Marketing Intelligence

1
Marketing in an economic downturn Perception
vs. Reality
Marketing Intelligence The fuel of an idea
company
2
Whats inside.
Page
3
Introduction.
The business cycle A recession is defined as a
period during which GNP falls for two consecutive
quarters. Its start is the peak of the preceding
expansion, and it lasts until the economy reaches
its trough, the lowest point reached by GNP in
each business cycle. A recession is a natural
part of the U.S. business cycle, which consists
of peak, trough, recovery, and expansion. The
business cycle usually lasts three to four years
with the expansion phase longer than the period
of recession. On average, a recession lasts about
a year. A recession is not an unexpected
occurrence it is a natural response to periods
of expansion. During expansion, consumers and
corporations borrow money. During this period,
the demand for credit causes interest rates to
rise. Rising demand can lead to higher prices for
goods and services. Real estate prices escalate,
and inflation may result. All of this leads to
too much debt--consumers no longer want to
borrow. This causes a reduction in spending that
leads to business cutbacks, and a reversal of the
expansion begins. When both consumer and
business spending and borrowing decline,
production and income fall. If a contraction of
the economy begins, the economy recedes. If the
contraction lasts long enough (falling GNP for
two consecutive quarters), it is labeled a
recession. The good news about recessions is that
they eventually end. When consumer confidence
returns, the economy begins the cycle all over
again.
4
U.S. consumer concerns
The U.S. economy has been in a slowdown since the
4th quarter 2007. A recent consumer poll shows
that the number one issued on the minds of
Americans, by far, is the economy. From an
advertising and marketing industry standpoint,
two key questions are What impact does a down
economy have on advertisers? And How should
marketers behave during a recession?
U.S. consumers biggest concern over the next six
months
Source Nielsen Global Online Consumer Survey,
conducted April 2008, released 6/2/08
5
Comparing U.S. recessions.
Recessions occur periodically (at least once a
decade for the last 200 years in the United
States). And every recession is fundamentally
different. It isnt a question of whether they
will happen but when. On average, the ten
recessions since World War II have lasted an
average of 10 months. However, economic activity
usually continues to be below normal for a part
of a recovery. The good news is contractions
dont last as long as they seem and expansions
(the period from trough to subsequent peak) last
an average of 52 months. A closer look at the
historical record reveals that many of the
purported differences between this recession and
other recessions turn out to be not so different
after all. There is a temptation on the part of
the financial press to exploit this situation
with lurid headlines about how this downturn
could rival the great downturn of 1929-1933.
Q108 0.9 Q208 1.8 Q308 -3.0
Headed to 8 by some estimates
6
Similarities in stock market behavior.
Stock market behavior around recessions.
The stock market behaves differently around each
recession, but there are some notable
similarities. Of the 10 recessions weve endured
since the end of WWII, seven have been
accompanied by bear markets, while the other
three have brought less-severe, but still
double-digit corrections. 2008 looks like another
bear.

• Recession Bear Market/
• Dates Correction
• 1948-49 -21
• 1953-54 -15
• 1957-58 -22
• 1960-61 -14
• 1969-70 -36
• 1973-75 -48
• -17
• 1981-82 -27
• 1990-91 -20
• -49
• 2008 YTD -36

