Kazakhstan is not the only former Soviet Republic to have gained some notoriety over the past year. While the spoof documentary Borat: Cultural Learnings of America For Make Benefit Glorious Nation of Kazakhstan gave the Kazakhs worldwide fame, Estonia, Latvia and Lithuania have also been making a name for themselves for different reasons. All three have been rising up the top-20 list of the world's fastest-growing ad markets. In fact, the list is now dominated by Eastern European countries such as Romania, Slovakia, the Czech Republic and Poland.
Less than 20 years after the fall of Communism, it is surprising to find this part of the globe outstripping ad markets in the Far East and Latin America in year-on-year growth. The latest figures from ZenithOptimedia show that Romania leads the global field, with a 34 per cent year-on-year rise. Not far behind is Russia with 30.1 per cent, while Lithuania is third with 22.4 per cent. Neighbouring countries, including Bulgaria and Hungary, make up the rest of the top ten. With ad expenditure expected to maintain double-digit growth over the next three years, it looks like Eastern Europe is now more than just a stag weekend destination.
"It's a land of opportunities," Pietro Leone, the chief executive of Grey Global Group for Central and Eastern Europe, Italy and Turkey, says. "These economies are growing at a 5 to 6 per cent rate, while in Western Europe it's around 2 per cent." In fact, Eastern Europe and the former Soviet states may even surpass these growth levels this year. The European Bank for Reconstruction and Development predicts that economic growth will reach 6.5 per cent in this region in 2007 owing to industrial revitalisation, foreign investment and rapid credit growth among consumers and corporations.
Russia, the largest economy in Eastern Europe, is expected to fare even better this year, with growth projected to reach 6.9 per cent by the end of 2007. This can only be good for the country's already booming advertising industry. "Russia is the market in terms of volume and growth," William Eccleshare, the chairman and chief executive of BBDO Europe, says. "If you look at it in terms of GDP, it is the fastest-growing economy in Europe. It has 8 per cent GDP growth, and advertising tracks GDP growth pretty closely. Over the past five years, we've seen a strong performance in the market."
Clearly a hike in oil prices has helped to sustain such a performance, but Russian consumers' new-found taste for shopping isn't exactly hindering economic growth either. The range of international products available was initially quite limited, but this has changed as the economy has flourished. "The companies that first went in had low-cost goods," David Blois, the regional director of Central and Eastern Europe for Results International Consulting, says. "But people are now looking to spend more."
Although the average monthly salary is still only $300, low income tax and subsidised housing and utilities mean that 70 per cent of Russians' income is disposable, compared with only 40 per cent in the West. Wealthier shoppers are spending their money on high-end brands such as Louis Vuitton, Fendi and Rolex, while younger, less-affluent consumers are opting for fashion imports such as Zara, Nike and Levi's. "You've seen a growth in luxury goods and the development of international luxury brands," Eccleshare says. "As consumer spending increases, you see a rise in premium brands and brands where image matters."
So far, this trend is only visible in urban Russia. "You have a strong segmentation between people with a sizeable income in major cities and people living outside cities such as Kiev, who are in a different situation," Leone says. But he does predict changes:"Moscow and St Petersburg are places where the market has exploded, this is starting to roll out into the regions."
While the countryside is starting to play catch-up with the cash-rich cities, it would be a mistake for advertisers and agencies to see Russia as one unified market. "It's a massive country with a number of different regions," Andras Vigh, the regional chief executive of ZenithOptimedia for Central and Eastern Europe and the Middle East, says. "You don't have to buy national solutions or run national campaigns. You have regional TV, too."
It's also crucial to differentiate between the tastes of consumers living in affluent cities and their poorer country counterparts. "Our research shows people in Moscow are more similar to people living in London than they are to those living in the provinces in Russia," Perry Valkenburg, the chief operating officer at TBWA\International and president of TBWA\Europe, says.
Vigh, meanwhile, has another piece of advice for international ad networks looking to make the leap into the Russian market. "Russia is the most exciting in terms of growth potential, but it is the most different in terms of business culture," he says. "Television is dominated by one player, Video International. It controls between 60 and 70 per cent of TV airtime. You don't get that level of concentration in most other markets."
The Russian ad industry does share one trait with its Eastern European neighbours, though. It is dominated by a handful of advertisers. "In these markets, telecoms companies and the banking sector are the highest spenders," Leone says. Traditional manufacturers such as Unilever and Procter & Gamble are also in there, however.
