Delivering results: Strong foundations and innovation will help the sector ride out what is expected to be a difficult period

Having weathered the international economic storm well, the South African advertising industry had a tough year in 2012 and may have a slower period ahead. The sector is contending with economic headwinds and subsequent caution among advertisers. Nonetheless, major clients are still willing to spend, and innovative agencies could find opportunities to expand in new niches. The size of the market continues to attract foreign investment, but international firms often work in partnership with nimble and creative local firms.

Spending Breakdown

Overall advertising spending, excluding self-promotion, grew by 11% in 2011 to R32.02bn ($3.9bn) from R28.85 ($3.5bn) in 2010, according to Tony Koenderman’s AdReview 2012.

AdReview is an annual publication published in partnership with Media24’s business website Fin24.com, and is named after its editor Koenderman, a South African journalist and advertising expert.

TV had the largest market share at 45.9%, with total spending of R14.68bn ($1.78bn), up 9.3% on 2010. It was followed by print, with R10.078bn ($1.22bn), or 31.5% of total spending, up 6.9%. Radio made up 14% of total market share with R4.46bn ($544.7m), up 21.3%. Out-of-home (OOH) advertising made up 4.3% with R1.36bn ($165.7m), up 11.2%. The internet accounts for 2.4% at R754m ($91.9m), up 30.2%. Cinema advertising recorded R597m ($72.7m), or 1.9% of the total, up 70% from 2010. In last place, direct mail shrank by 50.4% to spend R70m ($8.5m), or just 0.2% of the total.

Internet advertising has grown particularly rapidly in recent years – partly because it comes from a low base, being a relatively new medium. Internet spending was worth R376m ($45.8m) in 2008, but factors, including higher internet penetration, the increasing use of smartphones to get online, and rising awareness among clients of the importance and possibilities of web advertising, have played their part in growth. A number of traditional agencies have established digital arms, while some specialist digital agencies work with clients or larger advertising firms to enhance their online presence.

But Koenderman is keen to emphasise that traditional media are still the focus of the market, and that advertisers should not write them off just yet. “Print is still a very significant source of information,” he told OBG. “Advertising agencies have a tendency to think well ahead of what is still a very conservative market.”

Complex Environment

But while 2011 figures appear to be healthy, those for 2012, yet to be published at the time of writing, are likely to be considerably “more sobering”, Odette van der Haar, the CEO of the Association for Communication and Advertising, told OBG. According to Van der Haar, while the international recession began in 2009, South Africa’s advertising industry was cushioned by spending associated with the 2010 FIFA World Cup, which the country hosted.

The effect of World Cup-related spending continued through the early months of 2011, but by 2012 the situation had become considerably tougher, with advertisers reeling in spending. “Spending continued, but tenders and pitches became more short term, and often related to very specific projects,” said Van der Haar.

“Agencies were required to deliver a lot more for a lot less. Print media took more strain than other segments.”

Like many in advertising, she acknowledges that marketing budgets are often the first item that is lost. But she also said, “When consumers see consistent advertising, they see stability and reliability, which is important in a crisis.” Van der Haar added that companies including consumer goods major Procter & Gamble and entertainment firm Disney, performed well during the downturn thanks to their willingness to invest in advertising while others were cutting back.

Factors At Play

Sarel du Plessis, the executive director of Out of Home Media South Africa, identified a number of downside risk factors in terms of the macro economy, some international and some domestic, including the eurozone crisis, rising petrol prices, higher minimum wages and industrial action. South Africa’s huge numbers of young unemployed people – youth unemployment is 50%, according to official figures, and could be considerably higher – may also present a risk of social instability, as even government officials admit.

On the other hand, there are positive factors, including the ongoing investments by mobile telecoms companies to increase take-up of smartphones and data packages, a major focus at the moment. There is also a general election due in 2014. Beyond the substantial advertising outlay by political parties, particularly the ruling African National Congress, there may be some fiscal loosening that will boost broader growth – and the government may see the need to promote its programmes more heavily in the run-up to the poll.