Bear Market 20 or more drop in SP
500 Correction 10 to 20 drop in SP 500
7
Market pattern consistencies.
SP 500 performance pattern around recessions
There is a lot of historical consistency in terms
of the pattern of returns for the market around
recessions. As you can see in the chart to the
right, which combines all of the 10 prior
recessions into a single average line, the market
typically peaked about seven months before the
recession began, but bottomed quite decisively by
about six months into (or 60 of the way through)
the recession, with an average peak-to-trough
decline of just under 25.
SP 500 performance following recession lows
YTD, the SP 500 is currently down 36. In almost
all of these cases, the stock market headed down
in advance of the onset of a recession and
rebounded ahead of the recessions end. This
makes sense when you remember that the stock
market is a forward-looking device. But this also
means that even if we are in for many more months
of sour economic news, we may not have to endure
as many months of falling stock prices.
8
Media spending lags GDP.
In 2007, media spending was down .7, and
advertisings growth rate significantly lagged
behind Nominal GDPs (a gross domestic product
figure that has not been adjusted for inflation
also known as current dollar GDP). The same
trend is projected for 2008, although both rates
should more closely mirror each other. Yet, in
the last Olympic and Presidential year (2004), ad
spending growth outpaced NGDP, which is a
negative sign for this year. Put another way,
U.S. advertising as a percentage of GDP was only
2.0 in 2007, the lowest level
Source Robert Coen Presentation On Advertising
Expenditures, July 2008).
since 1981 (a recession year), and is projected
to decline to 1.97 in 2008. This is a decrease
of 7 vs. 2006 and 13 vs. 2004. This indicates
that marketers are putting the brakes on spending
even faster than consumers are, possibly out of
the anticipation consumers will be. This is an
opportunity for savvy marketers to attempt to
maintain ad spending and capitalize on increased
market share.
9
Recessions impact on media spending.

• Overall ad spending declined during the past two
  recessions (1990/1991 and 2001). Prior to that,
• however, it held steady or grew during such
  periods.
• Spending fell 1.6 from 1990 to 1991 and 5.1
  from 2000 to 2001
• The previous eight recessions dating back to
  WWII had either flat or increased spending
  (source Ad Age)
• Yet, even though historically there is ad
  spending growth during recessions, it is usually
  weaker than during expansion periods. From
  1960-2007, ad spending increased an average of
  7.9 in non-recession years, compared to 4.8 in
  years where a recession occurred.

10
Marketing budgets flat to decreasing.
A pair of recent studies indicates clients are
prepared to cut spending. More than
three-quarters of the 202 U.S. marketing
executives polled in April 2008 said the economy
has moderately to greatly affected their
companies in the past six months, and 77 of
nearly 100 global CMOs anticipate their budgets
will be flat or shrink this year. (sources
Reardon Smith Whittaker and Forrester Research).
Q. Could you please share with us how a possible
economic slowdown would impact your 2008 budgets?
Leaders expecting decrease represents 5.035
billion in marketing budgets
Leaders expecting increases represent 55 million
in marketing budgets
Source Forrester Research Feb 2008 Global
Marketing Leaders Online Survey
Across the board, marketers expect to cut budgets
by 3. Almost all market leaders expect to get
away with modest budget decreases or increases
between -10 and 10. A closer analysis of the
survey responses shows that the bullish marketers
control only a fraction of the budgets that their
bearish peers have an aggregate 55 million
versus 5 billion. This means that the largest
advertisers are anticipating the largest cuts,
resulting in an expected 3 average marketing
spending decline in an economic downturn.
11
Branding, advertising, and traditional media are
on the cutting board.
Branding, advertising, and traditional media are
on the cutting board. Two out of three of the
bearish executives said they would cut line item
branding and advertising, and more than half
would also cut traditional media spending. Most
of the bullish marketers say that they will shift
their extra funds to branding and advertising,
but since these optimists control small budgets,
they wont make up for the anticipated decline by
their pessimistic peers.
Q. Could you please share with us the three
elements of your marketing budgets you expect to
be affected the most?
Bullish
Bearish
12
Internal challenges.

• According to a June 30, 2008 American Marketing
  Association (AMA) survey
• Many marketers feel their greatest internal
  challenge is demonstrating the value of marketing
  when sales are decreasing.
• Other top internal issues include realigning
  marketing strategies to match business objectives
  and focusing on longer-term brand strategies.

Q. Which of the following is your greatest
internal challenge during periods of economic
downturn?
13
Biggest mistake halt or reduce spending.

