Recession Can Be a Marketer's Friend

From Soap Operas to IPods: History Suggests Slumps Spawn Innovation

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BATAVIA, Ohio ( -- The massive bailout of Bear Stearns from the brink of bankruptcy could be the first of many financial rescues needed. Despite double-digit plunges, U.S. housing is still overpriced by historical yardsticks. Retail sales have gone from slow to declining, and the consumer-spending binge that propped up the U.S. economy for years may not return for a long time.

Garden & Gun

Brands and other inventions forged during downturns

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An Ad Age Editorial
In short, it's a great time to be in marketing.

Previous recessions have provided big opportunities -- spawning the brand-management system, soap operas, modern cable networks, airline loyalty programs, the IBM personal computer, the iPod, Crest Whitestrips, Axe body spray and -- for better or worse -- fast-food value menus.

But as any old-timer could tell you, quite correctly, today's marketers don't know much about marketing through recessions -- or how good they have it when things feel so bad.

Short slumps
The past two downturns have been among the shortest on record: eight months each. They followed two of the longest economic expansions on record: 92 months and 120 months. That compares with the average recession of 14 months and average recovery of only 46 months.

Gut-wrenching news, layoffs and budget cuts aside, history shows recessions have been some of the best times for media and marketing innovation. For marketers who kept their wits, economic valleys -- the deeper the better, in fact -- became foundations of empires.

Two years into the Great Depression in 1931, a Procter & Gamble Co. executive named Neil McElroy wrote the memo that ushered in the brand-management system. It eventually helped propel him to the presidency of P&G. It wasn't a cure-all. During the first three years of the Great Depression, P&G's sales fell by more than half, from $192 million to $94 million, and earnings fell 50%, to $11 million. (Deflation accounted for some of that decline.)

But P&G didn't lay off anyone during the Depression. And it charged ahead with innovation. In 1933 it launched the first radio soap opera nationally and its first synthetic detergent brand, Dreft.

Around to cover such events were Advertising Age, launched seemingly inopportunely in 1930, and BusinessWeek, launched at the outset of the Depression, in 1929.

New downturns, new networks
You don't need to go that far back to find successful media launches or marketing initiatives during recessions. During the next-deepest downturn of the 20th century, the 1980-82 double-dip recession, Ted Turner founded CNN in 1980, and MTV launched a year later. By the time the economy began rebounding, those networks were poised to reshape media for a generation.

Less glamorously perhaps, airlines reeling from a recession-fueled downturn developed what would become a new marketing currency as American Airlines and Delta Air Lines launched miles-based loyalty programs in 1981.

Ronald Reagan, who essentially reinvented the marketing of politics as he realigned the political landscape, did so not coincidentally in 1980, during a respite of weak growth between two recessions. Franklin Roosevelt, did the same a little less than five decades earlier during the Depression.

Even the ultimately short recession in 2001 brought two notable media innovations, all the more notable because they emerged from the flaming wreckage of the dot-com bubble.

Wikipedia was conceived in January 2001 and rolled out over the course of the year. Of course, with no apparent revenue model, it's somewhat, um, recession-proof. But it did spawn a plethora of revenue-generating open-source media.

Tech picks up
In October 2001, only 42 days after Sept. 11, Steve Jobs unveiled the first iPod. It wasn't an instant success, as compatibility issues with PCs led to one of the highest post-holiday return rates in consumer-electronics history, said Rob Enderle, principal of the Enderle Group. But by 2002, it was still well on its way to reinventing portable media and music.

Indeed, recessions have been salad days for technology. Just about 20 years earlier, during another recession in August 1981, Apple's nemesis, the IBM personal computer, ushered in a new era in home and business computing. Arguably, the productivity and information revolutions it helped spawn did much to make subsequent recessions shorter and expansions longer.

OK, that's technology. As everyone knows, recessions kill other sectors, such as automotive. Right?

Wrong. The mid-1970s recession, spawned by the first energy crisis, produced an entire new segment of imported fuel-efficient cars in the U.S. During a recession in 1981, Lee Iacocca turned around Chrysler through the launch of fuel-efficient K-Cars (albeit backed by government loan guarantees).

