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In the early 1990s, international marketers such as McDonald's, Unilever and Philip Morris were quick to enter the more accessible markets in Eastern Europe. Now firmly established in Poland, Hungary, the Czech and Slovak republics, they are moving farther east into such large but relatively untapped markets as Romania, Bulgaria, the Ukraine, Belorus and Kazakhstan. "[This is] the largest growth area after Southeast Asia," said Grey Advertising CEO Bernd Michael.


These moves signal new opportunities-and obligations-to ad agencies, who are opening offices to service global accounts. But whether they join with local agencies or start from scratch, many agency networks have a tough time making a profit in Eastern Europe. They are plagued with heavy expenses-high start-up costs, expensive salaries, costly real estate-as well as inexperienced local staff and relatively low returns. Consumer purchasing power in the region remains low; the average net income hovers around $300 a month. And double-digit inflation, volatile politics and high unemployment in many markets contribute to conservative ad spending and low media budgets.

"Clients often show minimal understanding for our problems in these markets and look at the global budget the agency handles," said Reiner Erfert, chairman of Leo Burnett's Eastern European region. "But things are improving lately because clients are experiencing the same difficulties in this area. Often rollouts are postponed because of problems, which means no income for the agency."

Annual media budgets may be as low as $30,000 to $50,000 for an account, he said.


Collectively, the top agency networks reported gross income just under $180 million in 15 Eastern European markets last year, with $140 million of that coming from only four countries-Poland, the Czech Republic, Hungary and Russia. In these relatively developed markets, the tide is beginning to turn, and agencies are able to recoup earlier losses. In other regional markets, agencies figure they are investing for future growth.


When McDonald's opened its doors in Hungary in 1988 and in Moscow in 1990, DDB Needham was quick to set up offices in these markets. Now the fast-food giant is expanding again, so DDB Needham has assigned Todd Brandes, regional account supervisor, to help McDonald's (and DDB) enter Belorus and the Ukraine.

Philip Morris has commitments throughout the region, so it's no coincidence that its global agency, Leo Burnett, also is in a growth mode in the region.

In May, the agency acquired a minority stake in the Styx ad agency in Almaty, the capital of Kazakhstan.

Michael Parsons, European communications director of Philip Morris, said: "Leo Burnett is expanding worldwide anyway. . . . But clearly it is doing so because its clients are growing."


This area, which formerly was the Cold War frontier, now serves as a cola war battleground for the world's two biggest soft drinks marketers. Neville Isdell, president of Coca-Cola's Greater Europe Group, calls Eastern Europe the "next frontier opportunity for soft drinks."

In May, Coca-Cola announced it will invest $200 million in the region, including large plants in Almaty, Azerbaijan and Armenia. Coca-Cola already has factories in the Georgian city of Tbilisi and Tashkent, Uzbekistan. A month earlier, David Jones, president of PepsiCo's Eastern Europe and Central Asia division, said the company would invest $550 million in Russia over the next five years. Other marketers are expanding, as well. Nestle signed a joint venture in Moscow to produce ice cream. Initially, $20 million is going into the project, but that amount could double in the coming decade. Nestle already has factories in the Czech Republic, Slovakia, Poland and Hungary.

"This year, we expect to see an increase of 40% to 50% [in East European sales]," said Nestle Chairman Helmut Maucher. "This has been achieved in just a few years, so this market is getting bigger and bigger for Nestle. Establishing our brands is very important, because brand loyalty is still developing."

McCann-Erickson has become the largest agency network in the region, serving the marketing needs of major clients such as Coca-Cola, Nestle and Unilever. Its 1995 equity gross income in Eastern Europe was $17.1 million on billings of $114 million. Ad Age International credits agencies with returns in gross income and billings equal to their equity ownership in a local shop. Like most agencies, McCann-Erickson draws more than half of its regional income from Poland, the Czech Republic and Hungary.

Young & Rubicam, with gross income of $13.8 million on billings of $108 million was in second place.


McCann, which prefers wholly owned agencies to joint ventures, is still expanding. Just last month its 10th office in the region opened in Kyiv, Ukraine and another is planned for Kazakhstan.

All agency networks are being helped by growth in consumer spending despite inflation and by rising media rates. Growth in the upper double-digits in network gross income is not unusual.

French agencies Euro RSCG and Publicis have been latecomers to the area, largely because their mostly French client base was late to enter the region. In the top four markets, the French have established a presence, but they remain a step behind other global agencies in entering markets farther east.

In a somewhat controversial market strategy, competing agencies Bates Worldwide and Saatchi & Saatchi Advertising Worldwide (both owned by London-based holding company Cordiant) have entered most eastern markets together as a joint venture. This is attributed to the holding company's dire financial straits when the rush to follow clients into Eastern Europe began. The two agencies did enter Poland separately, but merged in July, a move that Managing Director David Williams said "leverages sparse market resources, such as people."


Cordiant not only links its two agency arms in the local markets but takes an overall minority position in the resulting agency. AAI's way of computing agency network size by equity "penalizes" those who follow such strategy. Equity aside, the 11 Bates Saatchi & Saatchi shops (second to Grey in number of shops) are the largest on gross bases at $25.5 million gross income on billings of $204.4 million.

As the Bates Saatchi & Saatchi agencies were developing, "we had less conflicting business than we thought we might, based on Western European experience," he said. "There will come a day where it may make sense to re-examine the [venture] strategy," he conceded.

"It is an extremely positive and fast-growing market which you have to be represented in as an international network, or else you miss a massive opportunity."

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