico Association of Public Relations Professionals. "The rhythm in public relations has speeded up as professionals are becoming more educated and involved in their clients’ industries. These are clients who can’t afford to work with professionals who don’t know what their industry is all about." According to Arguelles, public relations as a marketing tool has evolved in that it creates promotional strategies that have an immediate impact on sales. "Public relations is a cost-effective strategy that many marketers have come to acknowledge as a branding tool." "We have clients who are using only public relations to launch their products," said Bird. "They understand that their products attract a specific market and therefore they shouldn’t [create advertisements] for the whole mass market. They concentrate instead on their target markets." The public relations sector most affected by the recession was corporate communications. "In many cases the budget for corporate communications came from the sale of products. If the products weren’t selling, companies didn’t have the budget to invest in community and/or internal programs," said Arguelles. Arguelles, though, is optimistic about the outlook for the industry as a whole. "There is a lot of work out there for the public relations firms as well as the freelancers," he said. "Based on our experience, we are looking at a sustained growth in the coming years. However, we should be aware that next year there will be a new government regardless of which party wins. That may bring other changes that may affect the industry." Many people have misconceptions about what public relations can provide to companies, but most experts agree that change is in the air. Managers are becoming increasingly aware of the benefits and advantages of integrating public-relations strategies into their business plan. "We still need to convey to the decision makers the benefit and value of public relations to a business," said Bird. She said this is particularly important when it comes to selling consumer or specialized products, because public-relations firms target narrowly defined markets, which is necessary to sell these types of goods. "One of the trends that we are seeing is that advertising agencies are now including public relations in their roster of services. This has been done through the creation of alliances with independent firms or the creation of their own branches in public relations," said Bird. "We will continue to see this trend as agencies that don’t have public relations start to incorporate it. In addition, we can expect to see more independent public-relations firms that will service their own clients as well as advertising agencies." As for the future, many public relations professionals hope to develop a license examination that will specify the level of expertise of those working in the field. Today, there are around 30 professionals with Public Relations Society of America accreditation. An average of 10 professionals take this exam every year. This Caribbean Business article appears courtesy of Casiano Communications. or
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