And in 1991, in part because the recession lowered fuel prices, sales of SUVs rose 55% to more than 1 million units. SUV sales kept rising at a double-digit compound annual pace for a decade, quadrupling to 4.2 million by 2002.

Here come the hybrids
Ironically, of course, that contributed to rising gas prices today and current double-digit declines in SUV sales. It's not obvious how a combination of declining consumer spending, tighter debt standards and rising fuel prices could spawn a new automotive segment this time, though hybrids and super-efficient vehicles are an obvious guess.

Recessions also have been fertile ground for some retail chains. Home Depot opened its first two stores near Atlanta just before a recession in 1979. But it expanded the concept rapidly as the economy headed south, going public in 1981 and using the proceeds to build 100 stores by 1989.

On the brink of the early-1990s recession, corporate raider Robert Campeau took Federated Department Stores in a leveraged buyout and quickly shed its Gold Circle and Richway high-end discount chains in 1989. Rival Dayton Hudson bought many of the units, which it used to push its similarly styled Target into new territory during the 1990-91 recession.

Wal-Mart Stores used the opportunity to charge into markets Gold Circle had vacated in the Midwest. And Wal-Mart's ruthless efficiency, merchandising savvy and value-conscious consumers made the early 1990s the fastest-growing period in the retailer's history, with same-store sales up 10% to 11% each year from 1990 to 1992.

A decade later, the 2001 recession similarly helped fuel the national expansion of Wal-Mart rivals Dollar General and Family Dollar.

Hard times have spawned seminal innovation even for the finance industry. Charles Schwab founded his discount brokerage during a recession in 1974. The first interest-bearing (negotiable order of withdrawal) accounts launched in 1972 and spread rapidly in Massachusetts during the same recession. They won nationwide authorization during another recession in 1981.

That same recession's high interest rates spawned legislation authorizing adjustable-rate mortgages nationally in 1982. Of course, those helped spawn the current mess -- and a new opportunity for yet-unnamed financial instruments to help fix it.

While consumer staples might seem immune to business cycles, the reality is that the recessions of the early 1980s brought on the generics craze, and another in the early 1990s brought another surge in private labels and helped spark a rolling series of restructurings of such giants as Kraft Foods and P&G throughout the decade.

Yet recessions also have spawned launches of highly successful and pricey new brands, such as Kimberly-Clark Corp.'s Pull-Ups training pants in the early 1990s. It was probably the biggest risk K-C had ever taken, said former Chairman-CEO Wayne Sanders in a 2002 interview. It was also one that rival P&G considered, rejected as too small an opportunity, then later regretted not taking, Chairman-CEO A.G. Lafley has said.

Huge risks, rewards
But the last recession, under Mr. Lafley, spawned two of the most expensive products in P&G's history: Crest Whitestrips and Swiffer WetJet, both launched nationally in 2001 at prices near $50. And though both brands ultimately cut prices by half or more to expand their market or meet competitive threats, they still established new, high-margin categories they still dominate.

WetJet launched less than three weeks after Sept. 11, recalled Maurice Coffey, a P&G marketing director who led the launch as a brand manager, in a 2006 interview. "Quite amazingly," he said, "we were on track come January on our sales numbers." He credited extensive prelaunch buzz and the product's inherent appeal with helping it overcome the economic headwinds.

Amid an economy still reeling from that recession, Unilever launched Axe body spray in 2002, establishing a new category priced about 50% above existing deodorant sticks. The recession "made the stakes higher," said David Rubin, brand manager on the U.S. launch and now director of U.S. hair-care marketing for Unilever. "Consumers are forced to make tougher choices when the economy is bad, and the role of marketing just gets amplified."

Following a better-than-expected year in 2001, the U.S. business got a waiver on profit requirements from London to allow for an expensive launch expected to take three years to pay out, said Charles Strauss, who was president of the North American home and personal-care business at the time. Ultimately, the economy didn't factor into the launch decision, he said, and Axe came in ahead of Unilever's sales and profit forecasts regardless.

