Sources: By Burt Helm (Business Week)
Every time a recession threatens, executives glare at the balance sheet and wonder aloud about one particular expense: brand building. Trimming the marketing budget can seem eminently sensible. After all, doing so won't hurt product quality or, most likely, next week's sales. As the business climate has worsened in recent months, a number of blue-chip companies have announced plans to cut marketing costs, including Coca-Cola (K) and Visa. U.S. automakers have already done so. As have several hard-hit banks.
Then there are the other guys—companies that refuse to let tough times distract them from their long-term brand-building efforts. Sometimes they see a recession as the perfect moment to get a leg up on a weakened rival. Others strengthen their brands to ward off discount competitors. Still others feel they have a knockout new product that requires support. In BusinessWeek 's annual ranking of the 100 Best Global Brands, several are keeping their U.S. marketing budgets steady, as a percentage of revenue. Among them are American Express (AXP) (No. 15) and Diageo (DGE) (owner of Smirnoff, No. 89). Others are going further. Louis Vuitton (No. 16), Kellogg's (K) (No. 39), Accenture (ACN) (No. 47), and Kleenex (No. 74) are all aggressively boosting their marketing expenditures as a percentage of expected sales. "There's always pressure to cut," says Jez Frampton, chief executive of Interbrand, a brand consultancy, which for the eighth year crunched the numbers for our ranking and typically advises clients to spend harder during a recession. Consumers, he argues, "are more conscious they're spending their hard-earned money. It increases what they expect they should receive in return."
History shows that a recession can be an auspicious time to invest in a brand. Some of the most successful brand campaigns in the past six decades began during economically challenged years. Of Advertising Age's "Top 100 Ad Campaigns of the 20th Century," fully a quarter that got under way after 1945 did so during recession years. Several of the most effective were launched in the ugly years of 1974 and 1975, when consumer spending tanked and gas and commodity prices soared (sound familiar?). In 1974, for example, BMW introduced itself as "The Ultimate Driving Machine," a slogan that endures to this day and helped turn the German automaker from a niche sports sedan in the minds of American drivers into a top luxury auto brand known for superior engineering in everything from roadsters to SUVs. "I love bad times," says Martin Puris, the adman who came up with the slogan. "In good times, people are less apt to try new things. In bad times, they have to start to do things better."
Still, it requires a gutsy chief marketing officer to ask the boss to invest in something as squishy as brand-building when the economy softens. CEOs typically set marketing budgets as a percentage of expected future revenue, a number that often shrinks in a downturn. Results-hungry investors, meanwhile, want marketing money spent on activities that ring cash registers now, like promotions or coupons. Even the competition can create temptations to play it safe. Advertisers closely monitor how often their ads appear vs. the competition's. They call this their "share of voice." A pullback by a timid rival gives penny-pinchers an excuse to pull back while still preserving share and save money. And most companies succumb to the pressure. During the last two recessions, in 1991 and 2001, overall ad spending fell.
The choice is even harder in the current environment. Amid tight credit and falling housing prices, consumers are more jittery than they have been since the mid-'70s. And some economists worry consumers are only beginning to feel the real hit to their wallets.
Right now, the smooth talkers on Madison Avenue are out there telling chief marketing officers that it's smart to buy more ads during a recession. The standard argument, summed up in numerous industry-sponsored research reports, goes like this: Since everybody else is pulling back, the gutsy marketer can buy ads on the cheap, grab a larger share of consumers' attention, and subsequently, the logic goes, win greater market share. Then, when the sun comes out and the economy recovers, the brand will ride high as its newfound customers start spending again. The cowardly competition? Forlorn and forgotten.
Real life isn't so simple, of course. Many factors determine whether spending into a downturn will work, not least of which is the quality of the product and the advertising. Plus, the consumer you thought you knew, pre-recession, can be almost unrecognizable. When times get tough, people reexamine old habits and brand loyalties. Their tastes shift dramatically as they cut back. "The rate of change can be phenomenal," says John Hayes, CMO at American Express. In the past year alone, he notes, consumers have far more negative perceptions of debt and spending on themselves.
