Staying the course

‘Don’t waste a crisis’ is one of the mottos of the current US administration as it provides leadership and instills confidence and trust in American consumers through difficult times. Going back 80 years or so, during the time of the Great Depression, the American administration spoke then in the form of President Franklin Roosevelt who famously said “We have nothing to fear but fear itself”.

Because of a lack of trust in the future, consumers are holding back on spending. But even if their rate of spending is declining, they continue to buy things. And they continue to buy things that make them feel good. There will always be a hard-core of aspirational shoppers for whom a return to conspicuous consumption is a badge of personal success and self-worth. There will also be some who are prepared to pay a little more to ensure that their food is organic, locally-produced and environmentally sound. Others may be currently saving or ‘trading down’, but they are still prepared to save for ‘treats’ as compensation.

In other words, consumers still need to consume and marketers still need to market. Marketers should respond to this need by getting out in front of customers and prospects with messages that reinforce their brand’s equity and value. As AG Lafley, CEO of Procter & Gamble until June of this year, said: “We want to help consumers be certain they’re making smart choices when every dollar they earn counts.”

Opportunities and threats

There’s plenty of evidence to support the view that the current downturn offers companies opportunities and threatens those organisations that don’t react. In the past, many successful companies have maximised their value by maintaining their marketing and advertising investment when the economy slowed down and competitors cut back in their marketing activity. To quote Lafley once again, “We have a philosophy and a strategy. When times are tough, you build share.”

There are many very famous brands that launched during a recession: GE during the panic of 1873; Disney during the slowdown of 1923–24; HP was founded during the Great Depression of the 1930s; Microsoft during the crisis in 1975; and the iPod during the dotcom bubble burst of 2001. There are also many famous examples of companies that gained significant market share by investing in brands during a downturn. In the 1930s, for example, Kellogg’s maintained its marketing spend while its significant competitor Post did not. Kellogg’s then dominated the cereal market from that time forward. More recently, in the recession of the early Nineties, Barclaycard doubled its adspend while Access halved its budget. Barclaycard saw advertising awareness almost triple; Access’s awareness halved and Barclaycard seized significant market share (+10pc) from Access. But is there any documented evidence to support a case for anyone who sees a downturn as an opportunity to steal a march on competitors?

How marketing activity impacts on customer value

A study of a section of the PIMS (Profit in Marketing Strategy) database (200+ companies operating in branded consumer products in Europe) revealed that there is a direct correlation between advertising and perceived quality. And perceived quality drove customer value. Chart 1 shows that brands that invest to produce a share-of-voice over and above their share-of-market outperform the competition. It is not a case of how much you spend but of how much you outspend your competitors.

How marketing activity impacts positively on share price

Research from Corporate Branding in Connecticut shows that advertising has an impact on a company’s share price because corporate image has a direct influence on 5pc of the variation in stock price and an indirect influence on 70pc of other factors explaining stock price. It also reveals that advertising is the single biggest contributor to image. See Chart 2.

The long-term effects of marketing activity

There is strong evidence that brands that maintain their marketing budgets during a recession come out stronger and with bigger gains than those that have cut expenditure. And the evidence backs up the belief that these brands continue to benefit competitively for two or three years after the recession is over.

Chart 3 shows that, during a downturn, brands that stopped spending in year one lost significant sales and didn’t recover their sales levels for a two- or three-year period. By reducing marketing spend, brands in the study were left in a less competitive position when the economy recovered.

How share-of-voice wins market share

There is never a better time to build your brand and buy share-of-voice than during a downturn. It presents an ideal time to gain market share at a faster rate than in an expansion. During a downturn, there is a double-whammy effect, which makes buying significant share-of-voice easier. Not only are media costs falling but so are levels of competitor spending. This allows companies to steal a march on their competitors and take market share that competitors may find very expensive to buy back when the economy recovers.

Media costs in Ireland fell sharply this year and it is likely that there will be further deflation in 2010, albeit at relatively modest levels. Chart 4 shows the reduced cost of reaching the main audience demographics on RTÉ television in 2009.

The IPA (Institute of Practitioners in Advertising) in the UK has recently conducted very detailed research into the effect of share-of-voice on market share using the IPA databank and Nielsen. The critical metric that was measured was the excess share-of-voice – in other words, share-of-voice minus share-of-market (ie if brand x had a 25pc share-of-voice and a 20pc share-of-market, it would have an excess share-of-voice of 5pc).

The research found that share-of-voice in excess of market share delivers growth. For an average campaign for an FMCG brand, each 10 points of excess share-of-voice will deliver 0.5pc market-share growth per year. That is to say that a brand with a market share of 20.5pc with an excess share-of-voice of 10pc points would grow over a year to 21pc market share. Significant differences do exist across categories and brands, but there are certain factors that drive the level of market share growth year-on-year. On average, FMCG brand leaders deliver higher growth as do brands in younger categories (see Chart 5).

Overall, competing in a downturn is like running a race. A smart frontrunner will seize the lead and work to increase it while others are flagging. If the other runners allow the gap to widen, it will be really tough for them to regain the lost ground when the pace picks up again. With significant reduced media costs and competitive spending low, a downturn offers advertisers the potential to gain significant share of voice ahead of the competition, which can lead to market share gains. As Steve McKee, consultant and author of When Growth Stalls, said, “Marketing is muscle, not fat. Be careful about cutting it.”

Ciaran Cunningham is CEO of Carat Ireland.

This article first appeared in Marketing Age magazine