Charging ahead
Marketers should draw lessons from such examples of charging ahead despite recession, said Ed Rensi, former CEO of McDonald's USA through the early 1990s recession; he's now a motivational speaker, Nascar team owner and director of several companies.

Unfortunately, he said, companies usually do just the opposite. They cut staff, which he said leaves those left behind overworked and risk-averse. And they cut marketing, which props up profits short term but erodes market share down the road.

In his case, McDonald's lost market share in the early 1990s, in part to Taco Bell, which gained share with national advertising of its value menu (see story, P.1). But by continuing to invest in new stores and remodels through the period, Mr. Rensi said, McDonald's came out stronger -- and in a position where it didn't have to rely on discounting to build business.

Likewise, he said, McDonald's focus on new products and customer experience over discounts will continue to pay off.

"My response has always been that when you go through periods of stress, that's when you really have to go after top-notch, high-quality people," he said, "and really go out and market like crazy."

Did Taco Bell Sell Itself Short? An Argument Against Price Cutting

The decision to nationally advertise its under-a-buck value menu was hailed as a brilliant stroke by Taco Bell during the recession of the early 1990s -- a defining moment that allowed it to pry share from McDonald's. But a former McDonald's CEO maintains that the short-term gain forever doomed Taco Bell's long-term prospects.

Ed Rensi, who helmed McDonald's USA at the time and through 1998, said he believes his competitor's value menu ultimately proved to be a big mistake. Though he said he wasn't paying much attention to what Taco Bell was doing at the time, in retrospect, he said he believes national advertising of Taco Bell's value menu helped etch the image of the chain indelibly as a marketer of cheap food.

"Discounting as a tactic that's event-driven is one thing," he said. "Discounting as a strategy is something else. It's a very bad idea, because it cheapens your product and your brand."

In fact, he said the way the chains responded to that recession played a role in why McDonald's has sales per unit today of around $2 million vs. $1.2 million for Taco Bell.

McDonald's, of course, had its own flirtation with value menus after Mr. Rensi left in 1998, and still offers one today. But he believes part of the company's turnaround since has been from focusing instead on new products and improving the customer experience.

"There was a lot of criticism of McDonald's in the late 1980s and early 1990s for remodeling their restaurants and building so many," Mr. Rensi said. "But that period of stress, when we remodeled and built so many restaurants, put McDonald's in the position it's in today."

A former Taco Bell executive who worked on the chain's marketing during the early 1990s said the company's gains came from two factors: its 59-79-99 (cent) value menu and that for the first time the chain went from being a spot advertiser in about 150 markets to buying national media more efficiently. But the executive, who spoke not for attribution because she still works in the industry, acknowledged that today a value-menu strategy probably won't accomplish much, in large part because so many others follow suit with value offerings.

Nevertheless, she believes quick-service restaurants of all sorts will gain ground in the current downturn, likely at the expense of casual family restaurants such as Chili's and Applebee's.

Tips for surviving in tough times

  • Don't cut that budget: Recessions offer what may be unprecedented opportunities to market in an environment of relatively less noise as others cut back. And, particularly in industries with high ad-to-sales ratios, such as package goods, analysts have become fairly adept at flagging earnings gains that stem from marketing cuts, which can portend slower sales and earnings growth later.

  • Maintain or increase strong launches: Even in the deepest recessions, things that truly appeal to consumers, be they soap operas, CNN or disposable training pants, still flourished.

  • Beware that discounting can be addictive: Unless the price reduction is truly strategic -- e.g., a discount retailer or brokerage or a one-time event to drive traffic -- you could live to regret it.

  • Go with the flow: Some of the most successful recession-era launches were natural offshoots of the conditions created by or causing the crisis, i.e. high gas prices spawning fuel-efficient cars, interestbearing checking accounts that sprang from high interest rates in the 1970s and '80s, or declining gas prices and gas-guzzling SUVs.

  • You can't go wrong with diversion: Media, entertainment and other forms of cheap frivolity can be the bread-and-circus salve for hard times -- from the soap operas of the 1930s to MTV in the 1980s to the iPod and Axe body spray in 2002.
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