Ad Cutbacks Backfired for Bankruptcy Victims

Mervyn's, Bennigan's, Sharper Image All Dialed Back on Ads to No Avail

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NEW YORK (AdAge.com) -- In the really tough times, it's almost instinctual for a company to dial back on marketing, but there's a growing body of evidence -- and bankruptcy filings -- to suggest that cutting ad dollars can be the ultimate false economy.
Bennigan's, which cut marketing spending by 75% last year, has filed for bankruptcy.
Bennigan's, which cut marketing spending by 75% last year, has filed for bankruptcy. Credit: Scott Olson

Last week, department-store chain Mervyn's and S&A Restaurant Corp., which owns Bennigan's, Steak & Ale and Tavern restaurants, became the latest to file for bankruptcy. Both Mervyn's and Bennigan's dramatically cut marketing spending in the past 12 months.

According to TNS Media Intelligence, Mervyn's measured media spending plunged about 25% to $76 million in 2007. On a smaller scale, Bennigan's cut spending 75% in 2007, to $347,000. Another recent bankruptcy victim, Sharper Image, slashed its budget 82% in the two years before it filed for bankruptcy in February. Baker's Square restaurants cut spending 19% in 2007 and filed for bankruptcy in May. 

Of course, it's not strictly a cause-and-effect relationship. "Obviously there are a lot of factors at play," said Kevin Keller, professor of marketing at Dartmouth. "But the pattern is there. It's not like they were investing a lot in advertising and failed."

Fiscal restraint
Particularly for public companies, marketing cuts can demonstrate fiscal restraint. But Darren Tristano, exec VP of Technomic, said that while marketing seems like an easy place to pare, "ultimately, because a lot of traffic you're driving is through marketing and promotion, you're really cutting off your nose to spite your face."

Larry Light, former global CMO of McDonald's, recalled marketing cuts at the beginning of his tenure, in 2002. "It bought time, but the problems didn't get better, they got worse," he said. McDonald's boosted marketing spending as part of its "plan to win" beginning in 2003, and sales at stores open at least a year soon soared.

Cutting marketing at a critical time makes a turnaround more difficult, Mr. Light said, and in some cases impossible. "It is true that some companies try to cost-reduce their way out of problems, and all that does is delay the inevitable problem," he said. "You can't cost-manage your way into the future."

Still, it's clear that many companies will continue to do just that, with more budget cuts and bankruptcies expected among retail and restaurant chains in the coming months. "It's likely that we'll see more companies getting into trouble," said Avi Dan, a marketing consultant. "As long as there is a credit crunch and consumer-sector weakness, the first priority of many marketers is to protect their balance sheet, even if that means trimming budgets."

Vacant tables
Mr. Tristano also said to expect more bankruptcies before year-end. Restaurants have been filing at an alarming rate, five or six in each of the last three years. With four chains having already filed in 2008, Mr. Tristano expects at least three more by year's end, the highest number since Technomic started tracking restaurant bankruptcies in 1980. He pointed to the existence of more chains, many of which are now public companies.

Casual-dining chains seem most vulnerable, Mr. Tristano said. In that sector, Applebee's, Chili's and Ruby Tuesday have some of the worst same-store sales. But only Ruby Tuesday boosted spending last year, 12% to $49 million. Applebee's spending was down 3%, to $168 million, and Chili's was down 30%, to $88 million. Some fast-food chains are also making cuts. Wendy's, which has also struggled with same-store sales, cut spending 16% in 2007 to $300 million.

On the retail side, several companies have been showing signs of struggling under the burden of a tough economy and slowing consumer spending. Of those, Borders Group, Pier 1 and RadioShack are all cutting marketing budgets. Measured-media spending at Borders was down 48% to $3.5 million last year. RadioShack sliced budgets by 45% to $116 million over the last two years, and spending at Pier 1 was down 67% to $27 million last year. A spokeswoman for Borders said that the company's loyalty program is now the focus of marketing efforts. No other retail companies returned requests for comment.

"As long as the economic conditions stay tough, you're going to see companies that cut back and some that will potentially pay the price," said Mr. Keller. "It comes down to a very fundamental philosophical issue of advertising as an expense or an investment. If you view it as an expense, then you cut it. ... It's a big problem, because people [make cuts] without truly recognizing some of the revenue benefits."
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