European Media: Eastern Exposure

Has Eastern Europe failed to deliver on its promise? Mark Tungate investigates the wild East.

Fifteen years ago, Eastern Europe was just like China. Not that it was flooding Europe with cheap textiles, but it was considered a "promised land" by advertisers and their agencies. Millions of newly affluent consumers hungry for Western-style products, combined with the emergence of sophisticated media, would add up to one thing: dosh.

Today, it all seems rather quiet on the Eastern front. The forecasters have switched their attention to China and - with the possible exception of Russia - Eastern Europe appears to have been downgraded in status from promising market to interesting weekend break destination.

What could be behind this mysterious silence? Did Eastern Europe fail to deliver? Are agencies eating humble pie with their goulash?

Piero Leone, the Grey Global Group regional managing director for Central and Eastern Europe, puts matters in perspective. "CEE is still a clear opportunity, with 308 million inhabitants, which means it has a 42 per cent share of Europe's population (the total is about 729 million). But we are looking at a region that runs at two speeds, at least. There are markets that are developed and growing at a good rate, and markets that started from a lower GDP base but are posting significant increases."

Note the word "still" in that first sentence, though. After all these years, CEE remains an opportunity.

Ian Clarke, the managing director for Europe, the Middle East and Africa at Starcom, confirms this theory. "The region as a whole is still developing," he says. "If you look at the population figures, you can see where there is going to be huge levels of advertising expenditure in the future. Russia is clearly going to dominate. But the media infrastructure is not as advanced as we might have expected."

Dare we advance the theory that the East has proved a dead loss when it comes to raking in the profits? Leone points out that, in the early 90s, agencies entered the region to serve global and international clients that were expanding there.

This required a considerable level of investment, "especially from those networks, like Grey, that insisted on ensuring standards by maintaining full control of their agencies, either via start-ups or by acquiring local agencies," Leone says.

Considering matters of profit and loss, Leone says: "It's important to point out that CEE is a 'growth region', as opposed to the West, which is a 'volume region'. The average GDP growth rate is 4.5 per cent for CEE - ranging from 5.5 per cent in Russia to 3 per cent in Slovenia. But we are still talking about a region that has a total GDP of approximately EUR3 billion, as opposed to around EUR10 billion in the West."

What makes an article such as this one so difficult to put together is that Eastern Europe is arguably even more diverse than the rest of Europe.

Byelorussia provides much less opportunity for growth than Poland. Russia is providing a higher return than Ukraine, which is falling short of expectations following the Orange Revolution.

"I would assume that most of the networks in the region are profitable," Leone says. "The lower volume reflects a relatively low income base, thus resulting in lower absolute profit. But these countries are still posting growth rates that wouldn't be feasible in the West in the current economic environment."

He is confident that the speed of growth means that any shortfall will be overcome quite rapidly. The exaggerated importance of Russia will tip the balance in the advertising industry's favour.

The Japanese agency giant Dentsu closed its office in Moscow in 2001, owing to "stagnant economic conditions". But recently it announced its return. A Dentsu spokesman says: "The recent resumption of Japanese client activities in Russia - especially those related to the automobile and electronics industries - has provided us with new opportunities to enlarge our business in the country."

In terms of clients, the energy and telecommunications sectors are highly promising, in Russia as in the rest of the region. Indeed, it seems that many Eastern Europeans are turning into communications junkies.

Media may evolve there in a different way than it did in the West, with Eastern European consumers leapfrogging directly from the days when the TV news was read by someone in uniform, to downloading the latest Hollywood movies via broadband internet.

Leone confirms: "The speed at which things are happening in this region is at least three times faster then in the West. There is the will to create, there is passion and know-how. Consumers here discovered mobile phones before landlines, because of the complexity of providing landlines to every household a few years back. They discovered the internet before they owned PCs, through the many internet cafes in cities."

Clarke would agree. "Internet penetration is happening very rapidly. And I don't think it's necessarily fair to suggest that cable and satellite penetration is unusually slow. If you look at the UK, the number of multichannel homes has only increased significantly over the past ten years or so."

He adds that some of the most sophisticated advances in the field of media planning and buying are taking place in the East. "In fact, they are showing up some of the agencies in London. Starcom Poland was one of the first media agencies to win a Cannes Lion, for its work for Ikea.

