Is Heinz the first of many?

With Heinz axing its above-the-line spend ahead of an expected economic downturn, and other companies preparing similar cuts, the advertising industry must take decisive action to persuade such businesses that marketing need not be the first c

As Heinz axes its entire UK advertising budget for the foreseeable future in the throes of a strategic review (MW last week), a set of dire economic indicators suggest the UK is on the cusp of a downturn.

The UK economy grew at its slowest annual rate for 12 years in the second quarter of 2005, according to official data, with economic output up just 1.7 per cent on the previous year. Gross domestic product rose by just 0.4 per cent in the three months to June, the same as for the first quarter of the year. As UK advertising spend is generally pegged at about one per cent of GDP, such faltering growth could spell bad news for the media industry.

The picture is mixed, as June’s high street retail sales rose in volume by 1.3 per cent after zero growth in May, according to the Office for National Statistics. It was the highest single-month growth in sales volumes in 18 months. However, the unadjusted value of retail sales increased by only 0.4 per cent for the second quarter of 2005, compared with the same period in 2004, making it the lowest growth since comparable records began. The Institute of Practitioners in Advertising’s Bellwether report, published last week, also showed a slowdown in advertising spend in the second quarter of this year. It predicts that marketing spend for 2005 will be 2.3 per cent lower than expected.

In such times of gathering gloom, media owners and advertising agencies repeat a familiar refrain. At the risk of sounding self-serving, they warn marketers that cutting advertising budgets is the worst thing they can do in a recession.

They whip out case studies from recessions past, attempting to demonstrate that brands which maintain their advertising spend through a downturn perform better in the long term than those that cut back. For instance, they point to Barclaycard’s campaign during the early 1990s recession featuring Rowan Atkinson as a bumbling secret agent. The massive spend behind the campaign helped boost the credit card’s market share.

Striking Gold

ITV last week published a pamphlet entitled “Justifying your investment in brand fame”, which argues that brands should spend money on brand and image advertising rather than diverting funds into cut-price promotions. ITV director of customer relationship management Justin Sampson says: “Profitability is more likely to come to those who maintain their investment in advertising in difficult times, as opposed to those who move into promotions.” The pamphlet cites the example of Nescafé, which ran the Gold Blend romance ad campaign for ten years until 1996, encompassing the recession of the early 1990s. It claims that this enabled the brand to achieve leadership, maintain a price premium and attract buyers who might otherwise have bought a cheaper brand in the downturn.

The advertising industry also dusts off copies of research by Dr Stephan Buck of Taylor Nelson Sofres, who found in a recent study called “The true cost of cutting ad spend” that heavy and continuous advertising is a “causal factor in premium brands achieving success in both the short and long term, even in a commercially difficult environment”.

But try telling all of that to Jane Miller, the new UK chief executive of Heinz, who was brought in last month from the company’s head office in the US. It seems she has looked at the sales figures for Heinz’s UK brands and decided that, in order to hit her targets, she needs to save money. Slashing advertising spend automatically saves about £25m a year. Heinz refuses to comment on this, but says advertising spend has been halted while it integrates its purchase of HP Foods. “Heinz has decided to freeze all above-the-line marketing spend while it undertakes a complete strategic review after the completion of the HP acquisition,” says a spokeswoman.

One source says: “The problem for Heinz is that is has a big portfolio of products that need support, but it doesn’t have the money to support all of them. Taking a short advertising ‘holiday’ may not damage a brand in the long term, but its sales will certainly suffer after a while.”

Keeping your voice heard

Concern that brand owners risk losing market share if they cut back on advertising is shared by IPA director-general Hamish Pringle. “Advertising in the recession of the early 1990s showed the relationship between share of voice and brand share is quite close. I would predict that Heinz brands will lose share – though it may not lose accepts that brand owners are tempted to cut back in the search for savings in the face of recessionary price deflation, but believes they should make sure they spend above the average for their sector to maintain or increase market share.

However, not all agree that the lessons of past recessions necessarily serve brand owners well in present circumstances. Cranfield School of Management professor of brand marketing Simon Knox says the situation for food brands is quite different after years of attrition with retailers.

He also criticises media owners for failing to provide evidence of the effects of placing ads with them. “There is a strong feeling that without more accurate assessments of the deliverables of media, a lot of advertising spend is being wasted,” he says. This partly explains the growth of direct marketing and internet expenditure, which is easier to measure than scattergun advertising. And Knox points out that maintaining market share is only one of a marketer’s aims – increasing brand market share doesn’t automatically lead to increased profits.

Signs of life

Still, while categories such as groceries may be cutting their ad budgets, others are making up for it. The overall economy faces decline, but there is a constant stream of hi-tech products being launched that are buoying consumer spend and advertising budgets.

In the second quarter of this year there was a six per cent decline in television advertising spend, according to Zenith Optimedia. This was partly down to COI Communications withdrawing all of its ads during the General Election, though there were widespread cuts across the board. However, Zenith suggests that the ring-tone craze, exemplified by the Crazy Frog, helped inject funds into advertising. “Short-term demand – usually related to technology – can be explosive and surprising. The Directory Enquiries deregulation in 2003 was an example. Mobile phone innovations are likely to be another source,” says its report.

In reality, consumers are still prepared to spend money on exciting new products. The success of the iPod has demonstrated this, and the soon-to-be-launched Sony PSP is expected to be a success.

Andrew McGuinness, a founder of agency Beattie McGuinness Bungay, believes the jury is still out on what will happen to consumer spending and advertising budgets. “At the beginning of the year, there were predictions of six or seven per cent growth, which seemed bullish at the time. This is a correction and agencies have to wise up to the fact that it is no longer a pre- requisite that significant chunks of money will be spent on TV, press, posters and radio. Money will be moved around more than ever before to find greater efficiencies. We will have to wait and see for the overall picture.”

If predictions of a gradually worsening economic climate come true, it won’t just be Heinz that decides to cut its advertising spend. Many more brands will seek to rein in costs by slashing the most discretionary of all spending – the marketing budget.

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