The times are not easy, concede advertising industry members Jihane Nasrallah and Hani Haddad. But whereas growth in the Lebanese advertising market has been elusive for about three years, and while Haddad’s agency had a rare year of seeing turnover drop in 2015, the two are joining forces in a merger. The merger process formally commenced last month with the relocation of Nasrallah’s agency, Inhouse Communications, into the offices of Haddad’s Spirit.

The integration of the two businesses is currently in phase one, entailing evaluation of the team and new human capital needs. There were some redundancies or departures of staff members who did not see themselves fitting into the new organization, but, according to Haddad, these represented a small portion of the new combined team of 35 individuals. “There was some [employee] turnover but we are also recruiting and will have some vacancies that need to be filled as we are restructuring,” he says.

A common vision

A key element in their corporate plan is to use economies of scale for improved profitability and stronger positioning in regional markets. “The interesting part of the merger is not turnover but profit,” Nasrallah explains. Efficiency gains from joining their forces entail lower office costs and reduction of overheads, she adds.

The owners of 11-year-old Spirit and six-year-old Inhouse Communications say they share a history of collaboration going back almost 10 years when Haddad interacted with Nasrallah as a client of his marketing services. Discussions on joining forces evolved in 2015 at a time when Nasrallah was a nominee for an entrepreneurship woman of the year award and received coaching on ways to grow her business by regional expansion or merger.

[pullquote]Both agree that having the right chemistry is crucial for a successful business partnership[/pullquote]

The newly minted business partners tell Executive that they share the same vision of running an advertising business. Each of the two firms has been operating as an independent agency offering the full range of media planning, public relations and advertising services. As a merged entity, they will operate on the basis of the very same formula. “Both of us were working the same way, which is different from the market, and have the same vision, which is being a full-service agency. We are focused on proximity to local clients,” Nasrallah says.

Merging two local advertising companies into a larger independent agency is an alternative path to the advertising industry’s prevalent business development route, which is alignment with regional groups and, ultimately, with one of the multinational conglomerates. As shown by numerous cases in the recent and not-so-recent past, local Lebanese agencies using the latter route have found their final homes as fully-owned and controlled units of global marketing powerhouses.   

For Haddad, who started his career in the advertising and marketing communications industry more than 20 years ago, aligning his first agency with a multinational group back in 2000 was a disappointment and he reversed out of the relationship by setting up Spirit in 2004. Given that advertising talent moves easily from local agencies to multinational ones and vice versa, he says the difference is not in human capital but in the rigid corporate cultures and bylaws of the multinational organizations by which they oblige local clients to commit to a certain way of doing things. An independent agency can be more flexible in responding to client needs. “This is added value and this is what clients are telling us when they say they are comfortable working with us,” Haddad claims.   

According to him, the addressable market for independent agencies is getting larger because more Lebanese companies are expanding abroad. By Haddad’s own assessment, Spirit is the largest independent agency based in the country. He declines to say how much Nasrallah and he are expecting from the merger in terms of margin improvements but admits that growth of profitability should be double digit. 

Moving forward

The only number he is willing to disclose is also by self-assessment. Following the merger, Spirit is now a $30 million company when all assets and the Dubai office that serves Gulf clients are taken into account, he says.

[pullquote]A key element in their corporate plan is to use economies of scale for improved profitability and stronger positioning in regional markets[/pullquote]

The company will invest into capacity building, job training and business development, including travel, to explore and develop new markets in the region, but budgets have not been finalized. “We have drafted a plan but we are still testing it as we are now in phase one of the merger,” Nasrallah says.

The merger was done by exchange of ownership shares and did not involve a capital increase. Haddad refuses to say how the ownership stakes are now distributed. However, his position of chairman and chief executive of the company, and Nasrallah’s position as managing director of new business give an indication. According to Haddad, Spirit operated in the past with a perfunctory board and is now advancing to a three-member board as the strategic decision platform. Board members are Haddad, Nasrallah, and Spirit’s Regional Creative Director Maya Saab, who are all shareholders in the company.

Both agree that having the right chemistry is crucial for a successful business partnership. While sharing the same basic approach to the business is essential, “there should always be areas where one complements the other,” Haddad opines and Nasrallah notes, “That is why we are now putting proper structures in place and defining responsibilities.” She adds that the merger of cultures between the two organizations still has a lot of ground to cover, saying half jokingly, “I am realizing this today from your interview. I moved [into the Spirit office] three or four days ago, so we are still in the honeymoon phase.”

