By most accounts, they are a virus. Behavioral economists tell us the fear of economic insecurity infects the minds of consumers before it breaks out as red splotches in the quarterly numbers. Apparently, people can catch more bad news than Federal Re-serve Chairman Alan Greenspan can medicate away.
The advertising business is not immune. It handles the fear of recession badly. A major TV network, spooked by softness in the scatter market, reportedly cancelled all its departmental Christ-mas parties to protect the bottom line.
And well it might. If it comes, this will not be the recession of 1991, when agency white papers encouraged advertisers to "stay the course." Wall Street, they reasoned, would accept lower profits if there were a sensible long-term strategy in place. That's naive. Today's stock markets take no prisoners.
So when sales soften, costs must be cut-and, unfortunately, advertising is one of the least painful cuts for a brand to make. Major agencies have fired many employees since December. One wonders what would have happened if those agencies had large ad budgets to cancel instead.
VULNERABLE TO CUTS
Ad budgets are vulnerable to cuts, and they're ideal for cutting. There is no immediate risk, because in most cases the incremental sales or increased margins produced by advertising do not cover its cost. Turning that around, a dollar saved in media means less than a dollar lost in sales, so cutting advertising will increase profits for most brands--immediately.
The issue is short term vs. long term.
Agencies have always maintained advertising needs the long term to make its case. Their experience is advertising pays out only when lingering effects are considered. Advertising keeps a brand's share from eroding. Advertising attracts new users who become repeat purchasers. Advertising helps support the high unit volume that creates economies of scale. Advertising builds large brands that have higher repurchase rates and lower marketing costs.
By this kind of careful reckoning, most of advertising's contribution to a brand's bottom line occurs over several years. But in a recession, a quicker fix is needed.
Of course, those cherished facts could be wrong.
Almost everything known about brand advertising comes from the study of consumer packaged goods, because scanner sales data permit careful analysis. But packaged goods are the worst place to look for advertising effects. They are mature and stable markets, characterized by known brands and sophisticated competition.
Brands in growing markets, where news and information are important, are far more responsive-for example: direct-to-consumer pharmaceuticals advertising, financial services, wireless, retail, movies. In such cases, advertising often pays in the short term. Agencies need to make the case for advertising by looking where response is strongest, not just where the data are familiar.
There is a good reason for any brand, packaged goods or otherwise, to spend during a recession. A higher share of voice usually will result in a higher share of market, and a higher share of market usually will result in greater profitability.
Hard times present the perfect "now-or-never" opportunity. Share of voice as the driver means it's not how much you spend, it's how much more than the competition you spend that makes the difference. It's easier to spend more than the competition when they're cutting back.
There is convincing evidence that strong, continuous advertising helps to build brands. There is ample proof that these brands have substantial dollar value in mergers and acquisitions. But it is unrealistic (and self-absorbed) for advertising to defend ad spending and ignore the larger issues. As revenues fall, there is a survival imperative to cut back. What is cut reflects the brand's understanding and its priorities.
Instead of protecting the budget, agencies need to help the brand refocus its marketing priorities for tougher times.
For example, there are good recession strategies for a brand's TV advertising. These include lowering weekly weight rather than cutting weeks; moving weight to TV's lower pricing periods; taking advantage of the brand's seasonal purchase patterns and moving some national dollars into spot areas (higher purchase, higher share, higher growth), where advertising is more likely to produce an immediate effect.
Without a broader perspective and without constructive recommendations, advertising's arguments for maintaining budgets seem irrelevant to the problem at hand. They sound more like the Pentagon than the school board.
Better information on advertising effects is necessary, and should soon be available.
Many agencies and research firms are working on the problem. But until then, we'd better pray for a quick cure. The idea of spending scarce dollars now to increase profits tomorrow is tough to sell during a recession.
Mr. Ephron is a partner at Ephron, Papazian & Ephron, New York, a media consultancy (www.ephrononmedia.com). E-mail at [email protected]