Slowdown, downturn, decline, lull, stagnation, the financial crisis – these are some of the terms that advertising, marketing and the media people are using to avoid the word ‘recession’. However, whatever the euphemism they may choose, there is no denying the fact that globally and locally, we are living in recessive times. (In economics, a recession is defined as a reduction in the country’s GDP for at least two consecutive quarters).

It is no secret that Pakistan’s economy is in trouble, having moved from a rapid rate of growth to a state of crisis. Real GDP is slowing sharply – from 6% to 4.2%; the rate of inflation remains at record highs, having reached 25.3% in August 2008; the current account deficit continues to grow; foreign exchange reserves are falling sharply; foreign investment inflows are slowing down; and the fiscal deficit is surging.

While some of these gloomy financial indicators could be written off as the trickle-down effect of the global recession and rising commodity prices, there are several other problems that are unique to Pakistan. There is the tension on the western front with India, the seemingly uncontrollable insurgencies in Balochistan and the NWFP, the ever-precarious issue of homegrown terrorism, and to add further fuel to this fire (as if any were needed), the lack of confidence in the government.

Advertising revenues have been dramatically affected by these issues. An analysis of figures provided by Gallup shows that total ad spend (revenue) in 2008-09 registered an increase of just 10% over the previous fiscal year. This was significantly lower than the 62% increase in 2005-06 and the 32% increase in 2006-07.

Similarly, TV ad spend (revenue) increased by a mere 13%, whereas previous fiscal years had seen drastically high increments of 88% and 55%, respectively. The print media showed a 9% increase, a dramatic drop from its 24% increase in 2006-07. Radio, outdoor and BTL also registered similar declines.

And the shortfalls have continued. Commenting on the condition of anonymity, a financial expert disclosed to Aurora that in the first two quarters of the current fiscal year, TV channels have suffered a 40 to 60% loss of business; print, a 35 to 55% loss; and radio, a loss of 15 to 35%.

Brands and the recession

The above figures may seem astonishing considering that even in early 2008 the Pakistani media was showing every sign of robustness. The obvious reason for these shortfalls is reduced advertising, the received wisdom being that in times of recession, non-essential expenditures (such as marketing budgets) should be the first to come under the scalpel.

Slashing marketing budgets may prove to be counterproductive in lean times, considering that this is when brands need to connect with their consumers. Case studies from the US economy show that a recession is also an excellent time for innovation. Several iconic brands that literally created the categories they now function in (the iPod, Crest White Strips and even MTV) were launched during times of financial turmoil.

It seems unlikely that Pakistani brands will be following in these footsteps in the near future. In a country report on Pakistan in October 2008, The Economist predicted that private consumption will grow by a mere 3.9% in 2008-09 as inflationary surges will have a negative impact on real wages and consumer spending. This is a truly dismal figure compared to 2008, when private consumption grew by 8.5%.

One of the major reasons that consumer spending will take such a huge hit is the slowdown in consumer financing schemes as banks are unable to give loans at previous levels. Furthermore, consumers have already overborrowed to such an extent that they are deeply in debt and, in many cases, unable to pay back. Thus, not only has the quantum of financial advertising decreased but the focus has changed dramatically from ‘borrow and spend’ to ‘invest, insure and save’.

The telecom sector, which works on a January-December financial year, reduced advertising dramatically in the last quarter of 2008 (probably because budgets were depleted) and is unlikely to soar to its former levels in 2009 due to the burden of increased taxation. Here too the focus of the marketing communication has shifted from selling SIMs to providing more value to existing subscribers.

Decreased consumer spending is also impacting the real estate sector, as people are unwilling and unlikely to make high-involvement purchases such as land in recessive times. Although property prices have not crashed, the real estate rush has reached a plateau and could result in lower ad spend.

FMCGs remain mum about their troubles, but 2009 is unlikely to be a good year for them. Increases in oil prices in 2008 meant that several companies had to hike the price of finished goods to balance out the increased cost of raw materials. Thus, food price inflation reached 34.1% in August 2008 (the 12th consecutive month of double-digit increases). Marketing experts have mixed views about whether FMCGs will cut back media budgets in 2009. In fact, it is more likely that they will introduce newer, cheaper brands which may actually increase their advertising spends.

Advertising agencies and the recession

In spite of mitigating factors, some financial experts believe that the recession in Pakistan is little more than a crisis of confidence. Even if that is true, the impact of this lowered confidence is affecting advertising agencies in very real ways.

Masood Hasan, CEO, Publicis Pakistan, explains that agencies are feeling the squeeze from all sides as they are not being paid on time by clients but are still expected to pay the media within the given timeframe; otherwise, they risk being blacklisted by the APNS (All Pakistan Newspapers’ Society) and/or the PBA (Pakistan Broadcaster’s Society).