Remember the one from Brooklyn-born designer Kenneth Cole? “Millions are in uproar in #Cairo,” he tweeted in early February 2011. True. Because they allegedly had heard about his fashion company’s “new spring collection”, the gifted marketer blared on. Triple ouch.

Every year, there are some advertising campaigns that backfire badly. Most can be attributed to cultural ignorance/insensitivity in combination with stupid timing. Cole’s was in that class, although a few grades below Coca-Cola’s epic miscalculation of first Israeli and then Arab sensitivities that led to the brand’s 23-year Arab boycott from 1968 until 1991. As far as marketing communications blunders that hurt foreign brands in the Middle East and North Africa, one cannot assess if and how much Cole’s tweet damaged Kenneth Cole Productions beyond the large immediate outcry that it generated in 2011, since the company delisted in September 2012 and henceforth had no obligation to publish results.  

Some marketing mistakes are clearly costlier than others but in general, these blunders come and go and do surprisingly little damage to the advertising industry’s profitability. The profession has become more accountable – even if that is mainly due to scandals, litigation, bad press and the arrival of digital consumer power, it also seems rooted in the will to improve. Lying to the educated consumer is the big no-no of today. Cigarettes don’t improve your health, shampoo doesn’t make you irresistible, wearing sports shoes does not make you lose weight, food is just food and there is no one drug that cures all cancers. Moreover, marketing success doesn’t grow on trees. Therefore agencies have learned to steer away from lying to the customer and from deceiving the advertising client.

Grand ideas

At the same time, however, the advertising industry has an existential need to tell stories that are bigger than life. That’s why the right deodorant and the even more flavorful toothpaste get you your dream partner, why every detergent, mobile phone and breakfast cereal is far superior to last year’s version, why every hamburger looks much better in the ad, et cetera. The knowledge that people will respond positively to embellished tales of beauty, goodness and well-being is deeply engrained in the ad industry’s DNA. Advertisers on their end always want more return for every dollar they spend on campaigns. The problem for the marketing communications profession is that the two mandates of not telling a lie and delivering a great, funny, enchanting and profitable narrative are contradictory.

[pullquote]The smallness of the revenue pie sheds harsh light on the economic viability of even prominent audiovisual networks and practically all print media[/pullquote]

Agencies seem to have embraced life within this contradiction so thoroughly that they often perceive and describe matters in their own industry through bifocal lenses with very different focuses. Like now. Judging by the numbers, the Lebanese advertising market is drifting in very dangerous currents.

This danger is not prima facie because of the mind blowing discrepancies between billings according to rate cards and estimates of real advertising sales revenues achieved by local audiovisual, print, outdoor and digital media suppliers. This gap is so customary and currently so accepted that regional ad market researchers Ipsos Media CT in their report on Lebanon, published last month in trade magazine Arab Ad, just specify what they assume to be the correct inflator for each advertising medium. It is apparently useless to fuss about the fact that these inflators range from 50 percent in the cinema category to almost 1,600 percent in television, meaning that 2015 rate-card billings of $1.62 billion in Lebanon must be revised lower, much lower – namely to an estimated $190 million.

That amount is equivalent to not more than 0.4 percent of Lebanon’s Gross Domestic Product which has been estimated at $47 billion in 2015. In the context of the country’s fragmented media landscape, with many outlets that each cater to very partisan target groups, the smallness of the revenue pie sheds harsh light on the economic viability of even prominent audiovisual networks and practically all print media.      

The danger hidden beneath the disinflated ad spend figures is that this estimate contains too much ambiguity for making a proper assessment of the industry’s health or sickness. Real advertising purchases in 2014 and 2015 could have been even lower than the Ipsos Media CT estimates of $188 million and $190 million. Directors of media planning agencies – the experts in assessing the advertising clients’ demand and purchases of media supply – work with the numbers but cannot actually confirm their accuracy.

Cloudy outlook

At Mindshare, a media planning agency that is part of WPP, the world’s top marketing communications conglomerate by annual revenues ($19 billion in 2015), the Lebanese market is judged to have been below published estimates in the past two years. Ghada Hmedeh, who manages a portfolio of luxury business from the Beirut office, tells Executive that by Mindshare’s assessment, Lebanese ad spend in 2014 was similar to 2013 and reached about $180 million in each year. “We have estimated a decrease of about 20 percent and I would say from looking at all the numbers that 2015 was closed at around $150 million,” she says.