Membership to the European Union in 2004 for the Czech Republic, Estonia, Latvia, Lithuania and Poland has also opened the door for new sectors. "International companies, typically from France, Germany and the UK, are investing in the markets," Leone says. The French retailer Carrefour and the UK's Tesco are just two of the supermarket chains expanding their networks across Eastern Europe. Others are likely to follow as the food retail market is expected to drive European economic growth over the next few years. The market research company Mintel predicts retail food sales will have tripled in Hungary and doubled in the Czech Republic in the decade to 2010 as consumers take their custom away from traditional small stores and local markets to supermarkets.
With consumers across the EU now buying an increasingly similar range of goods, the gap between ad markets in the East and West is closing. "The line has been blurred by the countries who joined the EU in 2004," Vigh says.
Bolstered by EU membership and strong economic growth, the ad markets in Poland, Hungary and the Czech Republic are now producing more work for local clients. ZenithOptimedia estimates that local companies account for 40 per cent of work generated by the top-20 advertisers.
While the first wave of EU members are originating more advertising in their own markets, production serv-ices in Eastern Europe are attracting more international customers. "There are good facilities in countries such as Romania," Leone says. "Agencies are producing in Eastern Europe, and then doing post-production in more developed markets."
Although Romania is seeing an influx of international money for its production facilities, the country's ad market has a way to go before it catches up with Poland or the Czech Republic. "Romania, Croatia, Bulgaria and the Ukraine are at the bottom in terms of professionalism, and Russia, Hungary, the Czech Republic, Slovenia and Poland are at the top," Valkenburg says.
Similar to Romania, which joined the EU in 2007 with Bulgaria, Ukraine shows little sophistication in its ad market, but great long-term potential. "Ukraine has seen a lot of reforms in the past two years," Valkenburg, who predicts a more stable economy for the country, says. "It's a huge market. There are 60 million people there, and a lot of Ukrainians work abroad and send their money back home."
Valkenburg is not the only one gambling on a boom in the Ukrainian ad market. "It's where I have my biggest hopes," Leone says. "It's got fast growth from a low base and the disposable income of consumers is growing."
While the potential of Ukraine is clear, not all international ad agencies are willing to take the plunge. The ad community's view of Eastern Europe is still coloured by the region's Communist past. "They are not Third World countries, but you might think so when you hear some agencies talk about them," Eccleshare says.
When the Iron Curtain fell, business conditions were rudimentary. "There was a lack of infrastructure for the ad business," Blois says. "Agencies had to operate with one or two phone lines for companies with 50 people. You had to ship people in on ex-pat salaries, which ruined the cost base."
Many feared Eastern Europe would reject its new-found economic freedom and slip back into old ways. "There was a risk that some countries such as Poland, the Czech Republic and Hungary would tip back into their Communist beginnings," Blois says, "but that quickly died away."
Almost two decades on, the situation is different. "People in Eastern Europe are very educated," Blois says. "Media prices have increased because of the higher demand from advertisers. Originally, when the Wall came down, most advertising was above the line, but now you have below the line."
Whether it's above or below the line, many agencies are able to handle it all in-house. "Some of the distinctions we see in Western Europe are far less visible," Eccleshare says. "They are much more broadly based in terms of their capability. They haven't got the historical baggage that agencies have here."
Despite these changes, the ad community's old attitudes still persist in some quarters. Failing to grasp the region's promise may come at a cost.
"There is a definite risk that agency networks are taking a slightly patronising tone towards markets in Eastern Europe, or even underestimating their importance and growth potential," Eccleshare says. "They tend to see them as underdeveloped or developing. I prefer to see them as markets with under-exploited opportunity."
MARKETS ON THE RISE
TOP ADVERTISERS KEY SECTORS
Czech Danone, T-Mobile, Procter & Gamble, Vodafone, O2
Republic (Eurotel), Food and drink, office equipment,
Unilever, VW Group, Henkel Walmark, L'Oreal
cosmetics, vehicles, finance
Hungary T Group, Unilever, P&G, Pannon GSM, Henkel
Walmark,Cars, medicine, banking, Reckitt Benckiser,
Bayer, Vodafone, L'Oreal mobile phones, detergents
Poland Unilever, Polska Telefonia, P&G, PTK Centertel,
Polkomtel, Telecoms, healthcare, retail, Nestle,
L'Oreal, Telekomunikacja Polska, Agora, US Pharmacia,
Russia Danone, T-Mobile, P&G, Vodafone, O2 (Eurotel),
Unilever, Mobile phones, beer, soft drinks,
VW Group, Henkel Walmark, L'Oreal detergents,
motoring, dairy produce