Life after Tobacco

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Since last summer, a new crop of billboards has caught the eyes of motorists on Seattle's Interstate 5. Outdoor boards that once romanticized "Marlboro Country" now display humbled cowboys confessing, "I miss my lung, Bob."

The ads are the first wave of anti-tobacco messages that will be peppered across the U.S.this year. Much of Interstate 5 was stripped of tobacco ads months ago--the result of a mutual decision between local regulators and AK Media, which owns the outdoor boards. By week's end, signs on the nation's highways and byways all will follow suitIthe result of November's high-profile settlement between 46 states and the country's five cigarette makers.


Conventional wisdom once dictated that the outdoor industry couldn't survive without the hundreds of millions of dollars in revenue pulled in each year from U.S. tobacco marketers. Now it seems not only can the industry survive the loss of that revenue, it can thrive in a nicotine-free world. Thanks to technological advances, renewed interest from a wide array of marketers and rapid industry consolidation, outdoor's day of reckoning is fast becoming its day in the sun.

"The industry is well-prepared to handle the loss of tobacco advertising this year," said Paul T. Sweeney, media an1 alyst at Salomon Smith Barney.

Outdoor executives, weary of their association with a controversial product, are expressing a collective sigh of relief about the agreement, which requires cigarette advertisers to scrape billboards clean of tobacco ads. And the outdoor companies are collecting more cash since they can often resell the boards at a higher price.

"I'm very happy about it," said Karl Eller, chairman-CEO of Eller Media, a division of Clear Channel Communications, the nation's second-largest outdoor ad company. "We're able to take these great locations and sell them to other marketers."

Added Kevin Reilly Jr., president-CEO of the third-largest outdoor company, Lamar Advertising, "It happens to be an unpopular product, and content control issues go away."

So do issues with local regulators. Mr. Eller said his company experienced "a lot of problems with tobacco ordi nances around the country." A non-controversial product typically translates into fewer hassles in securing permits for local boards.


That's good news for the $2.3 billion outdoor ad industry as it continues to search for ways to streamline national operations after consolidation. The industry has experienced a wave of consolidation over the past four or five years; today just five companies control more than half of the total out-of-home market.

"With the consolidation, these companies can offer national reach and it provides very effective one-stop shopping for advertisers," said William Meyers, VP-media analyst, BancBoston Robertson Stephens.

Outdoor's current calm amidst tobacco's exodus is attributed to an earlier drop in tobacco ad spending.


Tobacco marketers in the early '90s pulled out of some outdoor contracts when marketing wisdom advised replacing billboards with coupons. Once bitten, the industry shied away from relying too heavily on tobacco revenue.

"Outdoor companies have only allowed a certain percentage of tobacco advertising on their boards," said Linda Tooke, president and media buyer at Outdoor First in Mequon, Wis. "When tobacco started coming back into out-of-home, they restricted the amount [they spent] because they didn't want to get hit again."

Today, tobacco advertising accounts for just 7% of the outdoor industry's $2.3 billion in sales. In 1991, it accounted for as much as 25% of $1.5 billion in revenue, according to Frank Bodenchak, principal of Morgan Stanley Dean Witter.

The rest of the outdoor companies, like AK Media in Seattle, saw anti-tobacco sentiment grow and gradually weaned themselves away from tobacco in the mid-'90s.

"Most of the publicly traded companies have been aggressive about replacing tobacco in advance of this, knowing the settlement was eventual," said Mr. Bodenchak.

In its place, the industry learned to feed on a more diversified diet of non-tobacco advertising.

Fashion marketers, for example, are among a number of new advertisers attracted to outdoor ads. Marketers selling everything from healthcare to high-tech are blanketing large billboards, wall displays, even supermarket floor tiles.

Together they fueled an 9.1% increase last year in out-of-home revenues.

"The out-of-home industry has seen such huge growth from a variety of advertisers who'd never advertised in out door before," said Benjamin Cruz, VP-account services at Media Resources International, a New York media-buy ing shop.


Out-of-home advertising has grown in popularity among newer-to-the-medium marketers for a number of reasons.

New technology is transforming the big boards from plywood and paint to highly sophisticated display methods. Also, consumers are spending less time at home and more time in their carsIor sport-utility vehicles.

