DID ADVERTISING JUST SNEEZE?
Agencies Need Better Arguments To Weather A Recession
By Erwin Ephron
Do recessions loom like a rock or spread like a virus? By most accounts they're a virus. Behavioral economists tell us the fear of economic insecurity infects the minds of consumers before it breaks-out as red splotches in the quarterly numbers. Apparently people can catch more bad news than Greenspan can medicate away.
The advertising business is not immune. It handles the fear of recession badly. A major TV network, spooked by softness in the scatter market, reportedly cancelled all departmental Christmas parties to protect the bottom line.
And well it might. If it comes, this is will not be the recession of 1991, when agency white papers encouraged advertisers to "stay the course." Wall Street, they reasoned, would accept lower profits if there were a sensible long-term strategy in place. That's naive. Today's stock markets take no prisoners.
So when sales soften, costs must be cut and unfortunately advertising is one of the least painful cuts for a brand to make. The New York Times reports major agencies have fired 2,000 employees since December. One wonders what would have happened if those agencies had large ad budgets to cancel instead?
Ad Budgets are
Ideal for Cutting
Ad budgets are vulnerable to cuts and they are ideal for cutting. There is no immediate risk, because in most cases the incremental sales or increased margins produced by advertising do not cover its cost. Turning that around, a dollar saved in media means less than a dollar lost in sales, so cutting advertising will increase profits for most brands, immediately.
The issue is short-term versus long-term. Agencies have always maintained advertising needs the long-term to make its case. Their experience is advertising pays out only when lingering effects are considered.
Advertising keeps a brand's share from eroding. Advertising attracts new users who become repeat purchasers. Advertising helps to support the high unit volume that creates economies of scale. Advertising builds large brands that have higher repurchase rates and lower marketing costs. By this kind of careful reckoning most of advertising's contribution to a brand's bottom line occurs over several years. But in a recession a quicker fix is needed.
Package Goods are
the Wrong Model
Of course those cherished facts could be wrong. Almost everything we know about brand advertising comes from the study of consumer-packaged goods, because scanner sales data permit careful analysis. But packaged goods are the worst place to look for advertising effects. They are mature and stable markets, characterized by already known brands and sophisticated competition. Here you advertise to stay in place. Brands in growing markets where news and information are important are far more responsive. For example, DTC, finance, Wireless, Retail, Movies. Here advertising often pays in the short-term. Agencies need to makes the case for advertising by looking where response is strongest, not just where the data are familiar.
"Now or Never"
There is a good reason for any brand, packaged goods or other, to spend during a recession. A higher share of voice will usually result in a higher share of market, and a higher share of market will usually result in greater profitability. Hard times present the perfect "now or never" opportunity. Share of voice as the driver means it's not how much you spend, it's how much more than the competition you spend that makes the difference. It's easier to spend more than the competition when they're cutting back.
There is convincing evidence that strong, continuous advertising helps to build brands. There is ample proof that these brands have substantial dollar value in mergers and acquisitions. But it is unrealistic (and self-absorbed) for advertising to defend ad spending and ignore the larger issues. As revenues fall there is a survival imperative to cut back. What is cut reflects the brand's understanding and its priorities.
Without a broader perspective and constructive recommendations, advertising's arguments for maintaining budgets seem irrelevant to problem at hand. Agencies sound more like the Pentagon, than the School Board.
Instead of protecting the budget, agencies need to help the brand refocus its marketing priorities for tougher times. There are many helpful recession strategies for a brand's advertising. These include moving weight to lower pricing periods (TV) and taking advantage of the brand's seasonal purchase patterns. It also may make sense to move some national dollars into spot areas (higher purchase, higher share, higher growth), where advertising is more likely to produce an immediate effect. But probably the most important recommendation is to reduce weekly weight instead of cutting weeks of advertising.
Better information on the short-term effects of advertising effects is necessary and should soon be available. Many agencies and research firms are working on the problem. But until then we'd better pray for a quick cure.
The idea of spending scarce dollars now to increase profits tomorrow is tough to sell during a recession.
- February 26, 2001 -