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FOR IMMEDIATE RELEASE
To Advertise, or Not to Advertise: that is the 'R'-word Question
by Saul Feliz
Business Accountability Specialist
It seems like every time we reach a period of difficult economic conditions, agencies are tasked with defending brand budgets by anxious brand managers looking at the financial section of the paper with one eye, and the business news television networks with another. One way agencies approach this challenge is by looking across their competitive set to see what the other guys are doing. This approach is circular in nature, at best, and with data lagging behind, perhaps not the most timely. Though by definition we are not near a recession, as of the second quarter of 2008, we believe a more analytical and objective course would be to simply look at the facts.
Fact #1: Companies that continue or increase ad dollars during a recession perform better in the long-term
Intuition might tell you that if you spend more when times are tough, you'll fail faster than those that tighten their belts. When it comes to advertising, though, your intuition would lead you astray.
An association of trade publications, American Business Press (ABP), led a study that was widely known in the advertising community through its analysis of the severe recession of '74-'75. The study found that those companies that maintained their ad budgets suffered no sales declines during the recession, achieved sales growth of 150% during '72-'75, and outpaced competitors for years later.
Other studies of more recent recessions have yielded similar results:
- WPP's Center for Research & Development 1990 study showed that those companies that increased advertising spending by 10%-50% gained market share by 0.5%-1%.
- MarketSense compared over 100 household brand names during the 1989-1991 recessionary period and consistently found that those that raised advertising budgets saw subsequent increase in sales from 15%-60% over category competitors.
- An American Business Media study from 2008 cites a 2001 Yankelovich/Harris study of the B-to-B market which concluded that 95% maintain high interest in learning about new products, and view companies that continue to advertise more favorably.
Fact #2: People's Disposable Income Doesn't Change Dramatically During Recessions
Advertisers will sometimes argue that it simply does not make sense to advertise at the same levels because their customers don't have the same amount of money to spend. But studies show that in every recession since 1940 the total number of people employed has never declined by more than 2%, and consumer spending actually increases during recessions.
Fact #3: Maintaining or Increasing Ad Spend when Competitors Decrease During a Recession is Strategically Sound
A reaction brand managers often have is to cut advertising based on the fact that their competitors have done so as well: 'I can afford to cut because others have done so too, right?' WRONG!
In 1974, one of the world's largest manufacturers of hand tools, Stanley Works, sensed softening demand for its consumer products. So, in the heart of the recession, it launched the biggest advertising campaign in its history: a blitz of network television and magazine ads aimed at driving home the Stanley name to the consumer market. And while sales of Stanley's heavy industrial tools fell sharply during 1974 and 1975, its consumer business held strong, giving the company a large sales and profit increase in 1974 and preventing a substantial decline in 1975. Additionally, its hand tool business continued to grow at annual rate of 8%--twice that of its competitors.
In the most recent recession (March 2001-November 2001), IBM increased their advertising budget 17%. Consequently, their sales increased 8.9%. Home Depot saw similar results in 2001. When the economy soured it mounted a heavy product push using TV. The company saw net income rise 10% on a 16% sales surge.
Fact #4: Recession Might Actually Be Your Best Friend
When in a recession, all companies suffer, right? Not exactly.
Several studies conducted by McGraw-Hill's Laboratory of Advertising Performance have shown that recognition increases when advertising increases, and vice versa. If consumers need to recognize products before purchasing, the fact that other firms have decreased their advertising should help boost sales for those who continue or increase advertising. Other McGraw-Hill Research has shown that steady ad spending during recessions results in higher sales. A study from the recession of the early and mid 80s shows that companies that did not reduce advertising spend during the recession years increased sales an average of 275% while companies which reduced or eliminated their advertising during the recession realized average sales increases of only 19%.
Fact #5: Shifts in the Economy Creates Shifts in Consumer Spending Advertisers Must Recognize
When consumers are feeling the pinch, they will often trade-down, or substitute an activity, service, or product with a lower cost alternative. For example, during the 1973-1975 recession, Quaker Oats increased advertising of grain products and communicated the concept of it being a cheaper source of protein, thereby reversing a long-term decline in the sales of oats, grits and cornmeal.
The pattern is also true in retail. A recent Wall Street Journal article details how discount retailers such as Wal-Mart are seeing their best sales numbers in years. In fact, discount stores overall saw sales jump nearly 6% in June of 2008, while those of full-price department stores declined.
So, when a recession hits, and you're asked to support your media budget, what should you do? Here's an action plan:
- Keep an eye on the competitors: if they're reducing budgets, this could be a great opportunity for your brand to take advantage and flank!
- Make shifts based on your consumer's price sensitivity to your offering and complimentary products: if people buy in bulk during recessions to save, storage solutions might have a greater demand. Your creative should shift to emphasize the greater value your brand provides.
- Exploit the changing consumer: research shows that people's basic behaviors stay the same, while the expression of the behavior shifts. So, if people eat out on average 3 times a week, during a recession they'll likely continue eating out, but at different places. While your target market may purchase less, you'll also have opportunities to target upscale consumers looking for greater value.
- Consider CRM: if you haven't yet, an investment in CRM solutions will help you keep track of existing customers, understand the new ones, and keep them with you when the economy recovers.
- If you're in the B-to-B market, continuing communication strategies with your core customers is particularly important. 86% of executives believe that when they see a company advertising in a down economy, it keeps them top-of-mind when they make a purchase decision, and makes them feel positive about the commitment those companies have to their products and services.
Sources
Ryan, Robert. Advertising in a Recession. AAAA 1999
The Importance & Value of B2B advertising during times of economic uncertainty American Business Media, 2008
Anonymous. Direct Marketing. Garden City: September 1991. Vol 55, Iss 5; pag 17, 3pgs
Nucifora, Alf When Going get Tough, Tough Take Out More Ads. Washington Business Journal May 11, 2001.
Grante, Lorrie. Home Depot Sales Soar 16%. USA Today. August 15, 2001.
Kastiel, Diane Lynn. Business Marketing. Chicago: Jul 1987. Vol. 72, Iss. 7; pg. 40
McWilliams, Gary. US Consumers Trade Down as Economic Angst Grows Wall Street Journal July 11, 2008.
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