Grace Kite: Not all brands should maintain ad spend during a recession

Businesses in “victim” sectors should work out whether investing to secure additional share of market during a downturn is worth the cost, argues econometrician Grace Kite.

BudgetingAlthough data from previous recessions indicates those businesses which kept advertising outperformed those that stopped, not all brands should maintain or increase their spend during the looming recession, according to econometrician and Magic Numbers founder Grace Kite.

Speaking at the IPA Effworks Global Conference today (12 October), Kite said for brands in “victim” sectors which are really struggling through inflation, the advice “don’t go dark” might not be the right answer. Instead, they may be better off saving their money for the economic rebound.

“If you are in a victim sector, you may be an exception to the rule,” she said.

The reason for this is twofold. First, in extreme cases, victim businesses may not survive to see the payback from their investment. According to PwC, 9,000 retailers closed during the first half of 2021 and 11,000 closed over the same period in 2020. This is up from 6,000 in 2017.

That payback for share of market has to be worth it and so the calculation you need to do is [to determine] whether the share of voice is actually cheap enough.

Grace Kite, Magic Numbers

Businesses in victim sectors also need to work out whether investing to secure additional share of market during a downturn is worth the cost, Kite added.

“The argument about why you should continue spending during a recession is others in your sector are going to go quiet, so you’re going to get cheap share of voice…and that’s going to lead to you over time getting a better share of the market,” she explained.

However, in victim sectors that share increase may result in a bigger slice of what becomes a much smaller pie, and that sector may not recover to its previous high after the economy stabilises.

Businesses must therefore make sure the price they pay to get that cheap additional share of voice is low enough to be worth it in the long term, Kite said.

“That payback for share of market has to be worth it and so the calculation you need to do is [to determine] whether the share of voice is actually cheap enough. You have to be sure it’s cheap enough to make that payback work out. It may not be,” she added.

Using survey data from consultant OC&C, Kite identified furniture, electronics, food delivery, homeware and theatres and concerts as victim sectors over the next year. Compared to an average category score of 100, intention to spend more on furniture scored just 27, electronics and food delivery just 38, homeware 61, and theatres and concerts 72.

Lessons from Covid-19

However, for those sectors which will remain “secure” during the coming recession, or even benefit from it, the “old lessons” about maintaining or increasing advertising spend still apply, Kite said.

“The old lessons about don’t go dark do still apply in some sectors where the rug hasn’t been pulled completely out from under you,” she argued.

Looking at the Advertising Research Community (ARC) database for 2020 and 2021, “surviving and/or thriving” brands cut their advertising spend as a percentage of revenue by relatively little.

The database contains effectiveness results from everyday campaigns which haven’t necessarily been entered into or won any awards. It includes 343 cases covering three years of data, carried out by econometricians at Magic Numbers, OMG, D2D, IRI and VCCP Media. As a result, data for 2020 and 2021 was provided by advertisers which continued to invest in advertising and effectiveness measurement over the pandemic.

From an average ad budget as a percentage of turnover of 12% pre-Covid, victim and “secure” brands dropped to 9%, while “beneficiaries” increased spend to 16%. Just 2% of turnover was removed as advertising spend overall.

The brands also continued to invest in a mix of media categories, with victims across 5.5 channels, secure brands using 5 and beneficiaries using 4.9.

Three data-led pointers for marketers during budget season

Analysing the data, IRI marketing strategy and effectiveness director Carl Carter said: “They still kept the spread of channels, which I think is a really important insight into how survivors and thrivers really invested.”

FMCG was one secure sector that was “relatively unscathed” during the pandemic, as survivors and thrivers increased their ad budgets to make the most of cheap media buys. The number of FMCG brands investing £0-£3m into advertising dropped from 51% to 38%, while the number investing £3-£8m rose from 20% to 27%, and £8m+ rose from 4% to 12%.

“In particular, what we see in the data is when you get around the £3m mark, that tends to be where TV kicks in for a brand. And TV delivers very good excess share of voice,” Carter said.

The biggest spenders in FMCG also saw better uplifts in revenue and better return on investment (ROI), the data shows. Those spending £8m+ reached a 5.3% revenue uplift and earned £1 back on every £1 spent, compared to a 4% uplift and £0.60 ROI when brands spent £0-1m.

For businesses in sectors that will actually benefit from the economic disruption, “don’t go dark” is actually “too conservative” advice, Kite said. “You can actually make big bets”.

In the ecommerce and direct-to-consumer (DTC) sector, one of the main beneficiaries of Covid-19, many brands committed for the first time to offline advertising, brand campaigns and econometric evaluations, she said. The number of ecommerce and DTC brands in the ARC database, indicating commitment to offline advertising and proper econometric evaluation, increased from seven pre-Covid to 14.

Advertising budgets as a percentage of turnover for ecommerce and DTC brands in the database also increased, from 3% to 16%. TV took a bigger share of those bigger budgets, from 19% to 32%.

“They made big bets and spent big too,” Kite explained, and as a result achieved a 30% uplift in revenue on average and £3.60 ROI per £1 spent.

According to the forecasts, the sectors likely to be secure next year include home improvement, gyms and fitness, beauty, clothes and shoes, sports events and cinemas.

The sectors most likely to experience a boost over the period include eating or drinking out, international travel, domestic travel and groceries.