China’s explosive economic development since Deng Xiaoping initiated free market reforms in the late 1970s has transformed the country into the second-largest economy in the world and given rise to a vibrant base of half a billion urbanized consumers. This consumerism has, in turn, fueled one of the largest and most dynamic global advertising markets. As a result, domestic and multinational corporations (MNCs) have invested heavily in advertising products to meet and stimulate consumer demand across many product categories, from mass consumer to premium brands.
Based on data from China’s State Administration for Industry and Commerce, total ad spend is set to top $41 billion in the country for 2014. This puts China third, behind the USA ($167 billion) and Japan ($52 billion), according to ZenithOptimedia’s global forecasts. At current growth rates, China is set to overtake Japan by early 2016.
Since 2000, China has seen the most dynamic growth of the top ten global markets, with total spend up 540%. As the Chinese advertising market has gained critical mass, annual growth rates have predictably slowed, although increases have still averaged 16% a year since 2001. In 2013, spend in China grew 10.1% compared with the global average of 3.4%. Ad spend as a percentage of GDP – a key indicator of the market’s maturity – is only half the global average at 0.45%. This suggests that there is plenty of room for further expansion.
Consumer goods lead the way
The main consumer product categories underpinning China’s advertising market make it less susceptible than some other countries to future economic downturns. More than half of all spend is generated from just four product categories: pharmaceuticals (including Chinese tonics), toiletries, retail, and beverages. Ad spend in China on mass consumer, daily-use products is much higher as a proportion of total spend than in most other countries.
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 growth in ad spend in China over the past decade. These higher-end categories are more vulnerable to economic slowdown and it is true that spend has already slowed, particularly in automotive and real estate. The impact on overall spend, however, is relatively trivial, because higher-end categories still represent a relatively small percentage of total investment.
Diverse media market
Given the strength of mass consumer products in China, it is not surprising that spend is heavily concentrated in mass media, particularly TV. Advertisers need to communicate to broad consumer groups to support the deep product-distribution network across a vast geographical area.
Of the main media channels, television dominates with a 40% share of total ad spend, and 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. Audiovisual commercial opportunities will be further enhanced by full conversion from analog to digital broadcasts by 2015, which will enable greater interactivity and convergence with other digital platforms.
Source: SAIC – ZenithOptimedia Global Ad Spend Forecasts, December 2013
In print, newspapers took 19% of total spend in 2012 but revenues have been in constant decline, falling from a peak of 40% just a decade earlier. This is as a direct result of the explosive growth of internet access and online advertising. Newspapers face significant challenges from the emerging digital media landscape and their market share will continue to fall. As in developed economies, most newspapers are struggling to take advantage of digital opportunities and to post the profits they once boasted.
Digital advertising is dominated by powerful indigenous online vehicles such as Sina Weibo, Tencent Weibo, Baidu, Youtu, and Alibaba. The likes of Facebook, Twitter, and YouTube are blocked, while Yahoo, Google, and eBay have failed to gain traction and have pulled out. Driven by domestic platforms, the sector has experienced vigorous growth over the past decade. Digital captured 19% of total ad spend in 2012, thanks to the growth of internet access and usage in the first- and second-tier cities. Today there are more than 590 million people online in China, with 460 million accessing content via mobile.
“As in developed economies, most newspaper are struggling to take advantage of digital opportunities and to post the profits they once boasted.”
Out-of-home advertising comprises about 14% of spend 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 innovation and interactivity in communication, and demand for prime site exposure exceeds supply in major cities. Spend on other media – including magazines, radio, and cinema – accounts for less than 8% of total spend combined. This proportion is much lower than in the US and major European markets.
Three big media buying challenges in China
As media investment continues to grow, China’s unique media landscape and media buying practices present significant challenges for advertisers, in terms of quantifying media buying performance and ensuring transparency.
1. Media scale and complexity
China has a fragmented media infrastructure with thousands of vehicles at national, regional, provincial and city levels. The mass media consists of over 3200 TV channels, 2000 newspapers, 9000 magazines, and countless out-of-home vendors across more than 600 major cities. The logistics of managing media execution in China is the equivalent of planning and buying media across all of Europe.
As a market, China is characterized by significant diversity in income, purchasing habits, attitudes, lifestyles, dialects, and media habits. Gaps exist not only between urban and rural markets but also between city tiers and geographic regions. Managing and optimizing TV buying performance in a media landscape of such complexity and diversity is highly challenging. Given the sheer geographical scale of China, TAM (TV Audience Measurement) is highly localized, with 84 cities and provinces covered by Peoplemeter TAM and a further 85 covered by diary measurement. Each Chinese city boasts the equivalent TV scale of one European country.
2. Media buying transparency
Media trading in China has historically been a highly commoditized, margin-driven business in which inventory is traded in bulk to agencies, brokers, and other third parties, with bonus inventory extensively traded as part of media agency deals. Subcontracting media buying through third parties is common practice. There are different types of discounts, volume rebates, bonus inventory deals, and incentives, many of which are not on rate cards.
Furthermore, cash rebates and other revenues – generated outside of the media service remuneration paid to the agency by the advertiser – have represented a significant part of agency groups’ margins, creating a fundamental conflict of interest. The advertiser’s share of these benefits depends on what it can negotiate up front with the agency. With literally thousands of vendors involved in the media buying chain in China, trying to obtain visibility on media rates and full value benefits is a major challenge.
3. Media buying cost and value variables
In light of the commoditized nature of media trading in China, there is significant variability in terms of media buying cost and value deliverables passed on to the advertiser. These differences can be much more extreme compared with those found in the other major global markets. Each medium has its own specific trading, media cost, and value negotiation currency; most are highly negotiable. Trying to ensure and quantify the most competitive media buying value delivery is therefore another major challenge facing advertisers in China.
The media buying value variables are highest on TV and, increasingly, digital. Concrete key performance indicators for each medium are essential tools for advertisers. They are necessary, firstly, to track costs and value delivery on an annualized basis in a highly inflationary market and, secondly, to quantify and benchmark performance value against both internal and external metrics.
Given the scale of advertiser media budgets in China’s commoditized and complex media market, MNC advertisers, increasingly driven by procurement functions, have implemented systematic checks and balances on media buying to drive greater media performance accountability and media buying transparency. There is an absolute need to agree on clearer transparency protocols that address specific media trading practices in China, and this also spills over into fairer and more performance-driven remuneration structures for effective buying by media agencies.
As the global and Chinese economies continue to tighten, both MNC and, increasingly, Chinese advertisers are evaluating all marketing and media costs more intensely. China is fast becoming one of the most scrutinized media buying markets in the world.
Alex Abplanalp is CEO of Ebiquity China