Another factor is efficiency. Outdoor and transit ads are still one of the cheapest mediums to reach a mass audience.

CBS' Transportation Displays Inc., the fourth-largest outdoor company, whose core business is in transit and shelter ads (subway station, commuter rail and bus posters), built much of its success in the 1990s on the fashion category with designers such as Donna Karan and Calvin Klein.

"We positioned the bus poster to as many advertisers as possible as the poster of the '90s," said Jodi Yegelwel, marketing director at TDI.

The fashion segment accounts for 20% of TDI's $246 million in sales, making that its single largest category.

Jayne Greenberg, VP-media at The Gap, was one of the first to experiment with "spectaculars," those now-familiar oversize boards and tall walls dotting urban landscapes.


For image-conscious marketers, improved vinyl technology is a lure since it has brought with it vastly improved re production quality.

Plus, the spots occupied by cigarette marketers are among the choicest in the country. Given their limited advertising options, tobacco marketers spent years acquiring the best locations across the country.

"The tobacco companies have been using out-of-home pretty steadily since they were kicked off TV," said Lars Skugstad, executive director of Outdoor Media Team, a division of Outdoor Services, itself a part of Interpublic Group of Cos.' Western Initiative Media Worldwide.

"They were one of the first aggressive advertisers in the medium and over the years picked up the strongest and most visible locations."

Said Jim McLaughlin, president of Chancellor Outdoor Group: "One thing tobacco companies enjoyed was great locations."


With such premium space, outdoor ad companies have the ability to charge premium prices. For years, tobacco com panies locked in contracts at low rates. Now, given the medium's popularity, operators have the ability to charge what the marketIin this case, marketersIwill bear.

"We would end up selling most of the space at 20% to 25% higher rates than they go for today," Mr. Eller said.

"The majority of our high-profile spots that we had with tobacco have already been sold to other advertisers," said Wally Kelly, senior VP, Outdoor Systems, the nation's largest outdoor company with $750 million in sales. Those advertisers include American Express Co., Apple Computer, Calvin Klein, Ford Motor Co., Miller Brewing Co., Nextel and Pacific Bell.

Analysts predict the industry overall will see revenue rise 8% this year. Yet the picture isn't so rosy all around. Monster boards may be popular in Los Angeles or New York, but secondary markets may not be such an easy sell.

"They're not going to be able to sell all these boards instantaneously," said Fred Delano, exec VP of Memphis, Tenn.-based Media Partners, adding that the impact will be felt more in secondary markets, such as Memphis, than in primary markets.


Reselling certain kinds of billboards favored by tobacco advertisers, such as those on surface streets in neighbor hoods, will probably be harder than finding new advertisers for the large-size boards dotting major highways.

"Near term, there will be some hiccups," said Mr. Meyers. "I think part of it is company-specific depending on the type of inventory they had with tobacco."

Several analysts anticipate most companies will make up any shortfall within 12 months.

Regardless of when contracts expire, tobacco marketers are required to tear down their ads this week, and in some cases replace them with anti-smoking ads, according to the agreement hammered out last year. Anti-tobacco mes sages will grace billboards until yearend.

All the leading tobacco marketers, including Philip Morris USA, R.J. Reynolds Tobacco Co. and Brown & William son Tobacco Corp., are complying with the April 23 deadline. Philip Morris, in fact aimed for a self-imposed March 23 deadline for fear of being fined, according to some media executives.

"Philip Morris was pretty successful in getting them down by mid-March," Mr. Skugstad said.

While waiting for state attorneys general to draft anti-smoking messages, PM USA's parent Philip Morris Cos. posted ads for some of its other products, such as Miller beer.


Meantime, in preparation for the post-tobacco, anti-tobacco world, several outdoor companies have already begun to ink contracts with other marketers.

AK Media, for example, has locked in new commitments from The Gap, Universal Pictures, Paramount Pictures and Airtouch Communications in all its markets.

Lamar has lined up Southern Link to replace Philip Morris' billboards in Alabama.

Most of Lamar's tobacco contracts terminate at the end of the year, said Mr. Reilly. He doesn't plan on renewing contracts with attorneys general that were originally held with the tobacco companies.

"They're just not a natural constituent of ours," he said.

Copyright April 1999, Crain Communications Inc.

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