• According to a June 30, 2008 American Marketing
  Association (AMA) survey
• 60 of AMA member marketers believe that
  halting or reducing spending on key marketing
  programs is the biggest mistake marketers can
  make in an economic downturn. Marketers also
  report that focusing on short-term tactics and
  sticking to the status quo are some additional
  missteps marketers make.

Q. Which of the following is the biggest mistake
marketers make during an economic downturn?
14
Shifting dollars from traditional media.
In times of economic downturns, marketers often
shift budgets to more accountable media where
results can be more immediately and easily
quantified and optimized, such as Direct
Response, including Interactive. Multiple surveys
and forecasts show that marketers plan to
increase online spending in the current economy,
at the expense of traditional advertising
That which get measured, gets managed

• A recent survey of senior marketing executives
  conducted by PR Week and Manning, Selvage Lee
  found that 75 planned increase online and new
  media spending over the next year. Only 4 said
  digital budgets would decrease. Conversely, 20
  forecast a decrease in other major marketing
  disciplines, with only 33 anticipating an
  increase
• Jupiter Research is forecasting online spending
  to grow at the expense of offline media this
  year, specifically, by drawing dollars from print
  and TV budgets. The company reasons that online
  is probably better insulated from these problems
  than other media, because so much of what happens
  online is direct response, and generates direct
  revenues for the advertisers.
• According to Marketing Sherpa a marketing
  research tracking firm, 38 of marketers expect
  to increase their online ad spending during this
  period, while 36 expect to decrease their
  traditional media outlay.

15
Issues and opportunities.
The question of advertising during a recession is
one that has been asked many times over many
years. The answer to the question is that
advertising during a recession provides a unique
window of opportunity for investment purposes to
Build equity Solidify your customer
base Gain new customers and
u
u
u
Make inroads on your competitors who have cut
their advertising during the recession period.
This window of opportunity is created by the
understanding that advertising is an investment,
not an expense.
u
16
Excuses for not advertising.

• The three most commonly mentioned excuses for not
  advertising during a recession are
• People do not have money, so our advertising
  would be wasted
• We can afford to slash our ad budget, since
  competitors are doing the same and
• The money saved on advertising helps us pay
  dividends to stockholders.

