WHAT HAPPENED TO ADVERTISING
Madison Avenue was always a street that had just one side: sunny. The ad game, after all, is about optimism and the power of positive thinking. Advertising legend David Ogilvy regularly exhorted his top lieutenants to "encourage exuberance" and "get rid of sad dogs who spread gloom."
Well, welcome to Madison Avenue, 1991: It's the gloomiest kennel you ever saw. This once-buoyant business is suffering through the deepest and most prolonged ad drought in 20 years. Advertising has muddled through its share of recessions. But this downturn has sent an unusual shiver through the industry. The gloom has even reached Chateau de Touffou, the 12th century French castle where Ogilvy now lives in retirement. The advertising world, says the 80-year-old adman, is haunted by "a pervasive atmosphere of fear."
BIG COMEDOWN. What's causing the fear is the suspicion among ad executives--and many of the publishers and broadcasters who depend on ad sales for much of their revenues--that the current hard times are only a foretaste of much slower growth to come. It's a stunning comedown for a business that had grown accustomed to a seemingly limitless boom. From 1976 through 1988, total U. S. ad spending consistently grew faster than the economy as a whole. In 1981 and 1982, when the U. S. economy caught a nasty cold, the ad biz didn't even sneeze. Instead, it recorded eye-popping growth rates of 12.8% and 10.2%, respectively.
New product categories, from personal computers to compact-disk players, were sprouting everywhere. All of them required lots of advertising. Airline deregulation prompted carriers to launch ad-intensive fare wars. The breakup of American Telephone & Telegraph Co. created seven Baby Bells that had to make names for themselves. Financial-services advertising stampeded along with the bull market.
For the mass media, it was a seller's market. The three TV networks demanded and got double-digit ad rate hikes every year. As ad revenues soared, the agencies reaped millions from their standard 15% commissions on media billings. Such heady growth spurred empire-building: Rupert Murdoch and Robert Maxwell built multinational media conglomerates. Maurice and Charles Saatchi snapped up ad agencies in Britain and the U. S., while three great American agencies--BBDO Worldwide, Doyle, Dane, Bernbach, and Needham Harper Worldwide--combined to form conglomerate Omnicom Group Inc.
Then the party stopped. Even before the recession, the industry began lagging behind gross national product growth (chart). As consumer spending slowed and corporate profits withered, marketers put the brakes on ad expenditures. Total ad spending grew just 5% in 1989 and 3.8% in 1990--well below nominal GNP growth. It could grow as little as 3% this year, according to Robert Coen, the industry's top forecaster. Coen, a senior vice-president at agency McCann-Erickson, has already downgraded his bellwether estimate twice.
And those aggregate statistics, which include spending on local ads, cable TV, and direct mail, don't reflect the much sharper downturn in advertising in the big mass media, such as TV networks and national publications. Netwoprk ad spending fell 7.1% in the first half of '91 from the same period last year, according to the Television Bureau of Advertising. And revenues at the 170 magazines tracked by Publishing Information Bureau fell nearly 5% in the first half of '91. Newspapers have also seen their growth contract sharply, pressed by the wave of retailer bankruptcies and plummeting real-estate and help-wanted classified ads. Total newspaper ad spending fell 7% in the first half of '91, says the Newspaper Advertising Bureau.
Now, advertising and media executives are searching fruitlessly for signs that clients are ratcheting up spending. "I don't know whether we've reached bottom," says Allen Rosenshine, chairman of BBDO. "At best, there's a wait-and-see attitude among clients." As Rosenshine and his colleagues gird for a bleak winter, many of them are asking: Why did a relatively mild recession trigger a depression in advertising?
LOYALTY GAP. To many marketers, the reason is as simple as it is scary: The recession has laid bare forces that are giving advertising a permanently diminished role in the selling of goods and services. Cynical consumers are wearying of the constant barrage of marketing messages. They're becoming less receptive to the blandishments of Madison Avenue. And their loyalty to brands has eroded as they see more products as commodities distinguished only by price.
At the same time that consumers have changed, technology and the proliferation of media are transforming the science of marketing to them. Now, companies increasingly can aim their messages to carefully pinpointed consumers through direct mail. General Motors Corp. is rolling out its new Cadillac Seville with a mailing offering a videocassette to 170,000 young and affluent consumers. Or they can advertise on one of the new and sharply targeted media. To reach young children, Levi Strauss & Co. used to advertise mostly during Saturday morning cartoons on the networks. Now the company also advertises on MTV and a new music channel on cable called Video Jukebox Network.