[pullquote]Lying to the educated consumer is the big no-no of today[/pullquote]

Wilson Issa, the managing director for the Levant at market-leading planning agency VivaKi, part of the global Publicis conglomerate, gives an opinion when asked if he considers the $190 million figure for 2015 to be the real one. “Let’s put it this way: if [advertising spend] is flat, that means it is shrinking. Even if spend remained the same in 2015 versus 2014, it means that efficiencies have shrunk,” he says.

According to Issa, it is not a good signal if overall spending on advertisements is stable, because it coincides with shifts into digital marketing and this investment then necessarily is at the expense of traditional media, such as print. He observes, “Media owners were tremendously challenged in 2015. Overall budgets are more or less the same [in 2016 to date], but in a scenario where you know that you need to increase your efforts on digital, this is bad news for certain media owners.”

Beyond being worrisome for traditional media, stagnancy of advertising markets is not sustainable for the entire industry if it goes on for extended periods. “Absence of increase for one or two years is understandable, but if the lack of growth goes on longer, it is alarming,” he says.

This, however, makes 2016 something of a year on the edge. Advertising budgets of multinational clients are not something that the Lebanese media planners can bank on, because the national market is part of their regional planning and a small one at that. Given that regional economic growth outlooks are subdued and Lebanon is steeped in uncertainties, local spending by multinational clients might be at levels unchanged from previous years but increases are unlikely.

Expanded spending from regional and local clients is not much of a prospect either, given absent or minimal domestic GDP growth expectations and necessary adjustments to lower oil revenues in energy exporting countries. The advertising industry numbers of 2015 show that most Arab advertising markets reflected the tighter economic realities with drops in spending.

[pullquote]The advertising industry numbers of 2015 show that most Arab advertising markets reflected the tighter economic realities with drops in spending[/pullquote]

The outlook of further drops in regional ad budgets is therefore very concrete, even if such a downturn at this time does not directly translate into contractions of the Lebanese market, as it did in the 2008/9 burst of the real estate bubble and crisis of financial markets in the Gulf Cooperation Council (GCC). In terms of impact, the prospect of another year of no advertising growth in Lebanon is something that large and well-positioned media agencies will be able to weather but this may not be the case for everyone, says Carole Hayek, the Lebanon general manager of planning agency Optimedia, which she established in 2004 under the Publicis umbrella from Beirut.

Hope for the future?

“The problems will be affecting mainly small and medium advertising agencies, independent ones. Lebanese agencies can easily survive another difficult year but I am not so sure about small agencies,” explains Hayek, who is also vice-president of the Lebanese Advertising Association. Moreover, the resilience is limited, she admits. A lack of growth beyond 2016 would be hard to stomach. In that case, “I personally think that there will be a difficult moment for the entire industry,” she says.

The best-case scenario for the local market, in the view of Mindshare’s Hmedeh, would be a boost from a new Lebanese president. A successful election in the near future would cause a number of local advertising clients to activate campaigns in response to the upswing in national sentiment over an end to the presidential crisis, she says, but even in that scenario, her best-case expectation is for a stable market. “If we can have elections, we can optimistically look to a similar performance as last year; otherwise we might be facing another drop [of the same magnitude as in 2015],” she says.  As to markets where Beirut-based agencies could become newly active, she sees Iran as a tentative potential, based on research undertaken there by companies in the Lebanese marketing communications industry.

[pullquote]The stagnancy of the Lebanese market is not helping with the recruitment problem but the market will remain on the maps of multinational clients[/pullquote]

For Hayek, the industry’s current problem is exemplified in a lack of agency recruitment that makes local doors hard to enter for new Lebanese talent. In terms of improvement options, she sees the potential as dependent on factors in the Near East region. The stagnancy of the Lebanese market is not helping with the recruitment problem but the market will remain on the maps of multinational clients, she says: “Improvement is not on the near horizon but things cannot continue like this. This market has good potential and I am optimistic that things will change. Once there is political stability in countries around Lebanon, things will change drastically.”

In Issa’s view, the market will sustain itself because some advertisers always see an opportunity to invest into more marketing and improve their positions when competitors react to an economic trough by lowering their marketing budgets. In this sense, his worst-case scenario for 2016 is for overall budgets to remain at the level of 2015, as he expects withdrawals by the cautious type of client to be balanced by the expansionary minded ones. He says, “This is why I am telling you that advertising in a way regulates itself. Both breeds of clients, however, want more [return] for the same [marketing investment] or more for less. That is the challenge for the advertising agencies and the media suppliers as a whole.” That now seems to be the optimistic view.