Rebuttal 1 People do not have the money, so
our advertising would be wasted. Studies of
every recession since 1940 indicate that
recessions have little adverse impact on total
employment (the size of the employed labor force
has never declined by more than 3 percent) and,
similarly, little adverse impact on disposable
income. (Real disposable personal income per
capita has never declined by more than 2
percent.) The pessimism among advertisers is
mainly myth, hardly warranted by facts. Because
families start curtailing their purchases during
a recession, not less but more advertising is
required to prevent consumption from
eroding-particularly since both employment and
income are holding up reasonably well. Rebuttal
2 We can afford to slash, since competitors
are doing the same. Equally fallacious is the
rationale that a company can afford reducing its
advertising spending because everybody else is
cutting back. Rather than waiting for business to
return to normal, top executives should cash in
on the opportunity that the rival companies are
creating for them. The company courageous enough
to stay in and fight when everyone else is
playing safe can bring about a dramatic
improvement in market position. Some progressive
companies have recognized this. Instead of
withdrawing into their shells and waiting for
something to happen, they expand their programs
during slowdowns. As a result, they better
position themselves to benefit when the eventual
upturn occurs.
17
Excuses for not advertising.
Rebuttal 3 The money saved on advertising
helps us to pay dividends to stockholders. Even
more tenuous is the third argument - that
advertising should be cut in order to release
funds for dividends. Attempting to regain a
favorable position lost during a recession costs
more in the long run than to retain it by
continuing to advertise. There is likely to be a
fast erosion of the consumer franchise that the
advertiser has taken years, even decades, to
build. It is near impossible to regain the old
customers once they have adopted competitive
brands. And, of course, firms can more readily
explain a drop in dividends if the money was used
as an investment to protect market share.
18
Guidelines for navigating through a recession.
Multiple studies have confirmed that the best
strategy in terms of long-term ROI is to increase
marketing expenditure during an economic
downturn. If a brand cannot increase or even
maintain spending, it should attempt to at least
maintain Share Of Voice (SOV) relative to other
competitors. SOV is defined as a brands
percentage of advertising weight compared to its
defined market segment. A brands SOV will
automatically increase if its competition cuts
spending, so long as the brand at least maintains
it. Businesses stand to gain more during
downturns than in good times, when a majority of
advertisers are increasing spending. While in the
short term, cuts can be made with little to no
loss in market share these cuts often create long
term problems that are difficult to fix once the
recession has ended. (source Millward Brown
Marketing During Recession May 2008 and April
2008).
If history is a guide, economic prosperity will
eventually return. It is important for companies
to remember that and to maintain, or if possible
even increase, their marketing efforts during
this period. By doing so, they will be poised to
capitalize on the market share losses of
competitors who dont. Remember your gain is
their loss.
19
Studies proving the importance of continued
spending.
One might feel that the results of these studies
are self-serving for the advertising industry,
but remember, these studies were not conducted by
ad agencies. The studies were conducted by
economists, business security analysts,
academicians and others who place severe
intellectual and professional constraints on
investigations.
One such study showed that increased ad spending
during a recession not only works, but also
contributes to financial performance for up to
three years in the future, after a recessionary
period has ended. Conversely, cutting
advertising during a downturn had adverse long
term affects for up to 3 years after the
recession has ended, even if that brand returned
to its pre-recession spending the year after the
cut. A 50 cut in spending for one year resulted
in a decrease in sales for that year and the year
after. A complete stoppage of advertising
resulted in a period of 3 to 4 years of decreased
sales versus where the brand would have been had
its ad budgets been maintained. For the company
to recapture prerecession sales levels within a
year requires spending 60 more money than the
amount saved by cutting the ad budget in the
first place.
1.
Source Paul Dyson, D2D Limited (independent
modeling and analysis agency, published March 2008
20
Studies proving the importance of continued
spending.
2.
In another analysis, presented by the Profit
Impact of Marketing Strategies (PIMS) in March
2008, companies that cut marketing spending
during a recession enjoyed superior return on
capital employed (known as ROCE) during this
period, yet they lost market share after the
recession had ended. Conversely, those who had
increased spending during a recession achieved
significantly higher ROCE during the recovery
period and gained an incremental 1.3 percentage
points of market share. (source Millward Brown,
May 2008)
3.
An earlier PIMS study showed that businesses who
significantly increase spending during a
recession (anywhere from 28-80) stand to gain
1.5 points of market share during a recession.
Reason being only 25 of companies in the study
displayed this level of aggressiveness, thus
their SOV increased. Interestingly, those that
decreased spending still gained two-tenths of a
point. As mentioned earlier, its not the short
term that creates problems for these businesses,
its the long term, when over 80 of marketers
increased media spending, significant market
share gain was difficult to come by, because SOV
remained constant among competitors
How media advertising expenditures affect share
of market
(source Strategic Planning Institute, Media
Advertising When Your Market Is In A Recession,
1982).
21
Studies proving the importance of continued
spending.
4.
A national brand that completely stopped
advertising in one region of the country for a
year but continued in all others lost 2 of
market share in the dark region during that
time frame. Even though it went back on air the
next year at levels consistent to the rest of the
country, its market share in the dark region
continued to lag behind the others (source
Millward Brown Managing Your Brand In A
Recession February 2008)
5.
Another classic study showed that advertisers who
maintained advertising during recessions
continued to grow sales while those who cut
advertising flat-lined or lost business.
22
Studies proving the importance of continued
spending.
6.
Advertisings Impact on the Economy Many
economist believe that it would not take
significant pressure to cause a chain reaction of
anticipatory advertising cuts that could turn
recession fears into a self-fulfilling prophecy.
Some economist theorize that all modern
recessions have been intensified and prolonged by
just such cutbacks. Instead of increasing
profits, as most companies expect, advertising
cutbacks only reduce demand. Many economist argue
that this trend has been overlooked, or at least,
underrated, and that many recessions could be
controlled by encouraging greater
advertising. Also, some economists believe that
the tax laws should be changed to offer companies
an incentive to set up contingency reserves in
good times to finance heavy advertising when the
bottom line will not permit.
7.
While ideally you should aim to maintain your ad
spend, it is possible to grow your brand with
lower budgets, provided the copy quality at least
compensates for this. In the chart to the right,
the bottom left quadrant shows brands where both
the share of voice and share of ad awareness
declined. On average, 20 percent more brands lost
share than gained. In the top right quadrant we
can see what happens when both share of voice and
share of ad awareness increased nearly a third
more grew than declined. However, the bottom
right quadrant shows that when share of ad
awareness grows, despite a drop in spend, more
brands grow than decline. (source Millward
Brown)
23
Studies proving the importance of continued
spending.
8.
An ambitious study was begun after World War II,
It was a long-term project to plot the profits of
a large group of companies through a series of
recessions. Beginning in 1947, the study
measured the annual advertising expenditures of
each company and correlated the figures with
sales trends before, during and after the
recessions of 1919 and 1954, For the recessions
of 1958 and 1961, this study included tracking
profits. Not only did sales and profits almost
invariably fall at companies that cut
advertising, but after the recession had ended,
they continued to lag behind companies that had,
maintained their ad budgets. After a period of
time, the study was then picked up by the
American Business Press (ABP), an association of
trade publications, which continued the
investigation. The ABP project has become widely
known throughout the advertising industry because
of its analysis of the severe 1973 to 1975
recession. Relying on questionnaires submitted by
advertisers, the study tracked the sales and
profits growth of 173 industrial companies
between 1972 and 1977. The companies were divided
into two groups those that reduced advertising
during the recession and those that did not
reduce advertising. The study found

