Spending your way out of trouble

What some advertisers consider the worst advertising recession in working memory and the looming prospect of a wider economic downturn has precipitated more calls for brands to maintain and even increase their media spending.

Last week’s terrorist attacks and a likely allied war against the presumed perpetrators means further uncertainties for the future. Many economists are comparing the situation to the recession at the start of the Nineties, which was exacerbated by the Gulf War and resulted in a surge in oil prices and a drop in US commercial travel.

The collapse of advertising revenues in the US and UK over the past year, coupled with buoyant consumer spending and declining interest rates should provide an excellent opportunity for companies to increase their advertising spend. Some argue that this can have the dual benefit of allowing brands to outshine competitors and build their brands over the long term.

Two weeks ago, jewellery retailer Signet announced that it would raise its marketing budget by 11 per cent, to take advantage of the lowest advertising rates for years. The group, which runs H Samuel and Ernest Jones in the UK and has extensive interests in the US, said it would spend $100m (&£69m) on advertising in the US and &£7m in the UK.

But it seems Signet is an isolated case. Walker Media managing partner for broadcast John Horrocks says: “You are unlikely to find anybody increasing their spend. Advertisers are saying ‘How much can I save?’ If they were planning 600 ratings this autumn, they are getting them and getting 15 per cent of their planned expenditure back.”

Walker Media predicts that ITV ad revenues will fall by 18 per cent in September and that the whole television market will see a 15 per cent decline. Additionally, Walker predicts that October will see a drop of 13 per cent for ITV and nine per cent for the industry as a whole and that November will see a 15 per cent and ten per cent drop respectively. This drop in ad revenue is in addition to similar falls last year – not just a correction to earlier levels, but a severe collapse.

The Institute of Practitioners in Advertising (IPA) welcomes Signet’s plans to increase its marketing spend and sees it as confirmation of what ad agencies have been saying for years – that brands taking advantage of a weak advertising market can reap great benefits.

IPA director-general Hamish Pringle says: “If the cost [of advertising] falls by up to 20 per cent, it presents brands with the opportunity to explore media that they wouldn’t have been able to explore before. We are not advocating that brands should increase their budgets, but that they look at the market and if it is ten per cent down, brands will gain an advantage if they maintain or not cut their spend by as much.”

Blueprint for success

But not everybody sees such a move as a blueprint for companies. Chartered Institute of Marketing chairman John Pratt says that Signet’s announcement “smacks of opportunism”. But he believes that there are ways to combat the worst effects of a downturn. There are opportunities for marketers to segment customers in new ways. He says: “Brands are saying that they are looking at their customers and thinking that if they split them into smaller groups, they can save money. They are asking themselves: which are the most appropriate advertising and sales channels to reach customers? And there is also an increased interest in finding out if they are using the best channels.”

Technological resources

Pratt believes that any economic downturn will be different from previous recessions, as marketers will have greater technological resources to help them divide their customers into more exact groups. But others say that the huge investments made by companies in customer relationship marketing (CRM) software over the past two years – according to some estimates a total of about &£18bn – could have caused the advertising recession, as companies have cut their advertising spend thinking that they will benefit from the new technology.

Mike Sommers, marketing director of Royal & SunAlliance estate agents division and a former marketer at Prudential and Woolworths, says: “The advertising recession has a lot to do with the bursting of the dot-com bubble. But it is also because so many companies have invested in CRM over the past year and have slashed their ad budgets.”

He argues that this CRM expenditure has been a “con” and that there are no signs that the systems have actually delivered the benefits they promised – of allowing companies to segment and serve their customers more economically.

Arguments about how to balance spending between short-term promotions and long-term brand building are as old as recessions themselves. Unsurprisingly, different areas of the industry take up positions that best suit their businesses.

The Advertising Association has reprinted its book Advertising in a Recession, which carries the subtitle “the benefits of investing for the long term”. The book, edited by London Business School professor Patrick Barwise, is a 135 page invective against the tendency of companies to cut back their advertising budgets in times of recession. Barwise says: “The most successful firms do not allow short-term economic conditions to make them abandon their strategy. Instead, they typically maximise long-term shareholder value by maintaining or increasing their ad spend when the economy slows down and their weaker competitors cut back.”