Then, too, there is a shift in philosophy at many major marketers. Leveraged buyouts, such as the $30 billion deal to take RJR Nabisco private, have left many giant consumer-goods companies saddled with huge levels of debt. Megamergers, such as Grand Metropolitan's purchase of Pillsbury and Philip Morris' acqusitions of both Kraft and General Foods have led to a harsher bottom-line approach. So in category after category, brand managers are scrambling to boost quarterly sales instead of investing in image advertising to nurture brands for the long haul. To pump sales, they're shifting marketing dollars from ads into promotions such as coupons, contests, or sweepstakes. And because most promotions are placed locally, companies are shifting dollars from national to local media. Many marketing experts believe that such strategies--carried to an extreme--run the risk of damaging valuable brand franchises that enable marketers to price their products at a premium.
'SOBERED UP.' To be sure, some marketers believe advertising spending will come back as soon as corporate profits rebound. Advertising, they point out, is one of the easiest expenses to cut when profits fall, since the savings go straight to the bottom line. Unlike interest expenses or capital costs, advertising is "easy to get to from a budget-cutting point of view," says James C. Reilly, general manager for U. S. marketing at IBM.
And it's true that ad spending often moves in concert with a company's profits. IBM, Adolph Coors, and Chrysler all saw their profits fall in the first quarter of 1991. And all three pared their advertising budgets, according to market researcher Leading National Advertisers. Profits at Philip Morris Cos., on the other hand, rose 22% in the same period. And the company boosted its ad spending for Kraft Miracle Whip, Maxwell House coffee, and other brands by an average of 5.1%.
For most marketers, however, there's a more fundamental shift taking place: They no longer regard advertising as the sine qua non of their marketing efforts. As a result, say many companies, while ad spending will turn up with the recovery, it will probably never again outperform the overall economy as it did in the boom years. "I absolutely, unequivocally do not see a time when advertising budgets will grow like they did in the halcyon days," says Philip Guarascio, executive director of advertising strategies at GM. The marketing chief at one of the largest national advertisers puts it more bluntly: "The recession has sobered everybody up," he says, "and if agencies think we're all going to start drinking from the same bottle again, they're kidding themselves."
Madison Avenue is already feeling the postbinge blues. After years of ramping up, it now faces a wrenching readjustment. Pretax profits at WPP Group PLC, the world's largest ad holding company, plummeted 65% in the first half of 1991. Ogilvy & Mather Worldwide Inc., a WPP subsidiary, has let almost 10% of its staff go, while Ayer Inc., the nation's oldest ad agency, recently laid off 60 staffers. In agency hallways, beleaguered employees murmur as much about pink slips as about their newest commercial.
The downturn has had a ripple effect on the media (box, page 7054). The decline in ad spending has pummeled the profits of newspapers, magazines, and broadcasting companies. Worse, as their column inches, ad pages, and commercial time go begging, publishers and broadcasters have had to cut rates--eroding margins even further. Publications such as 7 Days and The National have failed. The squeeze has forced media giants such as The New York Times, Time Warner, CBS, and McGraw-Hill, publisher of BUSINESS WEEK, to cut costs by buying out contracts of senior employees or laying off staffers. With new rivals such as cable and Fox Broadcasting Co., some media industry observers even wonder if the pinched ad economy can still support three TV networks.
It's enough to make media executives pine for the simpler days of the `50s, when GM promoted cars by having Dinah Shore sing, "see the USA in your Chevrolet." GM still mounts big TV campaigns, of course: Its Heartbeat of America pitch is a well-supported successor to that vintage Chevy campaign. But now, says Guarascio, "we're looking at a whole bag of marketing options: event sponsoring, direct marketing, public relations, you name it."
SATURATION POINT. Guarascio and other marketers recognize how much has changed since the 1950s. For one thing, consumers don't pay attention to advertising the way they used to. The average U. S. adult is already bombarded with 3,000 marketing messages a day. So it's well-nigh impossible to get any one pitch noticed or remembered amid all the clamor. "One of our real concerns is that we have an inability to stand out," says Robert Watson, director of advertising services at AT&T.
With good reason: Market researcher Video Storyboard Tests says viewer retention of television commercials has slipped dramatically in the past six years. In 1986, 64% of those surveyed could name a TV commercial they had seen in the previous four weeks. In 1990, just 48% could.
Worse, even when consumers do notice an ad, they're less interested in the brand message it conveys. Consumers once clung to brands: There were Crest households and Colgate households, families that washed with Ivory and ones that showered with Dove. And the characters Madison Avenue dreamed up to pitch brands became pop-culture icons--the likes of Star-Kist's Charlie the Tuna, Philip Morris' Marlboro Man, Procter & Gamble's Mr. Clean, or the Pillsbury doughboy.