Many companies that continue to invest in their brands during a downturn are not so much going on the offensive as playing defense. AmEx is no exception. CMO Hayes says he has been "doubling down" in recent months on messages that promote trust and security.
Often a downturn ups the ante in a defensive battle companies have been fighting for years. In such cases, pulling back is a false economy. Take Kellogg's attempt to ward off cheaper private-label cereals while also raising prices to pass along rising commodity costs. In 2000 the company decided to increase its advertising spending to brand Kellogg's cereals as premium products and avoid being commoditized. And despite a mild recession in 2001, Kellogg's stayed the course. In 2007 it spent $1 billion on advertising for the first time. The strategy so far has worked. In the first six months of this year, Kellogg's was able to pass along higher ingredient costs, while many other food companies couldn't. Second-quarter profits rose 9% and sales 11%, prompting the company to boost its full-year outlook. "We believe it's critical, when the economy gets tougher, that people should be seeing the value of our brands constantly," says Mark Baynes, Kellogg's chief marketing officer. "Brands are much more than flakes in a box."
Kimberly-Clark, which owns the Kleenex brand (No. 74) as well as Huggies diapers and Scott toilet paper, is also playing defense in the U.S. Yes, people buy its products no matter how the economy is doing. But broke consumers could decide they are fine crying into store-brand tissues. To justify charging more than its rivals, Kimberly-Clark is following the usual playbook for packaged-goods companies: creating new iterations of the same product—extra-soft tissues, anyone? It's also trying to forge a more personal connection with consumers by spending heavily online and on TV. "The worst thing you can do," says CEO Tom Falk, "is pull in your brand-building spending and become more of a commodity."
Then there are the companies that go on the marketing offensive. In some cases, they are perfectly suited to hard times and simply want to remind customers that they represent good value. Wal-Mart Stores (WMT), for example, has recently upped its advertising spending and returned to selling itself as a champion of the low- and middle-income consumer. McDonald's (No. 8) won't say how much it has spent on marketing in 2008. But since its Olympics ad blowout, it has shifted its focus to bargains on $1 menu to keep U.S. sales growing.
Some companies, having reached the top, are willing to spend to stay there. Louis Vuitton (No. 16) plans to continue to boost its marketing budget, downturn or not. "We never change the long-term strategy because of short-term problems," says CEO Yves Carcelle. Louis Vuitton's aim is twofold: keeping the aspirational masses hooked on classic luggage and handbags and ensuring that fashionistas continue to see the company as edgy. Louis Vuitton has been pouring money into magazine ads and earlier this year released its first video commercial, which first ran online. The company also ran the 90-second spot—called "Where Will Life Take You?"—on CNN, the BBC, and in movie theaters worldwide. Meanwhile, Louis Vuitton has linked itself to big artists, including Takashi Murakami, with whom it sponsored a traveling exhibit. Global revenue grew 14% during the first six months of 2008.
Even underdogs can show some bite during a downturn. Amid slowing sales in the U.S., Volkswagen (No. 53) is going after a niche its Detroit rivals have pretty much left for dead: minivans. Pushing its new Routan minivan, says VW marketing manager Brian Thomas, strikes at the soft underbelly of his rivals: The Big Three have slashed ad spending on minivans, and the entire industry is running ads promoting fuel efficiency. That makes minivans a comparatively quiet niche, one in which its theoretically easier to grab consumers' attention.
Thomas expects Toyota (TM) and Honda (HMC), which sell the popular Sienna and Odyssey minivans, respectively, to keep spending steady on marketing these vehicles. But he thinks a lower price (the Routan starts at $24,700) and lighthearted commercials starring Brooke Shields will lure first-time buyers. He wouldn't let on how much the company is spending to market the Routan but says the new minivan is getting more money allotted to it than any other VW model in the U.S. "We know that this is a huge growth opportunity for the VW brand," says Thomas. "It's consistent with our overall business plan over the next 10 years." In other words: What recession?
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