When all around is cutting back...

Mike Rayner

27th January 2009

Cynics would respond, with good reason, that it would hardly be in their best interests to argue anything else.

Both sides need to be aware, however, that a series of independent reports (compiled recently by the Financial Times) from the most respected names in market analysis has demonstrated beyond any reasonable doubt that those companies who maintain marketing spend - or even increase it - during recessionary times, perform dramatically better in the mid-to long-term than those who reduce it.

In a way, the logic behind these findings is simply common sense. Most companies, most of the time, invest in marketing to build market share relative to the competition. The degree to which this is successful is largely dictated by share of voice, and involves long term commitment. Ergo, when everyone around you is cutting their marketing spend and you are maintaining yours...your share of voice becomes relatively high and your brand share has a good chance of being greater when the good times return.

No pain, no gain however: clearly, marketing investment in hard times will have a negative impact on margin and profit levels at a time when these are already under pressure. What these reports confirm, though, is that for those companies who do continue to invest in marketing, the reduction in short term financial performance is typically soon outweighed by the increased revenue and profit growth when economic conditions improve.

Spend during recession? Brave, yes, of course. Irrational? Absolutely not.

Two of the most convincing reports in the FT compilation are by McKinsey and The London Business School respectively. The former studied 1000 major US companies over an 18-year period (1982-1999) which included the US recession of 1990 to 1991. McKinsey argue that because this recession was characterised by low rates of inflation and preceded by a long period of growth, it is a very appropriate point of comparison for the current global slowdown.

In the report, McKinsey identify a group of companies which 'made strategic decisions that defied conventional logic'. During the recession, these companies maintained investment levels not just in marketing but in all key areas - deal making, R & D, advertising - arguing that tough times required greater effort and offered greater opportunity. Following that logic, many of them, perversely, had spent less in the above areas (relative to the competition) in the more benign market before the slowdown. McKinsey demonstrate that these 'counterintuitive, challenger companies' with their 'contrarian approach to operating expenses' improved their overall commercial performance by no less than 17.4% relative to all industry averages between 1989 and 1992.

Less surprisingly, those market leaders who had maintained spend over the same period were shown to have extended their lead over their immediate challengers: whereas those who had cut back had lost share to their competitive challengers.

Similarly, Analyst Tony Hillier has looked at the marketing and financial records of 1,000 companies held in the PIMS database, and classified them depending on whether their marketing spend had increased, decreased or remained stable during recession. His findings are all but irrefutable, as well as beautifully symmetrical: when the economy recovered, on average, those which had reduced their marketing spend experienced a small fall in profits. Those which had maintained their spend experienced a small increase. But those which had increased their spend in the recession logged a substantial increase in profits during the economic recovery.

Closer to home, Professor Patrick Barwise of the London Business School has conducted a wide-ranging review of the impact of different advertising strategies in recessionary times. He makes the obvious but important point that marketing - and advertising in particular - are substantially cheaper in recessionary periods. Given that fact and all the above, he argues, it is self-evidently more cost-effective to attempt to build share during a downturn, than in economic high times.

So how best to behave in these deplorable times? Professor Barwick advocates three positive strategies:

1. Look for new creative, targeting or media opportunities. Markets - and people - change their behaviour when times get tough: and this can mean new options and new opportunities.

2. Take the opportunity to strengthen your market position when your weaker rivals will probably throttle back.

3. Keep going. It is much cheaper to maintain or grow share of mind during a recession, than it is to rebuild it later.

In summary: all the independent evidence suggests that to make dramatic cutbacks in marketing spend during a recession is really not the commercially sound decision it first appears. At the very least, those companies which do so should hope against hope that their nearest competitors have not learnt the lessons of recent history.