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Special Columns
Arindam Chaudhuri, Editor-in-Chief, 4Ps B&M Chief Consulting Editor's Desk
Rajita Chaudhuri
A.Sandeep Editor’s Desk
A.Sandeep

COST CUT OR CARTELIZATION?
PepsiCo and AB-InBev’s media buying deal in US is said to aim at cost cuts but the threat of others following a similar route might make US media reject it completely
 
The town of Hoegaarden (pronounced ‘whogarden’) in the Flanders region of Belgium, named much earlier, is virtually a namesake to the iconic spiced wheat or “white” beers produced there since medieval times. The industry, a sacred tradition in Hoegaarden and the biggest employer in town, flourished for over 6 centuries. But in 2005, InBev, the world’s largest brewer and Hoegaarden’s owner since 1985, decided to close down HoeGaarden Brewery forever. But the quick buck bankers had missed the recipe. The beer is made from a rare yeast that is difficult to cultivate and keep alive. The proposed shift of brewing operations to nearby Jupille boomeranged as the desired quality of white beer couldn’t be achieved. The European media lambasted the beer giant for its blunder while brewing resumed in Hoegaarden in 2007. It drew further flak from the media which was at loggerheads with InBev. Since then, the brewer’s camaraderie with the media has remained topsy turvy. The icing on that relationship came recently, when Annheuser Busch–InBev announced a recent deal with PepsiCo to make combined pitches for their media buying – not surprisingly, many in the press police smelled cartelization!

The pact is part of a “joint-purchasing agreement” the two signed in October 2009 aimed to cut costs on items such as travel, computers and office supplies. Barely 3 months had passed and these two – amongst the biggest advertisers in US – tightened their embrace to march in tandem for buying their media for their massive advertising campaigns. A sneak peek into the kind of bucks in the reckoning reveals huge numbers. Apart from the umbrella figure of $1.15 billion as the total media spending of the two entities combined, $490 million was spent on network TV, $182 million on cable, $194 million on magazines and nearly $70 million on outdoors. Importantly, the $1 billion plus media spend number is the highest in the four categories the 2 giants currently collaborate in.

PepsiCo has been among the top 20 advertisers in US for quite some time while AB-InBev holds more than 50% of US beer market and is the biggest advertiser in its category. The single-most significant ad spot that the firms aim to target at a reduced rate is SuperBowl, the most watched telecast on American TV almost every year, which thus commands stratospheric spot rates of $3 million for a 30 second ad spot during the game’s telecast. Although, this year, PepsiCo did not advertise during the Superbowl owing to the aftereffects of recession, its brand Doritos did.

 
But the verdict on whether the deal will pay out or boomerang will take this year at least. Prof. Timothy Calkins, Clinical Professor of Marketing at the Kellog’s School of Management, tells 4Ps B&M from Northwestern, “I suspect this deal will have little impact on media spending budgets, at least in the short run. By working together the companies will try to stretch the planned spending. I suspect the individual business units at the companies won’t adjust spending levels until it is clear precisely how much there is in terms of savings. Companies are aggressively looking for ways to stretch marketing dollars and this is one promising approach. I suspect we will see more companies teaming up to negotiate with the major media companies, particularly if this venture delivers real benefits”

The deal’s specifics include that a team of executives from each company will review plans and priorities, concentrate on common areas of spending in media apart from their other supplies and negotiate purchases on behalf of both companies. But the media planning of the two companies would continue to be handled separately. There are rumours galore that the advertising agencies of the two companies might also face the brunt of this deal despite repeated statements by the two companies that advertising budgets and decisions will be handled solely by the respective companies as earlier.

But early signs that the new terrain for the brothers-in-arms would be treacherous are already appearing. Recent rumours suggest that big media companies like Turner, NBC, Conde Nast and Time Inc. have all rejected the proposal by the duo to jointly buy time and space at sharply discounted rates ranging up to 50%. The networks might just be right on this one. Omnicom, the parent advertising giant whose sister firms like TBWA and DDB are the agencies for PepsiCo and AB-InBev respectively also handles PepsiCo’s media buying through its media arm OMD. OMD handles more than $13 billion worth of media budgets for a plethora of big and small advertisers in the US. If the deal has to work, not only will OMD lose its bargaining clout with networks, networks themselves will be risking the ire of their other advertisers demanding similar rates. “This program will have the biggest impact on traditional media outlets such as network television and print. Since everyone understands how to evaluate these vehicles, it is an easy place to go after savings. The deal could have a big impact on events like the Super Bowl, since both companies have been Super Bowl advertisers over the years,” says Prof Calkins.

But the biggest issue that might just end this tryst between the giants sooner than later is the culture collision. Both Pepsi and Inbev come with legacy baggage, and that would be a bigger worry than actually making money out of the alliance. Come to think about it, when did a puritan aficionado of white beer ever allow itself to be mixed with Pepsi and sold as a new combo?

Anchal Gupta           
 
 
 
 
 
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