Situation Overview
As the White House, legislators, and the Federal Bank use every regulatory finger they have in an attempt to plug the porous dam of our economy, advertisers have some tough decisions ahead. The good news though is that with those tough decisions, come potentially great rewards.
Contrary to conventional wisdom that tempts advertisers to cut their ad investments when demand is in a decline, history has proven that spending in a down turning economy can lead to significant sales increases, market share growth, and market value gains. With this in mind, top tier advertisers like Procter & Gamble, Kraft Foods, Kellogg, and Colgate-Palmolive are increasing their ad spending in the face of the impending economic downturn.
Findings
In the most recent study published by the American Association of Advertising Agencies in 2004, nearly 2,700 firms across three industries – consumer, industrial, and service – were analyzed on ad spending and financial performance in both expanding and receding economic periods. Findings demonstrate that advertising, in general, contributes to financial performance for up to three years in the future. In addition, according to the study, increased advertising in an economic downturn or recession has greater benefits than increased spending in a period of economic expansion. These benefits stem both from an increased share of voice (SOV) among consumers, as well as enhanced perceptions from stakeholders.
A presence in the market during tough times can act as a beacon of strength for customers and employees, but also for shareholders and investors. Advertising represents a firm asset that could enhance future earnings. As those earnings come to fruition, investors reward opportunistic firms with increased market value. Companies forced to take shelter during a downturn send a message to Wall Street and open the door for competitors to steal market share.
An increased advertising presence also serves as an important reminder to potential customers. The first step toward activating a purchase is driving awareness, and awareness consistently rises and falls with advertising levels. Driving and maintaining awareness is critical to a brand’s performance and vitality.
In fact, there may not be a better time to advertise. With the natural tendency to retract ad spending as consumer demand retracts, smart companies looking for growth can take advantage of the communications vacuum left behind by ramping up their own efforts. Increased spending for the brand, combined with decreased spending in the category, could lead to higher SOV. This amplified presence with consumers translates to sales and market share gains. This is evident in a study by Billetts of the Thompson Intermedia Group. The study, highlighting the relationship between ad spending and share growth in the consumer goods category during the ’90-‘91 recession, analyzed 127 brands and found that advertisers that increased their ad spending, by 7% on average, saw an increase in market share by 1.1% on average. Advertisers that cut their spending, by 8% on average, saw an average share decrease of 1.6%.
In addition to these potential share gains, savvy advertisers can tweak their messages or offerings in a downturn to create and communicate value propositions to consumers. If an advertiser has a value proposition that’s worth talking about, consumers in today’s economy offer a heightened predisposition to hearing that message and reacting accordingly.
According to recent articles in USA Today and the New York Times, advertisers like Starbucks and Club Med, not typically know for price-conscious messaging, have joined the value fray. Starbucks, for example, is testing $1 coffee and free refills in their Seattle outlets.
Conclusion
In the end, however, both economic slowdowns and advertisers’ reactions to them might be self-fulfilling prophecies. With a Consumer Confidence Index under 90, rising prices in core consumer goods, and constant reminders about the crippling effects of the housing crash and the credit crunch, there is a lot of anxiety pent-up in the marketplace today. The result is a tightening of consumer purse strings, which drives spending down, unemployment up, and the economy further into the red.
As history has shown, the same could be true with advertisers. Tightening ad budgets may result in declining awareness, falling sales, or sliding market share for brands. On the other hand, business-building strategies such as focusing on communicating value propositions and investing in advertising may help brands realize long-term growth. As Mark-Hans Richer, Harley-Davidson Chief Marketing Officer, said best in an interview with Advertising Age, “An extra dollar spent today has extra dividends for tomorrow.”