• Companies that reduced advertising
• Minimal sales growth in 1974
• Suffered a sales decline in 1975
• Increased sales by 70 during the five year
  period

• Companies that maintained ad budgets
• Sales suffered no slowdown during the recession
• Momentum gained by steady advertising helped
  them grow at a faster rate over the next three
  years.
• Grew 150 for the entire period

24
Rules of thumb.

• Maintain SOV
• If a brand cannot increase or even maintain
  spending, it should attempt to maintain SOV
  relative to other competitors. Thus, it is
  important to keep an eye on historical
  competitive media activity levels to determine
  what moves they will make during a recessionary
  period. Is their track record during past
  downturns to cut spending? Do they have strong
  financials? If so, they may be in a position to
  maintain or even increase spending during a
  recession.
• No more Mr. Nice Guy
• If your company is well funded and confident,
  then a simple argument applies. In tough times,
  everyone loses but not in proportion to size.
  Suppose your opponent weighs in at 100 lbs, but
  you are 120 lbs. a 20 advantage. Then come the
  downturn and knocks 20 off everyone. You may be
  down to 100, but your opponent is now at 80 and
  you have an increased advantage, at 25. This is
  the opportunity for aggression. More directly,
  the message is that the strong become relatively
  stronger and this is the time to use your
  strength.
• Look at a recession as an opportunity to deliver
  the death blow to some marginal players. Were
  not playing softball here.
• Support stronger brands
• If a company does need to cut spending and has
  multiple brands in its portfolio, it is better to
  maintain advertising levels on stronger brands
  and cut back completely or significantly on
  weaker brands than it is to make cuts across the
  board, thereby weakening all brands.

25
Rules of thumb.

• Reinforce brands perceived value
• It is also important to reinforce a brands
  perceived value during a recession, because if
  that can be established, consumers will seek out
  ways to purchase their preferred brand, (unless
  they simply cannot afford to purchase it).
  Perceived quality is closely related to the ratio
  between a brands share of voice (SOV) and its
  share of market (SOM). On average, only 10 of
  consumers in a category are motivated exclusively
  by price. Even if that doubles during a
  recession, the impact of price-driven consumers
  will still be relatively small. Consumers are
  more likely to purchase a known and trusted brand
  than a cheap one (provided price is within an
  acceptable range), and that level of trust is
  maintained via continued advertising support, via
  focusing on functional advantages of the product.
  
