GENERICADVERTISINGThursday, April 23, 2009By Alvaro Leiva, Kenny Lo, Steven WenEEP 142 Spring 2009Agenda• What is Advertising?• History• What they do• How they work• Examples• Facts & Stats• Advantages• Disadvantages• Legal issues• Conclusions• Q&AWhat is Advertising?• The main objectives of advertising are:• To increase the usage of a certain productand hence acquire more orders.• Create new customers and increase brandrecognitionWhat is Advertising?• Obtain feedback from customers regardinga certain product.• Indicate introduction of new products orreplacement of old ones.History• 1937: enactment of AgriculturalMarketing Agreement Act byCongress.• Up to 1990, 30 commodity boards hadbeen established by Acts of Congress.• But…History• …In the 1990’s, legislation that forcedproducers to make mandatorycontributions for generic advertisingwas weakened.• The Court found some of thesecommodity boards unconstitutional.• So…History• …In 1996 the Federal AgriculturalImprovement and Reform Act wasvoted through by Congress.• Strengthened the original Act of 1937.• Authorized creation of check-offgeneric advertising programs.What they do• Marketing orders set prices and otherconditions for the sale of certaingoods.• Goals: increase demand, sales andprices.What they do• Increase the size of the pie withoutincreasing the share of the pie for anyone producer.• Check-offs are organizations whichcollect a mandatory tax fromproducers of a commodity.How They Work• Must be for specific commodities.• Responsibility of USDA to initiate.• Run by Federal and Stateorganizations.How They Work• Need at least 40% of producers ofspecific commodity to participate toinitiate refereundum.• Must have 65% approval of producersthat participated.How They Work• Fund advertising, sales promotion, &research.• Ensure quality regulations withinspection.• Standardize containers and packs.How They Work• Control supply, volume, & production.• Prohibit unfair trading practices.Examples• http://www.youtube.com/watch?v=PJFutyUrllo&feature=player_embedded• http://www.youtube.com/watch?v=OH_vjpQdB3Q• http://www.youtube.com/watch?v=gvCMCAFmsuY• http://www.youtube.com/watch?v=31yqeBgt5r0• http://www.youtube.com/watch?v=A398VraSBwY• http://www.youtube.com/watch?v=IyNpEqTM9sY• http://www.youtube.com/watch?v=T4R4bYzN0QA• http://www.youtube.com/watch?v=OLSsswr6z9Y• http://www.youtube.com/watch?v=n6G7MuKDo6I• http://www.youtube.com/watch?v=UmPwL1YulMAExamplesEvery 1/10thExamplesEvery 1/10thExamplesEvery 1/10thExamplesEvery 1/10thExamplesEvery 1/10thExamplesEvery 1/10thExamplesEvery 1/10thExamplesEvery 1/10thExamplesEvery 1/10thFacts & Stats• Upwards of $1 billion spent each yearon generic advertising promotingcommodity goods in the U.S.• Each $1 spent advertising agriculturalcommodities yields an average of $3to $6 of additional revenue.Facts & Stats• Annual expenditures on genericadvertising:• Beef: $45 million• Cheese: $47 million• Florida orange juice: $24 million• Pork: $14 million• Cotton: $15 millionFacts & Stats• California, state with the highestnumber of programs.• 60 active commodity boards in CA.• Value of agricultural commoditiescovered by state marketing programsapprox. $15.6 billion.Advantages• Very effective at creating revenue.• Does increase primary demand.• Ensures welfare of agriculturaleconomy.Advantages• Increase visibility and consumption ofhealthier products i.e. milk and raisinsvis-à-vis soda and chips.• Can help keep prices of certainbranded goods low (pharmaceuticalindustry)Disadvantages• Difficult to maintain; lack of incentivealignment.• Possible decrease in consumption ofsubstitute products.• Free Rider Effect: producers of thesame commodity have incentive to notcontribute, particularly smaller ones.Prisoners dilemma…Disadvantages• Free Rider Effect:$10$10$8$18don’t contribute$18$8$16$16contributedon’t contributecontributeProducer 1Producer 2Disadvantages• Free Rider Effect:• Foreign companies that export to U.S.free ride off advertisement ofcommodity.Disadvantages• Decrease in revenue of smallcompanies in the long-run.• Legal controversy…Legal Issues• Several producers have refused topay commodity boards, their caseshave gone to district courts and eventhe Supreme Court.• Small beef producers claim that thecheck-off program only benefits largeproducers.Legal Issues• In 2004 a Federal Appeals court ruledthat the Beef, Pork, and Milk programsviolated First Amendment rights offree speech and association.• This sparked dozens of challenges tomandated marketing programs.Legal Issues• However in 2005 the Supreme Courtruled in favor of beef marketingprograms, claiming that they did notviolate free speech, rather they wereconsidered protected “governmentspeech.”Legal Issues• Despite this ruling, there are still over70 cases being litigated, the outcomeswill be determined by the specificdetails of the marketing programs.• The legal future of these programs isstill uncertain.Conclusion• Does generic advertising work?• Yes!• Does it have faults?• Yes!• But…Conclusion• Advantages outweigh disadvantages.• Especially in the midst of an