In today’s Finshots, we talk about surrogate advertising and see if brands can thrive without it.

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Now, on to today’s story.

The Story

Ever stopped by one of those blue-coloured paan shops on the street and noticed the vendor selling Kamla Pasand Elaichi (cardamom)?

Well, you’ll probably have a tough time finding this product on store shelves because it’s mostly created for advertising purposes and may not be widely or readily available for sale. In fact, some brands that market themselves under the garb of elaichi don’t even have actual elaichi products available.

But we know that as soon as you read Kamla Pasand, your brain probably went straight to pan masala or gutka (chewing tobacco). Just to clarify, that was an example, not an ad. Ads for tobacco and liquor products are a no-go under Indian law. These are considered sin goods. And this ban started way back in 1995 when the Cable Television Network Rules, 1995 (“CTNR”) were amended to stop both direct and indirect ads for cigarettes, tobacco products, liquor or other intoxicants.

But despite the ban, brands selling these products have found clever workarounds through something called surrogate advertising. This sneaky strategy actually started in Britain when domestic violence spiked as more men began drinking. Fed-up housewives protested liquor ads targeting their husbands, so companies got creative. They started promoting fruit juices and soda using the same brand names. This smart move helped them sidestep the ban and boost their sales.

And that’s something that’s still happening to this day. Brands advertise other legal products or brand extensions under their same brand names. It isn’t illegal as long as the ads aren't offensive, the products are genuinely available in the market, have substantial sales and the ad spending is in line with the revenue from these products.

But those non-existent products we talked about earlier? That’s a no-go. Yet it looks like brands have been openly breaking these rules simply because it's not very hard to.

Just to give you an example, ASCI has a rule that lets brands legally advertise their extensions if they meet certain criteria. Basically, if a brand extension is available in stores at least 10% as much as the leading product in that category, or if its sales hit ₹5 crores annually or ₹1 crore in the state it's sold, then they're good to go.

But if you look at stuff like pan masala, it mostly brings in cash sales and often doesn’t have bills. That makes it super easy for companies to fudge the numbers and look like they’re playing by the rules. And even if they aren't manipulating figures, they can still boost sales for these brand extensions by bundling them with their main tobacco products, along with things like silver-coated elaichi, mouth fresheners, and other non-tobacco items. It's a clever little loophole.

Even alcohol companies are pulling clever stunts like organising music festivals (music CDs earlier, but who listens to CDs now?) and selling mineral water, all perfectly legally, but still under their own brand names.

Brands have been exploiting loopholes in laws that have been tightened for years to make advertising tougher. And that’s why the authorities are cracking down finally.

Despite having triple layers of protection through the Cable Television Networks Regulation Act, the Cigarettes and Other Tobacco Products Act and the ASCI (Advertising Standards Council of India) Code, which all ban advertising tobacco and liquor products, these laws just don’t seem to be doing the trick.

According to a 2018 WHO (World Health Organization) report, India’s alcohol consumption jumped to about 5.7 litres per person in 2016 — double of what it was 10 years earlier. And research shows this could climb to 7 litres per person annually by 2030.

Pan masala, though not a tobacco product and interestingly regulated as food by India’s food regulator, is still harmful to health due to the presence of areca nut and is often sold alongside its tobacco cousin, gutka. This industry is huge in India, with a market worth over ₹40,000 crores. To put that in perspective, that’s 80% of the cost of India’s COVID-19 vaccination program. So, you can see just how massive these industries are becoming.

That could mean the authorities might gear up for a complete ban on surrogate advertising. They’re looking to countries like Norway, which bans ads for alcohol and related goods. And research shows this has helped reduce alcohol sales over time.

Does that mean that companies could struggle to thrive if these rules kick in, you ask?

Well, not really.

Because here’s the thing.

Brands tied to sin goods don’t rely solely on surrogate advertising for their income. Instead, they diversify into other businesses, which not only helps balance out their risks but also boosts their brand visibility. These are genuine brand extensions with solid revenue models.

One great example is Kingfisher. Known as one of the top beer brands in the country, Kingfisher is produced by United Breweries, which was once owned by liquor baron Vijay Mallya and is now under Heineken. Even though Kingfisher faces stiff competition from new craft beers today, it’s memorable because of its clever surrogate advertising strategy. When advertising was restricted, Kingfisher diversified into aviation, creating a whole new experience and boosting brand visibility. Sure, the airline didn’t take off, but the brand recall did. Since this kind of diversification brings in real revenue and keeps the core product in the spotlight, authorities have a tough time cracking down on it.

And if you think about it, even if Kingfisher Airlines were still around today, it would easily dance around ASCI's brand extension sales rule that its alcohol brand would have to follow.

Tobacco companies use similar tricks too. They’re not just about selling tobacco products. For example, ITC is big in luxury hotels, consumer goods, paper, packaging and IT. Lesser-known tobacco-associated companies like K P Group, which makes Kamla Pasand, or Sanjay Ghodawat Group, makers of Star 555 Pan Masala, run wind and solar energy businesses but don’t mention their pan masala brands on their websites. These companies have clever ways to build brand awareness. For instance, the Dharampal Satyapal Group, which makes Rajnigandha Pan Masala, has teamed up with brands like Costa Coffee, Bata, Archies, Central and Pizza Hut. Customers can get vouchers to redeem at these stores, boosting their online retail sales of pan masala.

But you might be thinking, “Hey Finshots, what about new players trying to enter the market? Won’t a ban on surrogate advertising hurt their chances?”

Sure, it might be tough, but it may not be an absolute death knell.

Take Bira, for example. They positioned themselves as a lifestyle brand and diversified into selling merchandise online back in 2016. This move really boosted their sales and helped them stand out. So, even in a tough market, a fresh approach can make a big difference.

So yeah, banning surrogate advertising might mainly impact advertising agencies that used to rake in big bucks creating campaigns for these companies. And cracking down on these ads might be the authorities’ way of showing they’re doing something, even if they can’t fully ban sin goods, which generate significant revenue, high taxes and employ millions.

How these new rules will turn out is anyone’s guess. We’ll have to wait and see when they actually roll out.

Until then…

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