“The next two years are going to be difficult,” said Van der Haar. “It is hard to tell what’s going to happen – changes to the exchange rate, petrol and electricity prices. All these things affect disposable income and consumer demand.” Advertisers and clients alike must adjust to a new situation in which value for money has become more important than brand loyalty, which shifts priorities as far as the sector is concerned, she added. Whereas before a company might focus on developing its brand, there is now a more day-to-day emphasis on special offers and discounts.

Big Spenders

In sector terms, major purchasers of advertising in South Africa are not that dissimilar to those elsewhere in the world: fast-moving consumer goods (FMCGs), retailers, telecoms companies and financial services firms. According to AdReview 2012, the single leading purchaser of advertising in 2011 was Unilever, the international FMCG company, which invested a remarkable R1.29bn ($157.25m). It was followed by retailer Shoprite with R915m ($111.5m); brewer and beverage company SAB Miller with R815.8m ($99.4m); Pick ‘n’ Pay, another retailer, at R600.9m ($73.2m); and Telkom, the state-owned telecoms firm, with R507.2m ($61.8m). Interestingly, all are South African brands, though SAB Miller is now based in London since its merger with the US’s Miller. Following in the top 10 were telecoms firm Vodacom with R504.9m ($61.5m), MTN at R469.1m ($57.1m), Standard Bank with R381.8m ($46.5m), alcoholic drinks company Distell at R374.3m ($45.6m) and First Rand Bank with R372.4m ($45.3m).

Government Spending

The government comes in at 12th place, with R328m ($40m). Like in many countries, the public sector as a whole is among the very top spenders, but its expenditures are split among a number of different bodies, counted separately.

In this case, for example, the majority state-owned Telkom is not included in the total for government spending, and nor are provincial governments like those Total advertising spend by medium, 2011 of Gauteng, which spent R106.3m ($12.9m) on advertising in 2011, and Western Cape, which spent R68.7m ($8.3m) in the same year. The publically funded Independent Electoral Commission spent R74m ($9.02m) on voter education advertising, ranking 83rd.

Market Players

The size of South Africa’s advertising market guarantees a substantial presence of international advertising firms. They compete, and often collaborate, with a lively selection of local firms. “It’s a very competitive sector,” Koenderman told OBG. “The market is quite big, but it is shared among around 30 significant agencies. And some small companies do produce high quality. Often contracts will now go to several small agencies rather than one big one.”

According to AdReview 2012, the largest advertising company in terms of staffing is Ogilvy SA, subsidiary of the US-based Ogilvy and Mather. As of 2011, it employed 755 people and earned revenues upwards of R500m ($60.9m) from clients that include VW/Audi, KFC, SAB Miller and telco Cell C. It is followed by another two US-based firms: Draftfcb, with 687 staff, revenues of R450m-500m ($54.8m-60.9m) and clients such as Vodacom, Coke and Toyota; and TBWA South Africa, in the same earnings bracket with 618 staff, serving the likes of Spar, Standard Bank and Nissan.

The largest South African agency is Jupiter Drawing Room, with 352 staff and revenues of around R225m250m ($27.4m-$30.4m) and its clients include Hyundai and retail chain Woolworth’s. The only other South African firm in the top 10 is King James Group, which ranks 10th in size, with 106 employees, revenue of around R55m ($6.7m) and contracts that include insurer Santam and investment management outfit Allan Gray. Otherwise, the biggest companies are familiar names: JWT, Young & Rubicam, Aegis Group, Saatchi & Saatchi and McCann Worldgroup.

Some major advertisers prefer to work at an international level. For example, some companies make deals with advertising agencies in London; however, this adds little value to the domestic advertising industry.

But there is plenty of space for local firms too. For example, AdReview’s Agency of the Year for 2012 was Gloo Digital Design, which generated R60m ($7.3m) of new business in 2011 and assembled a roster of clients including Samsung, with which it works across Africa; Castle Lager (SAB Miller’s local flagship brand); and the Nelson Mandela Foundation. The company has also won contracts in Nigeria and Dubai. It has successfully deployed digital technology, including touch-screens and dynamic billboards, as well as social media and viral videos to spread its customers’ messages.

