Wednesday, December 16, 2009

What's Old Is New Again

In 2001, the publisher of the five-month old LUCKY magazine asked me to write a presentation addressing the question: "Why Launch a Magazine about Shopping at the Beginning of an Economic Downturn?" I gave her three answers: (1) Consumers are ready for the combined benefits of fashion magazines, catalog shopping & e-commerce, (2) Twenty something women who love to shop... love to shop! and (3) When times are good, you should advertise; when times are bad, you must advertise.

As part of the presentation, I included a line chart showing the decline of the Dow Jones from 11,600 to 9,200, which I then covered up bit by bit with expert opinions supporting the importance of maintaining marketing budgets during a recession. These were the following:

- "Companies that increase their marketing activities during the recession are more successful than companies which cut back." PIMS database of 1,000 companies.
- "Economic downturns reward the aggressive advertiser and penalize the timid one." Strategic Planning Institute
- "The most successful companies [maintain] their advertising investment when the economy slows down and weaker competitors cut back..." London Business School
- "During an economic downturn, a strong advertising/marketing effort enables a firm to solidify its customer base, take business away from less aggressive competitors, and position itself for future growth during the recovery." Coopers & Lybrand
- "Maintaining 'Share of Mind' costs much less than rebuilding it later on." American Business Model

I have always felt a sort of sympathy for car manufacturers spending millions of dollars on television advertising that was bound to get lost in the clutter of two to three automotive commercials per commercial pod (one national, one local and, more recently a second national ad separated from the first by some kind of "pod-breaker"). Personally, I found myself forwarding through automotive ads on a somewhat regular basis despite my being generally inclined to watch TV commercials. But it was a no win situation for automotive brands. While magazine publishers tried valiantly to impress upon them the value of print advertisements, car companies could not afford to take money out of TV so long as their peers were still there.

Fast forward to 2008 and 2009 and a sudden automotive silence within TV commercial pods. It was eery and a bit scary. Careful what you wish for - one might say. And then came the Super Bowl. During the game, there were two brands who dared to pony up the money for multi-million dollar spots: Hyundai and Audi. Audi, the insurgent brand that has often been willing to take risks, positioned its brand against other luxury autos through years, coming out as the only one with the performance attributes worthy of a James Bond. Hyundai, meanwhile, showed compassion for a country of would-be consumers paralyzed by their fear of losing their income. "If you lose your income, we will allow you to return your Hyundai," the announcer promised. Quite daring. Now, American Express will reimburse you (up to $300, I believe) if you break something you buy with the card or change your mind and are unable to return it. And that strategy has often given me the piece of mind that allowed for the indulgent impulse buy. But this is taking that concept to a whole new level! And rightly so. Truly brilliant, I think, to address the problem head on. To remove the roadblock on the path to purchase.

So the message was smart, but equally as important was the audacity on the part of both car companies to see this calamity as an opportunity and to finally gain the unique benefit of television advertising without getting lost in the clutter. Did it work? Yes, it did. Both Hyundai and Audi have experienced increased sales in 2009 - an achievement not to be underappreciated.

-- Originally posted May 14, 2009



A classmate who saw this entry sent me a link to a very interesting New Yorker article on the same subject. A webcast I attended yesterday made me think of both (my entry and this article):

In the late nineteen-twenties, two companies—Kellogg and Post—dominated the market for packaged cereal. It was still a relatively new market: ready-to-eat cereal had been around for decades, but Americans didn’t see it as a real alternative to oatmeal or cream of wheat until the twenties. So, when the Depression hit, no one knew what would happen to consumer demand. Post did the predictable thing: it reined in expenses and cut back on advertising. But Kellogg doubled its ad budget, moved aggressively into radio advertising, and heavily pushed its new cereal, Rice Krispies. (Snap, Crackle, and Pop first appeared in the thirties.) By 1933, even as the economy cratered, Kellogg’s profits had risen almost thirty per cent and it had become what it remains today: the industry’s dominant player.

You’d think that everyone would want to emulate Kellogg’s success, but, when hard times hit, most companies end up behaving more like Post. They hunker down, cut spending, and wait for good times to return. They make fewer acquisitions, even though prices are cheaper. They cut advertising budgets. And often they invest less in research and development. They do all this to preserve what they have. But there’s a trade-off: numerous studies have shown that companies that keep spending on acquisition, advertising, and R. & D. during recessions do significantly better than those which make big cuts. In 1927, the economist Roland Vaile found that firms that kept ad spending stable or increased it during the recession of 1921-22 saw their sales hold up significantly better than those which didn’t. A study of advertising during the 1981-82 recession found that sales at firms that increased advertising or held steady grew precipitously in the next three years, compared with only slight increases at firms that had slashed their budgets. And a McKinsey study of the 1990-91 recession found that companies that remained market leaders or became serious challengers during the downturn had increased their acquisition, R. & D., and ad budgets, while companies at the bottom of the pile had reduced them.

One way to read these studies is simply that recessions make the strong stronger and the weak weaker, since the strong can afford to keep investing while the weak have to devote all their energies to staying afloat. But although deep pockets help in a downturn, recessions nonetheless create more opportunity for challengers, not less. When everyone is advertising, for instance, it’s hard to separate yourself from the pack; when ads are scarcer, the returns on investment seem to rise. That may be why during the 1990-91 recession, according to a Bain & Company study, twice as many companies leaped from the bottom of their industries to the top as did so in the years before and after.

Chrysler’s fortunes in the Great Depression are a classic instance of this. Chrysler had been the third player in the U.S. auto industry, behind G.M. and Ford. But early in the downturn it gave a big push to a new brand—Plymouth—targeted at the low end of the market, and by 1933 it had surpassed Ford to become North America’s second-biggest automaker. On a smaller scale, Hyundai has made huge gains in market share this year, thanks to a hefty advertising budget and a guarantee to take back cars from owners who have lost their jobs. Those gains may turn out to be temporary, but in fact the benefits from recession investment are often surprisingly long-lived, with companies maintaining their gains in market share and sales well into economic recovery...

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