And we've just launched Starcom Next in the region, an integrated offering which links internet marketing with reverb (word-of-mouth) and ping marketing (using SMS)."

Non-traditional marketing has become important in a region where the opportunities for classical advertising are more limited than in the West.

Customer relationship marketing, event marketing and sponsorship are all growing rapidly. "More and more clients want to develop a full range of touch-points with their clients, following the examples of blue-chip companies such as Procter & Gamble and Coke," Leone confirms.

As a whole, doing business in Eastern Europe is getting easier. In the mid-90s, the region had a reputation akin to that of the Wild West. This reporter heard one story of a Russian ad sales rep producing a knife and sawing off a media buyer's tie under the knot as a hint about what might happen to him if the media owner didn't get a chunk of adspend.

"All markets, including Russia, have matured no end," Clarke says. "There has been significant investment on the part of agencies and advertisers, and that has naturally enhanced professionalism."

But what's the mindset of the Eastern consumer? Are they already as jaded as audiences in the West? One thing is for sure - they have an eye for a good bargain.

"Many brands have built their presence through special offers, rather than serious branding," Leone says. "Consumers have grown used to 'deal marketing' rather than 'brand marketing'. In the West, it's rather the other way around - we have been educated to believe in brands, and it's only recently that we've become less loyal and more inclined to look for a better deal. In the East, brands that wished to develop rapid volume growth did it through discounts and promotions. This encouraged consumers to run from one brand to another. Many consumers would buy from certain brands only when there was a promotion - stocking up on the product,then waiting for the next deal. Brand loyalty is extremely low in this region."

Of course, different nationalities behave in a different manner. Historical contexts and cultural differences may make it unwise for brands to adopt a single-message approach. Grey's research, for example, shows that holidays are considered the most desirable purchase by Hungarian and Czech consumers, while Poles, Romanians and Bulgarians prefer to spend their money on their homes. Slovenians and other former Yugoslavians are keen on cars. The Russians adopt cars as status symbols, too, and the richer end of the Russian population has a pronounced weakness for luxury products, as the Prada, Cartier and Gucci stores in Moscow clearly demonstrate.

One might have assumed that European Union accession would have boosted the industries of Poland, the Czech Republic and Hungary. Yet, apart from an initial burst of advertising projects designed to inform the public about the benefits of accession, the move has had a stagnating effect.

Compliance with EU rules concerning salaries and other employee benefits is costing companies more, while their productivity levels remain static.

And governments' determination to enter the euro zone requires drastic measures to slash their budget deficits, in order to meet the 3 per cent of GDP threshold imposed by the Maastricht Agreement.

This means cutting overstaffed government departments and reining in budgets - including those destined for communications.

"But I think, after this adjustment period, growth will start again," Leone says. "After all, many local companies can offer services or produce at a relatively lower cost than those in the West, which makes them very competitive in the European market."

To sum up, it seems there is still plenty of work to do before Eastern Europe really delivers. There is pressure on agency networks to grow faster in the region, delivering a higher return on investment for their shareholders than they have done up until now. But there's also an educational job to be done - both in terms of encouraging consumers to buy into brands, and in terms of training the next generation of advertising people.

Leone says: "The hunt for talent is ongoing. Finding the right people is the challenge within the challenge in this region. Only with the best people can we guarantee the best service and hence the best results. In the end, people are the greatest asset we have."

EASTERN EUROPE'S BIGGEST AD MARKETS RANKED BY ADSPEND COUNTRY Population GDP per capita Adspend (purchasing (EURm) power parity): USdollars Russia 143,420,309 9,800 10,209 Poland 38,635,144 12,000 2,163 Romania 22,329,977 7,700 2,082 Hungary 10,006,835 14,900 768 Czech Republic 10,241,138 16,800 591 Croatia 4,495,904 11,200 475

Which markets in Central and Eastern Europe are about to soar, and which are still in the nest? According to Campaign's sources, performance in the region will be based for some time on the results generated by, respectively, Russia, Poland, the Czech Republic, Hungary, Romania and Croatia. Slovenia is also a promising market. Other countries could be bubbling under for some time. Ukraine should provide interesting results in the short term, and Serbia is also growing. It's also worth monitoring Kazakhstan, which could benefit from rising oil prices - but this is a much longer shot. Georgia has recently lifted the requirement for visas for Europeans and Americans, as it tries to develop a tourist economy.