AdReview also had plaudits for Gauteng-based Ireland/Devonport, which has burgeoned from a start-up to a mid-sized agency with contracts including SA Tourism and TopTV, and in which British advertising multinational WPP has a 35% stake. AdReview’s specialist agency of the year was Cape Town-based 34, a marketing firm which has been involved in campaigns for Coca Cola and Kleenex, among others.

OOH Advertising

There still may be room for more foreign entrants as well. JCD ecaux, one of the world’s biggest OOH advertising companies, is expected to enter the market in 2013, the local press has suggested. If the move comes about, it should intensify competition in the sector and could lead to a shake-out of some of the less efficient companies. JCD ecaux has reportedly made bids for more than 100 billboard sites in Johannesburg, while it seems that incumbents have also moved to make bids in an attempt to strengthen their position once the newcomer arrives.

Du Plessis sees scope for growth in the OOH segment, saying that within a few years it could reach a share of 5% of all advertising spending, in line with developed-country norms. Currently, a 96-inch roadside billboard in an area of medium traffic volumes will cost around R25,000 ($3047) per month, but the price varies considerably depending on the precise location. But, of course, OOH also includes a number of other segments that range from television screens in malls, which are curiously under-used in South Africa despite the strong mall shopping culture, to the ubiquitous small signs tied to lampposts advertising local businesses and, particularly, daily newspapers’ top stories.

The market is currently dominated by Continental Outdoor Media, Africa’s largest billboard company, which has gone through a series of ownership changes. Its success can be attributed to its human resources, detailed understanding of the market, contacts and innovative capacity. It presents a formidable incumbent for any newcomers such as JCD ecaux.

New Ideas

Du Plessis asserts that South African agencies, already showing “some interesting innovation”, should look into non-traditional forms of OOH, for example, sponsoring street name signs and road signs, as countries including Argentina and Russia have tried. This both lowers pressure on the taxpayer and provides prominent, if spatially limited, locations for advertisers. The biggest stumbling block is likely to be political resistance. Another OOH medium that has been underdeveloped is digital screenage, particularly in roadside locations. The technology is now available to make it possible to display high-quality, clear images even in South Africa’s bright sunlight, but the authorities often say the screens are a distracting traffic hazard.

One challenge for the segment is tight regulation by local authorities that own or at least regulate many of the prime billboard sites. Even those wishing to erect signs on their private property are frustrated by bylaws at times; Cape Town has particularly restrictive rules on OOH. The hope is that local authorities, already in need of cash, can be persuaded to loosen laws on billboards to boost revenues, while also keeping roadsides and other public areas from becoming swamped.

Alcohol Advertising Ban

In 2012 the national government proposed a ban on alcohol advertising, in a move that has alarmed many in both the drinks and the advertising industries. As SAB Miller and Distells’s prominence among very top advertisers shows, alcoholic beverage companies are important clients. Marketing analyst Chris Moerdyk estimates the media would have lost around R2bn ($243.8m) in revenue if the ban went through, while the state-owned South African Broadcasting Corporation (SABC) says the move could cost it R400m ($48.7m) per year. Du Plessis points out that in tighter economic times there are fewer other sectors that could take up the slack in demand left by brewers and distillers in the advertising market.

Bathabile Dlamini, the minister for social development, reiterated his desire to limit alcohol advertising in February 2013, citing public health. Indeed, South Africa has serious public health and crime issues related to alcohol. But opponents of the ban have called it unworkable and superfluous. Van der Haar says there is no evidence anywhere in the world that a ban is necessary, and points out that it could in fact benefit SAB Miller, and other incumbents, by making it very difficult for newcomers to the market to promote their products. A compromise may still be reached, given the potentially damaging effect on the advertising sector and on small beverage companies of a total ban.

Outlook

Having been carried through the worst of the international recession with the help of the World Cup, South Africa’s advertising industry now finds itself in a more difficult period, in which competition is high but business is not flowing as strongly as it once was. Nonetheless, the growing economy should continue to feed into higher spending over the longer term.

Traditional media is expected to take the lion’s share of revenue for the medium term and with good reason – it has the highest audience. Innovation remains vitally important across the board, from papers and TV stations to new forms of internet and OOH advertising.

Top five advertisers by spend, 2011