By Gerry Khermouch
How much does advertising matter? That's the question that marketers are asking themselves as the worldwide economy slows and budgets tighten. When times are good, the corporate commitment to long-range brand-building knows few bounds. But when profits drop, the ad budgets become an irresistible target for the budget-slashers.
It's dangerous, though, to give in to that temptation. "People who starve their brands now will be paying for it in the future," warns Kevin Lane Keller, marketing professor at Dartmouth University's Amos Tuck School of Business. After all, in an era of wide consumer choice among roughly comparable products, marketers have learned to think of their brands not so much as a list of features or a logo or an advertising tag line but as a relationship with the consumer. And just as one's friendships need to be kept in good repair, customer relationships can be maintained only through consistency. The marketing budget pays for much of that needed face time.
So what's the ad-spending outlook like this time? Certainly, ad agencies and media sales staffs have been doing their best to remind advertisers that history has a way of repeating itself. They point to the last downturn, in the early 1990s, when private-label products leaped to prominence while packaged-goods marketers slashed their budgets. And while it's not definitive, some research suggests that the best way to gain share is to sustain your spending during a downturn as your rivals are cutting back. That's how cereal maker Kellogg (K) leapfrogged C.W. Post during the Depression, and how Pizza Hut (YUM) and Taco Bell grabbed share from McDonald's (MCD) during the early 1990s' dip. "Smart companies look to these environments, when other people go darker, to advance their proposition," says Donald R. Uzzi, senior vice-president of global advertising, marketing, and communications for information-systems company Electronic Data Systems.
SLOW SPRING. That sounds logical, but lots of companies take the short view. With unrelenting pressure from Wall Street to hit their earnings forecasts, it's not hard to see why. Cutting back on ad spending for a quarter or two seems like an easy way to make the numbers. Some, including Delta Air Lines Inc. (DAL) and General Motors Corp. (GM), reacted quickly to slowing growth earlier this year by slashing marketing budgets. Overall, U.S. spending for the first four months of 2001 dropped 5.7% from last year, according to ad tracker Competitive Media Reporting. And in this spring's so-called up-front market, in which marketers and their media buyers dickered with TV networks over ad time for the coming programming year, bookings showed their first fall-off in more than a decade.
Still, most major ad-spending analysts are projecting at least a slim gain for 2001. Indeed, plenty of marketers are sticking with their ad plans. After scoring sales gains with yogurt-in-a-tube and other new products in recent years, Dannon Co. (DA) in Tarrytown, N.Y., is not about to fritter them away by slashing the budget now, vows Eric Leventhal, vice-president of marketing. "Our spending behind media is certainly at an all-time high and will be increased next year," he says.
Marketers outside of traditional consumer goods have shown less willingness to support their brands. As a result, they risk losing their pricing power--and more important, their connection with their customers. Technology, which has led the downturn, is where marketers most need to stay the course. Skittish customers need reassurance that the investments they have made will pay off and that the supplier will be there to support them. Besides, those that cut back risk ceding ground to a few well-funded players eager to grab market share from weaker rivals. That's why third-ranked IBM, with a $650 million media budget, is "absolutely going to stay the course," says Maureen McGuire, vice-president for integrated marketing communications. "Successful companies try to use the downturn to solidify their position and take some share. We see it as an opportunity." That kind of long-term thinking may well be one reason why IBM lost only 1% of brand value last year, compared with bigger declines at some other high-tech companies.
Will IBM and similar opportunists show the grit to maintain these commitments? As Dartmouth's Keller points out, marketers tamper with their core commitment to their brands at the gravest risk. Those who don't burnish their brands in the downturn may find their good names are worth a whole lot less when the tough times end. Marketing Editor Khermouch writes about brands and advertising.