Venezuela's Adland Grapples With Chaos and Uncertainty

Industry Hobbled by Rules, Price Controls, Dollar Shortage

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While Hugo Chavez is treated for cancer in Cuba, Venezuela remains in limbo -- the president's 14-year reign has left marketers and ad agencies struggling with a plethora of rules, from price controls to a government-created shortage of dollars.

"With all the regulations, the biggest challenge really is to cope with uncertainty," said Gustavo A. Ghersi, CEO of independent agency Grupo Ghersy. "You never know when the government is going to expropriate [a business] or launch new regulations that can commercially limit our clients."

Caracas customers wait in line for food
Caracas customers wait in line for food Credit: Bloomberg
Advertising can be a target because ad budgets help sustain the privately-owned media the Chavez government has tried over the years to crush. "The [number of] state-owned media keeps getting higher, while privately-owned media is sanctioned, threatened, shut down or practices self-censorship," said Juan Rafalli, an attorney for Venezuela's National Advertisers Association.

It's a long way from the pre-Chavez days, when Venezuela was a gateway to Latin America, and Procter & Gamble even based its headquarters for the region in Caracas.

"It is a sort of daily crisis management," said Mariana Frias, CEO of Ars DDB, which has a no equity arrangement with DDB. (In Venezuela, a few agencies are majority-owned by holding companies, but others are minority-owned or have no equity affiliations.) "When you least expect it, you get some shocking news that directly affects your -- or your client's -- business."

Some of the regulations -- more than 340 -- that affect advertising and marketing are specific to the industry, like a ban on product placement or a requirement that at least 80% of commercials broadcast be produced locally. But among the most onerous are currency and price controls.

In Venezuela, companies or individuals must seek permission to buy euros or dollars from the Central Bank to pay for everything from importing materials to entering ad festivals abroad. Usually they're granted a fraction of what they request.

"This not only affects a marketer's product launch and the campaigns behind that launch, but also the product supply," said Mr. Ghersi. "When a client runs out of stock, they just say, "Why am I going to advertise if my product isn't even in stores?'"

The lack of dollars at the government-set official rate of 4.3 bolivars per dollar has pushed the black market rate to 20 bolivars per dollar -- more than four times higher.

(Late Friday, the government announced a 46.5% currency devaluation from 4.3 to 6.3 bolivars per dollar, and eliminated a secondary exchange mechanism that had acted as a safety valve, allowing companies to buy scarce dollars although at a less favorable exchange rate. As a result, imported goods and raw materials will all cost more.

Previous devaluations, Ms. Frias said, "have resulted in cost increments and sometimes in a cutback in ad and marketing budgets.")

Much of advertising media in Venezuela, like its billboards, are state owned.
Much of advertising media in Venezuela, like its billboards, are state owned. Credit: Bloomberg

Despite the challenges, many companies make money in Venezuela. But when it's time to repatriate profits, it's hard to get money out of the country. And inflation is high. Some companies look for things to buy with their profits -- cars, real estate and even gold.

"The private sector has to do that so that their bolivars don't turn to sand," Mr. Ghersi said.

To send 114 entries to the Cannes Lions festival last year, for instance, agency executives used their own dollars, tapped international partners' funds or bought government bonds that were legally convertible to dollars. The government appears to have stopped issuing those bonds, so "you will see a big drop in Venezuelan Cannes entries this year," one local executive said.

To fight inflation, which the government claims is caused by speculation, price controls were imposed on basic products such as oil and rice in 2003. But in 2011 the Fair Costs and Prices Act set a cost structure for companies and fixed prices for products including mineral water, flour, fruit juice, some cleaning products, shampoo, diapers, toilet paper and even deodorant.

The price controls are popular among consumers, because they make products more affordable. But with inflation at more than 20% a year, price controls distort the economy by forcing manufacturers to sell products below cost. That can lead to product shortages. When marketers try to create added-value products they can charge more for, the government cracks down, and can even take over a company.

"With our oil-driven economy and a populist government always willing to throw money on the streets, especially every time it faces an election, sales volumes have been high for quite some years," said Mr. Rafalli. "But if you're not well prepared to face all these challenges and risks, your chances of disappearing as a business are high."

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