Now, many Americans, brought up on a steady diet of commercials, view advertising with cynicism or indifference. With less money to shop, they're far more apt to buy on price. And they're a lot less likely to be smitten by Tony the Tiger or the Campbell Kids. A survey by ad agency DDB Needham Worldwide Inc. found that 62% of consumers polled in 1990 say they buy only well-known brands, compared with 77% in 1975. A recent Grey Advertising Inc. study says 61% of consumers regard brand names as an assurance of quality--a drop of six percentage points since July, 1989. In the same study, 66% say they're trading down to lower-priced brands.
But even if consumers remained staunchly brand-loyal, marketers would be less willing to blanket them with media advertising. To be sure of reaching the right audience, companies once had no choice but to use general advertising campaigns, which reach nearly everybody. Now, computerized market research is letting them collect detailed information on their customers--not just the approximations offered by demographics, but the specifics of names and addresses. Marketers such as American Express Co. and Philip Morris have assembled vast data bases identifying their customers and their buying habits. With such information, companies now believe it's as important to reach the right people as it is to reach lots of people.
Increasingly, direct marketing is the vehicle of choice. Junk mail used to be the sales tool for fairly specialized products and services--credit cards or magazine subscriptions. Now, marketers of mass consumer products ranging from cars to coffee are turning from the TV box to the mailbox. Chrysler Corp., for example, recently mailed a videocassette promoting the changes in its 1991 minivan to 400,000 current minivan owners. It included a coupon for a Rand McNally road atlas redeemable at any Chrysler dealer. McCann-Erickson's Coen figures national direct-mail spending will grow 6.5%, to $24.8 billion, in 1991, while ad spending on network television will creep up just 1.5%, to $9.5 billion.
Even such traditional TV advertisers as Kraft General Foods Group are shifting to direct marketing. Kraft uses individual mailings, a newsletter, and a toll-free telephone to sell its Gavelia Kaffe, a premium Swedish coffee, to baby boomers and older consumers.
Direct mail has its problems. Consumers are also weary of being flooded by junk mail. And the vast data bases gf marketers have prompted fears that they could invade the privacy of consumers.
SLICED THIN. The woes of the traditional mass media are being sharpened by the proliferation of new competing media outlets. CBS, NBC, and ABC once commanded a 93% share of U. S. homes watching television. Now, they have just over 60%. The rest are watching Bart Simpson on Fox or a baseball game on cable TV, which now reaches 59% of homes. Or they're watching a movie on a rented videotape. Or a boxing match on pay-per-view television. Some new media target even thinner slices of the population. Want to reach air travelers? Turner Broadcasting System Inc. recently began testing a channel that will beam news from Cable News Network and commercials to TV monitors in airport waiting lounges. GM, AT&T, and American Express have signed up as charter advertisers. How about grocery shoppers? Turner is also rolling out a channel to be viewed at supermarket checkouts. Both services beat mass media on one important count: The advertisers know who their messages are reaching.
Packaged-goods companies such as Nestle are also relying more on targeted media. Camillo Pagano, Nestle's worldwide marketing chief, figures that in the past two years, the giant Swiss company has shifted roughly 20% of its advertising budget into alternative media. Pagano wouldn't give details, but he says Nestle will use a variety of these media in a new venture with Coca-Cola Co. to sell cold canned coffee and tea under the Nescafe and Nestea brand names. Says Pagano: "There is no question in our mind that the key point is more targeting of the consumer."
Nestle and other marketers are spurred by a growing desire to measure the effectiveness of their advertising. Media entrepreneur Chris Whittle says marketers can get more bang for their buck by using his targeted media. His products include Special Reports Family Network, a group of publications and a TV channel distributed to doctors' waiting rooms, and Channel One, a satellite service that beams 12 minutes of programming and commercials each day into school classrooms. Whittle says a 30-second commercial on Channel One reaches 40 times more teens than one on MTV.
Ad executives are unimpressed by such claims: "These methods may be effective," says Philip H. Geier, chairman of Interpublic Group of Cos., "but they are only adjuncts to mass media." Still, Whittle has persuaded Quaker Oats Co., Procter & Gamble Co., and Burger King Corp. to buy commercials on Channel One. "There are still people who believe in a core buy: three networks and a dose of women's magazines," says Whittle. "But a lot of people understand that's not the way things work anymore."
There's no denying that marketers want more accountability. Struggling to meet financial goals in markets that often grow no faster than the population as a whole, packaged-goods companies have been riding herd on their brand managers to produce quarterly sales results. The impact of image-building advertising on sales can often be tough to see. Not so with price discounts or coupons, which give sales a quick, easily measured kick. "People are saying: `I can't wait for advertising to work. I've got to turn these dollars around more quickly,' " says Don E. Schultz, a professor of advertising at Northwestern University.
