Big Companies Cut Back on Everything But Ad Spending in 2013. Why?
Why would major U.S. corporations keep a tight rein on almost all costs last year -- except advertising?
By continuing their firm grip on hiring and spending, U.S. corporate profits reached new highs for 2013, The Wall Street Journal reported.
Advertising expenses, at least for the top 1,000 companies, was the exception. According to Kantar Media, the biggest marketers boosted spending 3.3%, while smaller advertisers cut ad budgets 6.6%
What's going on?
Maybe companies figured it was cheaper to spend money on advertising than to invest in research and development to try to stay one step ahead of the competition. After all, such product advantages can too easily be eliminated by competitive price cuts.
But that meant advertising's job too often was to divert attention from the product itself and toward emotional and purpose-driven benefits.
As Marc de Swaan Arons, founder of consultancy Effective Brands, and leader of the Association of National Advertisers' ambitious look into the future, Marketing 2020, pointed out at the ANA conference last fall, product innovation is no longer innovative if a competitor somewhere in the world is able to introduce something that is almost as good at half the price.
If the functional benefits of competing products are the same "and in many categories we found that the functional benefits are the same, it's going to be the emotional, but also the societal benefits where people will say, 'If everything else is the same I'm going for you because you stand for what I care about."
Another benefit of increased advertising is that it helps corporations chip away at the distrust that hit the major brands after the economic meltdown of 2008.
CoreBrands founder and Chairman Jim Gregory told me that his company's latest report on the 100 top brands found that distrust is "lessening" -- but trust has been slow to recover.
"Not every company was impacted by the trend," Jim noted. "We believe these perceptions are starting to turn positive, which is contributing to the rebound of corporate brands."
While this isn't shown in the brand rankings, CoreBrands also tracks "Perceptions of Management" and Jim said those perceptions in general and on average have been in decline since 2004 when the Sarbanes- Oxley legislation "cast a shadow of untrustworthiness over business leadership in the U.S."
Jim added that "there is no doubt that bigger spending leads to greater brand power, but trust needs to be earned. That is especially true when it comes to trust of management."
Keep the pressure on
The trust issue suggests another reason to keep the ad pressure on.
If consumers understand that companies are enjoying record profits (and in many cases record stock prices), while putting a freeze on hiring, corporations might want to depict themselves as sharing the values of their customers.
It's harder to get angry at companies that stand for what their consumers care about, as Mr. Arons indicated.
The WSJ noted that many companies are "guarding their cash rather than putting it back in the economy in the form of new hiring." So another factor in the increase in ad spending might be that with fewer people in the workforce -- and on the sidelines, shopping-wise -- marketers figure they need to invest more marketing bucks to keep reaching and selling to a smaller audience of active buyers.
And one reason why companies aren't hiring is that they're putting their money into technology, which they think has a bigger impact on sales than hiring more workers.
Less is more
Some of that technology is telling them less is more.
The automobile and the airline industries are two sectors that have discovered they can make more money by having less product available.
In the days prior to the Great Recession, the auto guys would churn out more cars than consumers wanted or needed, then push the metal through the pipeline with generous rebates.
The game plan now is to build fewer cars, more in keeping with demand, and offer less cash back. The idea is to keep inventory tight even if dealers scream for more of the popular sellers.
Likewise in the airline industry the new economic mode is to fly fewer routes and charge more per ticket. And if you want to change your reservation, you're going to pay for that, too.
So if you're building fewer cars and flying to fewer places -- and making more money than ever (the airlines never even made any money to begin with) -- you obviously don't need to hire any new people.
But by all means keep spending more on advertising so customers know that your heart's in the right place.