Case studies of brands that maintained or increased their ad spend during the recession of the early Nineties include the Renault Clio, Whipsnade Wild Animal Park, De Beers, Barclaycard, Nescafé Gold Blend and BMW. The studies, all written by the ad agencies that carried out the work, are said to support Professor Barwise’s “three positive strategies for dealing with recession”.

The first – looking for new opportunities – is apparently supported by the Renault Clio, Whipsnade and De Beers. Renault launched the Clio in March 1991 – in the midst of the recession – as a successor to the Renault 5. Through a weighty advertising campaign, the book claims, Renault managed to successfully position the Clio at the premium end of the small car sector. Whipsnade executed its first television ad campaign in 1990, and increased attendance by 28 per cent following years of decline.

In 1992 De Beers launched a new ad strategy across 23 countries to stave off the worst effects of the global slowdown. It aimed to strengthen diamonds’ positioning as the “ultimate gift of love” through the “shadows” campaign created by J Walter Thompson. The agency claims it raised the amount people were prepared to pay for diamonds, increased penetration in developing markets and maintained diamonds’ desirability.

Beating the trend

Barclaycard is an often-quoted example of a brand that boosted its advertising in the last recession, with its ad campaign featuring Rowan Atkinson as a bumbling and pompous secret agent. The campaign was an attempt to safeguard Barclaycard from a spiral of dropping interest rates, and was accompanied by a relaunched card with new features. BMP DDB, the agency that created the campaign, claims that Barclaycard’s turnover increased by &£508m in 1991, and that advertising was “directly responsible”. The increase in short-term profits alone were more than three times the ad expenditure, the agency claims. However, the arrival of cut-price credit card operators from the US, such as Capital One, appears to have wiped out any long-term gains the early Nineties ads may have created, and Barclaycard has been losing customers hand-over-fist to cheaper rivals for some time. But BMP claims that advertising slowed the rate of decline.

It may be argued that these examples are one-offs and specific to the situations of their particular brands. In recessionary times, there are always brands that increase their advertising spend when they need, either to reposition themselves as upmarket or to undertake a relaunch.

Balancing expenditure

Just as ad agencies tell marketers to increase ad spend to combat economic downturns, so too with the other operators in marketing services. Sales promotions, money-off schemes and two-for-the-price-of-one offers are the typical response of packaged goods and other brands to an economic downturn. In Advertising in a Recession there is a chapter devoted to the drawbacks of sales promotions and their tendency to “erode perceived brand value”. The book quotes a study of 314 fast moving consumer goods and found that those that spent the bulk of their marketing budget – at least 76 per cent – on promotion, achieved an average return of more than 18 per cent. For those employing a mixed strategy – with 44 per cent spent on advertising and 56 per cent on promotions, the return on investment stood at 27.3 per cent. Brands that spent at least 50 per cent of their budget on advertising experienced returns of over 30 per cent.

But Sales Promotion Consultants Association director Clive Mishon says that recessions inevitably benefit marketing services that are not based on big budget advertising. He says: “If you base it on past performance, the below-the-line industry has benefited from a slowdown in ad expenditure. Those client companies must have benefited or they would not have done it. The direct marketing industry shows a short-term return. In a slowdown, people want faster results. If the media costs are less, they might try to use the media as a way of promoting sales, as opposed to investing in long-term brand building.

“In a recessionary time, I would encourage the balance of expenditure to change, but I do not think it’s a black and white solution – you can have too much investment going into below-the-line.”

Marketers will be watching carefully to see if other brands follow the example of Signet and raise budgets to take advantage of the low ad rates. Signet itself will be watching US consumer trends following last week’s terrorist attacks to see if people really do cut back on spending because of fears for the future. But one thing is clear: there has never been a cheaper time to pour money into an advertising campaign.