The economic slowdown and the Hispanic market: The Hispanic Advertising Market.. PART II

As a continuation of my three-part look at the potential effects of the economic slowdown on the U.S. Hispanic market (click here to read the first part focusing on Hispanic consumer spending), I will look at the Hispanic advertising market.

As most of our readers already know, the Hispanic advertising industry has grown into a major sector of the overall U.S. advertising and media marketplace, and therefore a key industry in the U.S. economy. As a direct result of the growth in the population and spending prowess of U.S. Hispanics (see the last post for more info), a cottage industry has grown from a few local agencies in New York during the 1950’s into a $5 billion industry in 2007. If you’re interested in reading more about the history and rise of the U.S. Hispanic advertising industry, I highly recommend you read “Latinos, Inc”.

I see 4 key players that make up the Hispanic advertising sector:

1. Advertisers – these are the companies that spend marketing dollars on Hispanic advertising and marketing services, both nationally and locally. They can be as big as Proctor & Gamble and as small as a local used car dealer in Tucson, AZ.
2. Hispanic advertising agencies – there are approximately 100 Hispanic agencies, based on AHAA’s current active member and associate member list. They are the gatekeepers of the Hispanic ad dollars.
3. Hispanic media companies – mostly Spanish-language, but increasingly English-language TV networks, Cable TV, print (newspaper and magazine), online, radio, outdoor, and new media companies (e.g. HipCricket mobile)
4. Related industries – is a catch-all for companies such as production houses, translation firms, and event marketing specialists that play an important role in delivering Hispanic advertising services along the “last mile.”

To understand the economics of this industry, it’s important to understand the food chain that drives this market. To illustrate this, I’ve put together the following diagram which I’ll refer to as the Hispanic advertising industry food chain:

Hispanic Advertising Food Chain

This diagram represents how the majority of the money flows, from the top to the bottom, and provides an approximation of the relative weight of each sub-sector or component (i.e. Hispanic ad agencies see the bulk, but not all of Hispanic ad spend, some flows directly to Hispanic media companies, particularly at the local/regional level). Also, I will argue that the economics of the Hispanic ad industry is not all that different from the general market ad industry, except for the fact that it is less complex and less fragmented (new media and technology have significantly altered the general market landscape into a much more fragmented industry of specialists agencies, media companies, and technology services firms).

So what should we expect to see in the next year or so as the economy goes into a slowdown? The first trend that has some significant historical precedence is that Hispanic ad budgets at national advertisers will inevitably be trimmed. Anyone who has worked in this business for more than a few months know this age old rule all too well – when ad budgets need to be cut, the Hispanic budgets are the first ones to feel the pain. Does this make sense? No, particularly if you believe my predictions from Monday’s post that Hispanic consumer spending will fair better, in aggregate, than the general market. This will reduce dollars flowing from the top down to the agencies, which will be negative for the entire industry.

Another big trend is the meltdown and consolidation in the financial services market, particularly the disappearance of major consumer-facing banks like WaMu and Wachovia. While the financial services industry has historically underspent in the Hispanic market (as an industry they only spent $167 million in 2007, ranking number 10), their budgets have been growing and the recent events on Wall Street will dramatically hit those budgets in late 2008 and 2009.

Add to these the doldrums affecting auto makers, and the picture looks pretty bleak.

I see two potential silver-linings:
1. Hispanic advertising spending by consumer product companies will probably remain robust, particularly considering the underlying fundamentals of the Hispanic consumer market I discussed on my last post.
2. Local ad spending, which is always hard to gauge, might be bolstered by the democratization of media (which I’ll talk about more on my next post) which will open the market to new, regional advertisers that have not previously invested in Hispanic advertising.
3. Overall Hispanic ad spending has been growing significantly during the last 5 years (at between 4-13% per year), and any slow-down will probably not result in negative growth.

All in all, the outlook is negative for the Hispanic ad industry during the next 15-18 months. I expect that overall Hispanic ad spend growth rate for 2008 will drop below 2%, and will remain mildly positive, but close to flat for 2009.

By Jose Villa.
Jose Villa is CEO and founder of Sensis http://www.sensisagency.com ranked the fastest growing Hispanic company in California and an Inc. 500 fastest growing company in 2008. Sensis is a digital advertising agency helping its client reach diverse audiences using both traditional and new media. Sensis clients include the U.S. Army, Sempra Energy, L.A. Care Health Plan, and Impremedia.