Japan's Ad Biz Feels Economy's Squeeze

Spending Expected to Fall Again in '09; Foreign Shops Could Cash In

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TOKYO (AdAge.com) -- Things are bleak in the U.S., but Japan's ad industry is reeling, and the global economic crisis figures to forever change the way agencies in this market do business. During the last quarter of 2008, the gross domestic product of the world's second-biggest economy -- and a $40 billion ad market -- fell an annualized rate of 12.7%. In the U.S., the drop was 3.8%.

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"It is devastating news," said Yukihiro Oguchi, a spokesman for Dentsu, Japan's largest agency. Last year, Dentsu said ad spending in Japan on traditional media fell by 7.6%, including a 12.5% drop for newspapers, but local sources said ad spending was falling by up to 15% toward the end of 2008. "We expect a similar decline in 2009. Across the board, clients are taking very, very conservative positions in advertising investment this year," said Kevin Ramsey, Tokyo-based regional director for McCann Worldgroup, Asia/Pacific.

But the shattered economy might have an unexpected upside for non-Japanese shops in the market as it brings an end to the 15%-commission system on media buys that Japanese agencies have earned long after marketers in other countries switched to fee-based remuneration.

But for now, advertisers are cutting spending in mass media and spending more on digital media with lower commissions. Advertisers are also learning to negotiate cheaper deals on their own with desperate media owners, particularly in print. Toyota Motor Corp., for instance, recently went to newspapers directly and offered -- and received -- half the usual price for a few ads.

"I don't think the current commission system can survive [the economy]," Mr. Ramsey said. "Moving to a fee-based business helps in situations like this."

Layoffs looming
Dentsu and No. 2 player Hakuhodo DY Holdings realize that. They have already invested in value-added businesses such as consulting, product and service development, and digital, all with fee-based remuneration. Agencies aren't laying off staff yet, but that's likely to come.

Dentsu, which controls about one-fourth of Japan's ad market, expects a group operating profit of $382 million for the full year through March 31, 2009, about 4% below its earlier forecast. Hakuhodo forecasts an 18.2% drop in annual profit to $144 million.

"It's hard to be optimistic right now," said Gary Wenzel, chief operating officer of TBWA/Hakuhodo. "By far, the biggest and toughest-hit is the auto industry, which is huge in Japan."

Most agencies depend heavily on billings from Japanese automakers such as Toyota, Nissan Motor Co., Honda Motor Co. and Mazda Motor Corp. Those companies, in turn, rely on exports that have dried up.

"The situation has shown us how dependent the Japanese economy is on foreign sales. It's quite shocking for us," said Mariko Fujiwara, research director at Hakuhodo Institute of Life and Living in Tokyo.

Cuts from every corner
Auto is the biggest but not the only category slashing spending. "Everyone is cutting budgets, including insurance, services, real estate -- everything," Mr. Oguchi said.

Foreign companies such as Coca-Cola Co. are also hurting. In an earnings report this month, the beverage giant reported flat 2008 sales in Japan.

Japan has experienced recessions before, and its economy stagnated in the 1990s. This time is different, however, as the country is trapped in a global web of economic chaos led by falling exports.

Of course, not every marketer in Japan is suffering. Uniqlo, a manufacturer and retailer of inexpensive casual wear, "is the biggest winner coming out of this," said Dave McCaughan, McCann's Tokyo-based regional planning director. "Consumers are going from top luxury brands to basic-level brands and skipping the middle brands."

A drop in international tourism is also helping domestic travel, as people flock to theme parks such as Disneyland Tokyo. And McDonald's sales have been booming since Japan's economy started to slip six months ago.

In the meantime, Mr. Wenzel said, "everyone else is looking for the U.S. stimulus program to fuel a rebound at some point, and looking to China."

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