Understanding the key drivers of China’s dynamic media market can help maximize media return on investment
China’s explosive economic development since Deng Xiaoping initiated free market reforms in the late 1970s has transformed the country into one of the largest economies in the world and given rise to a vibrant base of roughly 350 million urban consumers. This consumerism has in turn created one of the largest and most dynamic global advertising markets in just over a decade. Domestic and multinational corporations (MNCs) have invested heavily in advertising their products to meet and stimulate consumer demand across a plethora of product categories, ranging from mass consumer to luxury goods.
A variety of sources track media ad spending and offer different estimates of the size of China’s ad market. Most of them greatly exaggerate ad spending because their data is based on prices listed at media rate-card value—rates that few companies actually pay in a market where heavy media rate discounting is common. Based on data from China’s State Administration for Industry and Commerce and iResearch Consulting Group, China Media Consulting Group (CMCG) estimates that in 2008 China ad spending reached $20.7 billion. This amount puts China into fifth place in terms of global ad spending, behind the United States ($179 billion), Japan ($41 billion), Germany ($26 billion), and the United Kingdom ($24 billion), according to ZenithOptimedia Group Ltd.’s global ad spending estimates. China’s total ad spending has increased by a factor of 33 since 1994, when ad spending totaled $590 million and China ranked outside the top 40 global markets.
As the China advertising market has gained critical mass, annual ad spending growth rates have predictably slowed but have still averaged 17 percent since 2001. In 2008, ad spending was forecast to grow 21 percent, reflecting additional spending for advertising related to the Beijing Olympics. Because of the current global economic uncertainty, CMCG is forecasting 11.6 percent growth for 2009, lower than in previous years but still significantly outstripping the global ad spending growth rate, which, as CBR went to press, was forecast to slow to as low as 0 percent, as the major economies show more signs of instability.
China’s macro-level growth indicators are positive for future ad spending. Although annual growth rates are slowing, there is a direct correlation between gross domestic product (GDP) and ad spending buoyancy. Even with a lower annual GDP forecast, ad spending will continue to grow. Ad spending as a percentage of GDP, a key indicator of the advertising market’s maturity, is only half the global average, suggesting that ad spending has plenty of room to expand. Even at slower growth rates, China will overtake Japan as the second-largest global ad spending market by 2015.
Consumer goods lead the way
The main consumer product categories underpinning China’s advertising market make it less susceptible than other countries to economic downturns. More than 50 percent of total ad spending is generated from just three product categories: pharmaceuticals (including Chinese tonics), toiletries, and retail, the first two of which combined account for 37 percent of total ad spending. China’s ad spending on mass consumer, daily-use products as a percentage of total ad spending is much higher than that of most other countries.
In other major global advertising markets, top ad spending categories include automotive, telecom, financial services, and entertainment, all of which are more susceptible to economic cycles than China’s top three categories. “Indulgence” product categories—such as personal accessories, financial services, spirits, leisure, clothing, and automotive, all of which are directly related to higher levels of disposable income—have seen the most dynamic ad spending growth in China in the past five years. These higher-end product categories are more vulnerable to economic slowdown, and ad spending has already slowed significantly, particularly in automotive and real estate, over the past 18 months. The impact on overall spending, however, is insignificant, because these higher-end categories still comprise a relatively small percentage of total ad spending.
The robustness of China’s ad spending profile was demonstrated during the severe acute respiratory syndrome (SARS) crisis of 2003, which caused ad spending to fall in Hong Kong, Taiwan, and Singapore but left mainland China unscathed. In fact, ad spending in China grew 24 percent in 2003, as the core pharmaceutical, Chinese tonics, and toiletries categories ramped up their ad spending and consumers purchased more products related to health, nutrition, and personal hygiene.
CMCG’s five-year forecasts do not project a significant change in China’s overall ad spending product-category profile, with mass consumer products continuing to drive ad spending. The most dynamic growth will still come from the higher-end product categories, although at a slower annual growth rate than in previous years, and such categories will—as in the past—account for a relatively small percentage of the overall market.
Given the strength of mass consumer products in China’s market, it is not surprising that ad spending is heavily concentrated in mass media. Advertisers are communicating their messages to broad consumer groups to support a deep product-distribution network across China. Of the main media, television—which takes 40 percent of total ad spending—is the most intrusive and cost efficient way to reach mass audiences. The TV market is complex and multi-layered, with channels administered at city, provincial, regional, and national levels. CMCG forecasts that television will maintain a stable market share of about 38 percent for the next five years and retain its strong position as the most efficient and effective way to reach mass audiences across a large geographic area. The audiovisual commercial opportunities will be further enhanced by full conversion from analog to digital broadcasts by 2015 in China, which will enable greater interactivity and convergence with other digital platforms.
Within the print medium, newspapers took 29 percent of total ad spending in 2008, but ad revenues have been in constant and dramatic decline from 41 percent of total ad spending in 2002, as a direct result of the explosive growth of Internet access. The newspaper segment faces a significant challenge from the new digital media landscape, and its share of market will continue to fall. Most newspapers are struggling to take advantage of digital opportunities.