It is widely reported that both associations are stringently enforcing credit periods as their members are also feeling the liquidity crunch. Some agency heads have reported that the PBA has recently reduced credit periods from 90 days to 60 days, causing further difficulties for advertising agencies.

The government, which is the biggest advertiser in the country, has also yet to pay agencies. According to Sohail Kisat, CEO, MCOM, in addition to not being paid, business from the government has slowed down to such an extent that whereas it would generally spend 40 to 45% of its media budget in the first two quarters of a fiscal year, less than 10% was spent from July to December 2008.

Keeping in mind already drastic reductions in media commissions and the uncertain economic climate, agencies are turning to the retainer model in order to ensure a steady, monthly stream of money. Clients, for their part, are using this model to squeeze out as much work as possible from agencies.

Agency heads complain that because advertising agencies are not capital-intensive enterprises, the burden of having to pay the media on time while being overworked by clients without timely payments is going to have serious repercussions on their most valuable resource: people.

Already the industry is rife with rumours that recession-connected layoffs have occurred. The most persistent ones include 25 people being laid off by an Islamabad-based agency, the complete shutdown of another agency in Islamabad and a mid-sized Karachi-based agency laying off three to five people. These remain unconfirmed and although most agency heads hint that people have been laid off, they refuse to give specifics.

Shahnoor Ahmed, CEO, Spectrum DYR, says that if clients drastically cut back on spending in 2009, agencies will have to let go of people because they do not have the reserves to support staff without business.

Although pay cuts seem like an unlikely course of action, agencies may have to let go of their more expensive personnel, especially those on the client’s payroll, and then hire new people at lower salaries. In addition, many agency executives are certain that their salary evaluation will be seriously compromised.

Most agencies admit that for the time being they are dealing with the recession by rationalising operating expenses such as cutting down on non-essential travel and re-examining stationery, electricity and even canteen expenses.

Never has the need for an industry association for advertising agencies been as great as it is in this dire scenario. Ahmed, who will head the soon-to-be-launched Advertising Association of Pakistan (AAP), says that one of the key tasks of the newly formed association will be to negotiate more relaxed credit periods for its members with the APNS and the PBA.

“We don’t want to walk away from any of our debts but we also need the media to cooperate. Lack of cooperation from them will diminish our capacity to provide jobs.”

The media and the recession

A diminished capacity to provide jobs has been the worst impact of the recession, particularly on the electronic media. There are confirmed reports that some of the major channels have shelved projects and laid off people en masse. The responsibility for these layoffs must lie with those who, at the height of the media boom, hired staff at exorbitant salaries mainly to pluck them away from other TV channels and are now unable to retain them.

Shahab Zuberi, COO, Aaj TV, says that TV channels, by virtue of being the most popular media with advertisers, have also been the worst hit by the recession, resulting in serious cash flow problems because of decreasing revenues and ever-increasing expenses. He further mentions that the increasing rate of the dollar has raised satellite fees and the cost of technology, equipment and international news service feeds.

According to Fouad Husain, Managing Director, Mindshare Pakistan, the electronic media was initially overzealous in its hiring policies.

“Most channels are realising that if they do not revamp operationally and in terms of people, they are going to suffer.”

Ali A. Rizvi, Head of Media, Adcom adds to this saying that whether or not clients scale down their media budgets next year, the one thing that certainly will happen is a rationalisation in the number of TV channels they advertise on.

“Telecom companies, for example, instead of advertising on every single channel, will choose a bouquet of, say, 15 channels.”

When clients start becoming picky about electronic media choices – no doubt to extract more bang for their buck – TV channels will have to rise to the challenge by giving advertisers better content and value for money, areas that they have continued to struggle with.

As clients revisit their budgets, the print media continues to receive the standard criticisms about lack of credible readership research and, in some cases, poor printing quality. Similarly, the outdoor media, the growth of which has already been severely hindered due to regulatory issues, continues to face rationalisation.

Rizvi suggests that even though radio has registered losses, it will probably continue to be popular with advertisers because it is still the cheapest media to advertise on.

Hasan for his part is of the opinion that BTL is the media of the future, as brands will be looking to spend money on one-on-one interactions with their consumers. Of course, the efficacy of BTL could be heavily compromised due to the danger of civil strife and terrorist strikes.

Predictions for 2009

Financial experts wonder why advertising agencies and the media did not foresee these gloomy times, as in their view recessions are cyclical and any sector that goes through a boom is bound to have a lull period; thus, people should have planned ahead.

If indeed they had planned ahead, hiring strategies may have been a bit more conservative so that the current situation of mass layoffs could have been delayed if not completely avoided. Thus, in view of the fact that agencies, media and, to some extent, brands have failed to ready themselves for the recession, 2009 is going to be a grim year.