Advertising in and out of a recession
Rhea Jose and André Bonfrer consider how marketers can use evidence-backed strategies to justify the long-term value of marketing and advertising during a recession.
We are all familiar with the marketer’s challenge of ‘selling the value of marketing’ to the C-suite and their justification of marketing communication budgets. This could be due to non-marketers not appreciating the lag in impact between advertising and sales.
Research in ‘Do stock prices undervalue investments in advertising?’ has shown the impact of advertising is often not factored into the valuation of share price by analysts. While the focus of that study was not specific to advertising and recessions, it provides quantitative general evidence that marketers can use to justify their long-term view of the value of marketing and advertising budgeting.
In terms of the looming recession, Karl Winther, of Winther Consulting, believes that management needs to focus on evidence-backed strategies to improve their brand share. “Evidence-based studies, as far back as the 1920s depression and more recently the 2008 GFC, proved that during a recession it is easier to increase your brands SOV and therefore SOM. However, Marketing Week UK reported that only 7 percent of marketers were using the opportunity to increase their marketing investment.”
So why are so few marketers using the current recession as an opportunity to increase investment? Karl poses the question: “Are marketers unable to convince their management team?”
This appears to be an opportunity for marketers to help the C-suite understand evidence-based marketing results, which will in turn enhance marketing’s credibility in the boardroom.
Caroline Ruddick, GM of Marketing at Latitude Financial Services, believes that advertising in recessionary times can help achieve a competitive advantage through brand investment. “Companies that invested in recessions were found to outperform the S&P 500 over a 5-year period. SEEK found investing during the GFC to be cost-effective, as competitors pulled out of media. SEEK built confidence in the brand and competitors were left playing catch up after going dark. Competitors had to invest significantly more to try to catch up lost ground to SEEK.”
Considering this example, why wouldn’t a CFO take a long-term view here in terms of supporting a CMO?
Having visibility across multiple categories, Mark Coad, CEO of IPG Mediabrands, considers advertising budget setting in a recession to be very category-specific in terms of industry and product. “Whilst market SOV is incredibly cheap we are also seeing the unprecedented instances of categories simply closing down – travel, entertainment, airlines, cinema/films, non-essential retail. Conversely, some categories struggled to meet demand. Pulling spend in both of these circumstances was seen as a necessity, not a decision.”
So, is it possible for decision makers to find a middle ground instead of tipping on either side of the extreme? The answer might lie within category management.
Mike Harley, managing director of XPotential, offers another perspective to advertising budget setting, based on short-term versus long-term impacts of advertising. “The challenge with justifying continued advertising support in fast-moving consumer goods during the period of a financial crisis are two-fold. Firstly, the lag effect of branded advertising means competitor brand saliency erodes slowly, so it can be 6-12 months until you feel the impact. Besides, promotional activity drives cashflow but is often rushed and doesn’t connect with the brand. Adapted brand creative to an aligned promotion will enhance both.”
A considerable body of academic work points to the vulnerability, response and efficacy of marketing in the face of crises, for example during a currency crises, oil price shocks and so on. Findings suggest that there are category differences, with some industries that are less vulnerable to economic recessions than others. While durable goods and tourism are particularly susceptible to macroeconomic cycles, other brands are counter-cyclical and demand increases.
Further, marketing performance depends on the type of response. A 2009 post GFC review of advertising studies revealed that advertising expenditures tend to move pro-cyclically, with a 1 percent drop (gain) in GDP resulting in a 1.4 percent drop (gain) in advertising expenditures. While brands may spend less on marketing budgets, in many cases the effectiveness of such expenditure is higher – in part due to lower competitive interference.
Finally, marketing and advertising activities in a recession will govern how firms fare post-recession. The most concerning outcome is that many firms do not survive; recessions tend to wipe out marginally efficient and inefficient firms. For firms that do survive, the post-recession market structure can change dramatically. Research in FMCG industries points to the shift of choices toward private labels during recessions. Likely brought about by consumers looking to save money and being less influenced because brands reduce their marketing expenditure. These shifts were found to be persistent and market share improvements in private labels are sustained long after the recession is over.
So, how many of you will use these facts in your next boardroom presentation?
Rhea Jose is a research assistant in the Department of Marketing at Deakin University and a marketing specialist at Dynamiq Global.
André Bonfrer is a Professor of Marketing at Deakin Business School.