Out-of-home advertising comprises about 14 percent of total ad spending and has grown rapidly; new digital technologies and liquid crystal displays now illuminate major cities. The prospects for out-of-home advertising are strong, as new technologies allow greater communication innovation and demand for prime site exposure exceeds supply in major cities. Ad spending on other media, such as magazines, radio, and cinema, when combined, still makes up less than 8 percent of total ad spending, much lower than in US and major European markets.
Online advertising comprised 9 percent of total ad spending in 2008 as a result of the huge growth of Internet access and use in the first- and second-tier cities, with more than 250 million netizens now online in China (see China Data). The online ad spending product-category profile is quite different from that of mass media, with ads featuring products aimed at narrower consumer segments, such as information technology, automotive, real estate, telecom, and consumer electronics. Given the relatively low capital cost and targeted, affluent user profile, online advertising is better equipped than print advertising to weather the economic slowdown. Online advertising will experience the most dynamic growth as Internet users expand past the 300 million mark and online advertising achieves 10 percent market share by 2010.
Media challenges for MNC advertisers
The dynamic growth of China’s ad market directly reflects the massive scale of investment in China’s economy in recent years and the importance of media advertising in building brand equity and driving consumer sales. As economic uncertainty affects key North American and European markets, the performance of MNC businesses in China has become even more critical for companies’ overall performance. China’s media landscape presents significant challenges in terms of quantifying and maximizing media return on investment (ROI) because key performance indicator variables—including media cost, prime-time access, effective reach, and ratings—are more volatile than in other major advertising markets.
China has a large, fragmented media infrastructure with thousands of vehicles at national, regional, provincial, and city levels. The mass media boasts over 1,600 TV channels, 2,000 newspapers, 9,000 magazines, and countless out-of-home sites across more than 600 major cities. The logistics of managing media execution in China is the equivalent of planning and buying media across Europe. It is characterized by significant diversity in income, purchasing habits, attitudes, lifestyles, and dialects. Gaps exist not only between urban and rural markets but also between city tiers and geographic regions. Optimizing and measuring media buying performance in a media landscape of such complexity is highly challenging for advertisers—much more so than in other major global markets.
Escalating media costs
One common misconception is that media costs in China are low. City-level TV media costs (measured in cost per thousand, or the cost of reaching 1,000 target consumers) in many cases exceed so-called mature market levels. Annual inflation of rate-card prices across all media still ranks among the highest in the world, averaging about 19 percent since 2002 and pushing up prices to such a degree that ROI needs to be carefully quantified, not just among cities or different media in China but also relative to other countries. China marketing teams are under even more pressure from global headquarters to further expand top-line sales and enhance profit margins, yet they are faced with double-digit cost per rating point (CPRP) inflation in key cities. (CPRP, the standard media trading currency in China, is the cost of reaching 1 percent of a target audience group.) To maintain the same media weights or advertising-to-sales ratios as in previous years, they must deliver significant additional sales to cover rocketing media costs. In some key cities, a change in sales policy of the main TV station group can drive up CPRP by more than 40 percent. At these levels, the media buying ROI equation becomes critical. In a context of escalating media costs, marketing teams must be able to improve cost efficiencies and deliver consistent net media cost deflation to drive short- and long-term sales growth.
Media buying cost variables
Media buying costs vary enormously across buying points in China, and the differences are much larger in China than in other markets. On television, CMCG has audited CPRP differences as high as 193 percent in the same city and demographic. Several factors that influence these pricing variables set China’s market apart. They include TV audience volatility, with high numbers of viewers migrating across channels because of the fragmented TV market—in major cities, households have access to more than 70 different channels; bigger differences in negotiated net costs depending on which inventory brokers a media buying agency has access to; larger margins for media buyers associated with bulk buying that are not passed on to the advertiser; and a much higher cost premium for niche-targeting opportunities than in other countries. With such extreme pricing variables, it is much more difficult for advertisers to assess the relative value of their media buys. Key performance indicators for each medium are therefore essential, first, to track costs and, second, to measure performance value against internal and external metrics.
Media buying transparency
China media trading has historically been a commoditized, margin-driven business in which inventory is sold in bulk to brokers and other third parties or free inventory is traded as part of media agency deals. Advertisers’ risk of not getting maximum value and benefit from media buys is much higher and is exacerbated by the significant media cost variables among media buying agencies, brokers, and other media purchasers. There are different types of discounts, volume rebates, bonus inventory deals, and incentives, many of which are not on rate cards. In the past, these entitlements have often fallen into gray areas because they have not been agreed upon in advance between advertisers and media buying agencies or clearly stipulated in service agreements. Given the scale of advertiser media budgets in China, in an era of greater share-holder accountability and financial transparency, MNC advertisers are already enforcing strict checks and balances to drive greater media buying transparency. There is an absolute need to agree on clearer protocols that address specific China media trading practices, which also spills over into fairer and more performance-driven media buying agency remuneration structures. As the global economy tightens, companies are scrutinizing all costs more intensely, and every media dollar entitlement and value opportunity must be measured and accounted for.
Maximizing media ROI
Given China’s unique media buying context, advertisers in China need to track and benchmark their media costs and buying delivery with the same methodical detail they use to monitor sales and market share, because in most categories they are closely correlated. As China’s contribution to MNC global businesses grows, and advertisers’ media investment expands more quickly there than in other key markets, benchmarking media ROI will be vital to maximize short- and long-term business growth.
Alex Abplanalp is CEO of China Media Consulting Group, based in Shanghai.