In addition to luring consumers, manufacturers must satisfy the demands of an increasingly powerful retail trade. Scanning devices at the checkout counter enable supermarkets to see which products sell and allocate shelf space accordingly. To hold on to a coveted place on the shelf, marketers must ante up dollars in the form of various "slotting fees," trade discounts, subsidies for the retailer's own advertising, or payments for in-store displays. These fees have ballooned because the explosion of new products has made shelf space that much more precious. And paying for them all cuts down on the amount of money available for traditional brand advertising.
That has hit advertising like a kidney punch. Companies now spend 70% of their marketing budgets on promotions, leaving just 30% for ads, according to researcher Donnelley Marketing. Ten years ago, advertising got 43%, vs. 57% for promotions. Ad execs and marketers grouse that trade promotions are a form of extortion and that too many coupons dilute a brand. But with the pressure for sales and the power of retailers only growing, few predict that advertising will ever regain its share.
LOCAL TIE-INS. Promotions also hurt mass media because they siphon dollars from national to local marketing efforts. Burger King now spends half its ad budget on local tie-ins to build traffic in its franchises. Burger King Chief Executive Barry J. Gibbons says that because of the greater choice of media, network TV advertising will become less important. "The networks are efficient," says Gibbons, "but dollar-for-dollar, they're not as effective."
Even some brand advertising now carries promotional components. Not long ago, the Super Bowl telecast provided a huge audience for some of the year's flashiest new ads--for example, Apple Computer Inc.'s atmospheric anti-IBM commercial that paid homage to George Orwell's 1984. Now, the telecast has become a platform for fevered promotions and sweepstakes: The Bud Bowl, which invites consumers to guess the score of a mock football game for prizes, competes with noisy promos for the soft-drink companies.
The highly praised Diet Pepsi ads starring Ray Charles and his bluesy rendition of You've Got the Right One Baby, Uh-huh represent one of the best brand-image campaigns of 1991. But the commercials also invited viewers to send in videos featuring their own rendition of the jingle. A few are chosen for use in future Diet Pepsi commercials, and those viewers will win cash prizes. Pepsi also just ended the Summer Chill Out campaign, a slickly produced series of ads that gave away discounts, cash prizes, and 130 new cars. So what's wrong with that? Again, the money to run sweepstakes and promotions comes at the expense of airing more ads.
Media advertising is not going away, of course. Campbell Soup Co. plans to boost its ad budget 30% next year. Some of that money will go to revive its fabled Campbell Kids campaign. Herbert M. Baum, president of Campbell North America, hopes the new Kids will win younger consumers over to its red-and-white soup cans. "We missed a generation or two of kids," he says. Another big marketer, P&G, has also bolstered its U. S. ad spending. And most advertisers acknowledge that mass media can't be beat as a low-cost way to reach huge audiences. "The networks are still the Main Street of advertising," says Peter S. Sealey, senior vice-president and head of global marketing at Coca-Cola.
'BLOODY FOOLS.' Sealey and other marketers also recognize that advertising is still the most effective method to nurture a brand's image over the long haul. The risk in cutting advertising support is that the brand will erode: Mars Inc. surpassed venerable Hershey Foods Corp. as the nation's largest chocolate maker because it spent more to advertise M&Ms and its other brands than Hershey did. "Brands can take short-term cuts in ad spending," says Roy J. Bostock, chairman of D'Arcy Masius Benton & Bowles. "But there's a time bomb waiting to go off."
What's more, marketers have an interest in maintaining strong brand franchises because it enables them to price their products at a premium. In doing so, America's big consumer marketers have been able to roll up comfortable profit margins.
So there's no question ad spending will recover to some degree. But with companies racing to reach consumers in so many new ways, Madison Avenue is struggling to adjust: Since agencies now draw most of their commissions from placing media ads, they're rushing to develop faster-growing disciplines such as promotions and direct mail. They're also looking overseas: The deregulation of media in Western Europe has fueled faster ad spending growth in many of those markets.
As the industry adjusts to these new realities, it may actually be returning to the fundamentals of its business. Advertising, after all, does work in some fashion, even if its workings are often mysterious. But when the good times were rolling, many ad agencies hurried to see who could produce ever more lavish, ever more "creative" advertising. Clients complained that their shops were interested only in grabbing awards or raking in millions from agency mergers.
Perhaps these hard times will help the business relearn a valuable lesson, says David Ogilvy: "Maybe we'll stop being such bloody fools and get down to our business, which is selling products for clients." He should know. He began his career as a door-to-door salesman, and the verity he learned then applies to the hard truths taking hold today: "No sale, no commission. No commission, no eat."Mark Landler in New York, with Walecia Konrad in Atlanta, Zachary Schiller in Cleveland, Lois Therrien in Chicago, and bureau reports