• In addition, during a recession, advertised
  brands may appear to consumers as safer, more
• aspirational choices.
• Dont cut the price/discount
• If your brand is strong, resist the temptation to
  cut prices, even if it carries a price premium.
  Instead, focus on the value your product provides
  for the money you charge. Consumers who are
  forced to switch to a cheaper brand are likely to
  come back once times get better. However, it is
  difficult to regain a price premium once a cut is
  made. Also, resist the temptation to cut back on
  quality of products/services in an attempt to
  save money. A product or service that delivers
  exceptional performance will keep people coming
  back.
• Whether times are good or bad, discounting your
  price discounts your product in the eyes of your
  customers.
• If you need to make your products more affordable
  (to generate volume, goodwill, or both) do so
  carefully and deliberately. But lower the price
  instead of offering a discount.

26
Rules of thumb.

• Cautiously use price promotions
• If it is necessary to use price promotions to
  drive or maintain market share during a down
  economy (i.e. to respond to a competitor who has
  cut price), use them strategically and
  judiciously, as they can damage the brand
  long-term by reducing its perceived value. It is
  best to avoid responding to such a cut with one
  of your own. For example, as the result of a
  price war in an OTC category in the UK, brand
  equity declined, with only 55 of consumers
  holding a strong affinity for any one brand
  afterwards. Prior to the price battle, 81 had a
  brand preference.
• Shift emphasis
• Research indicates that during recessions,
  advances in sales can be made by shifting
  emphasis within advertising executions.
  Advertisements during a recession tend to stress
  quality and value, as well as new uses for old
  brands. This is primarily driven by the fact that
  commercials and advertising in general need to
  reflect the current consumer mentality.
• Reevaluate media mix
• Additionally, brands can reevaluate their media
  mix to seek ways to improve efficiencies (i.e. by
  moving to cheaper TV dayparts or shifting from
  expensive media to less expensive). However, in
  doing this it is critical to consider the
  potential negative impact from moving out a
  medium/daypart which more effectively reaches
  your target from a media consumption standpoint,
  just to save on CPM efficiencies. During
  recessions, media costs are likely to decrease,
  thereby making it more efficient to
  maintain/increase SOV.

27
Rules of thumb.

• Trim fat, not muscle
• Economies go through cycles of expansion and
  contraction. Its what we all learned in college
  economics courses. The trouble is, while
  academics can pontificate on the cyclical
  economy, real business people have to live
  through difficult economic events. We love the
  expansion times, but the contractions can be
  painful. During the economic contractions you
  make have to make some cuts. Just be careful to
  trim fat and avoid cutting muscle as much as
  possible. Remember marketing is muscle, not fat.
• Just as the savviest investors view down markets
  as a time to buy when everybody else is selling,
  the savviest marketers know recessions are a
  great time to pick up market share. They
  understand that by maintaining their budgets (or
  even increasing them) they may not come out ahead
  during the down times, but they can pick up
  market share that will pay off in the long run.
  Marketing dollars in a recession are like oxygen
  on Mt. Everestthe less there is in the
  surrounding environment, the more valuable the
  amount you possess becomes. Cutting your
  marketing spending is a sure way to give ground
  to competitors who may be more aggressive during
  the downturn.
• Smart companies are careful about how and where
  they cut back, so they dont sacrifice the future
  on the altar of the present.

Recessions are selective Recessions impact some
industries, products and regions of the country
hard and bypass others entirely. Among the
industries and products most affected are
automobiles, home furnishings, large appliances,
travel and airlines, convenience foods, aluminum,
steel, petrochemicals and synthetic fibers.
Relatively unaffected are liquor and wine,
tobacco, small appliances, packaged goods,
computer and service industries.