Impact of Change in Advertising Budget During Recession on

Long Term Growth

Dinesh Kumar Tyagi, SIMS

Abstract

This research paper studies the impact of change in advertising budget during
recession on long term growth of the company. Short term measure of reducing ad
spending during recessions does improve companies’ return on capital. This paper
studies the secondary data of various companies with respect to change in
advertising budget in previous recessions that created an opportunity for long term
growth. This paper further validates the impact of changes in advertising budget on
profits of Indian companies in present recession.

Keywords: Recession, Advertising budget, Market share, SMART marketing.

Introduction

Uncertainty is always a part of business, but in a recession it dominates

everything else: no one’s sure how long the downturn will last, how customers will
react, whether we’ll go back to the way things were before or see permanent
changes in consumer behavior. So it’s natural to focus on what we can control:
minimizing losses and improving short-term results and cutting spending is a good
way of doing this. Intuitive response is “let's start slashing costs” and marketing is
the first to go. The reasoning is that a recession will mean lower sales and lower net
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income. Belief that cutbacks in discretionary expenses such as promotion can be

easily made, and there won't be any impact.

The research question therefore is as follows, “What is the impact of changing

advertising budget during recession on long term growth of the company?” This
paper proceeds by studying intuitive reaction to change advertising budget in
recession and its impact on long term growth of companies, followed by statement of
proposition, methodology, describing case companies, findings, conclusions and
recommendations.

Change in advertising budget and its impact on long term growth of the
company.

A recent study done by Ad-ology (a research firm for the advertising industry)
shows that nearly fifty percent of adults in the U.S. believe that a lack of advertising
by retail stores, banks, auto dealerships and other mainstream large companies
during a recession-- indicates that those businesses must be struggling. Let us
understand following questions and their answers.

• What does advertising do for us, and can we achieve those same objectives with a
smaller budget?
• Is there any cause and effect information available regarding companies that have
cut their advertising budgets during recessionary periods as opposed to those who
have maintained or increased their budgets?
• Can a recession be used to gain an advantage on the competition?

Smaller Budget
All too often, management not only looks at advertising as an expense but also as
something that is carried out with the sole purpose of immediate sales. But
advertising should be viewed as an investment rather than an expense – an
investment not only for short-term sales gains, but also for achieving long-range
goals and developing stronger name and brand franchise. Strong and consistent
advertising reinforces favorable attitudes toward your company and its products, not
only among customers but also among investors and the other public you must
influence.
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In today's industry, advertising is being used to assist in reducing the overall

cost of doing business. The average cost of a business-to-business sales call has
risen to over double the cost of 5 years ago, and on the average, each sale requires
at least five sales calls. If advertising can substitute for one or more of the personal
sales calls, the effect can be accomplished for much less.

With the industry's growing understanding and use of the marketing concept,
advertising is being viewed as an integral part of the marketing mix rather than as an
expense. This would seem to indicate then that it is in the company's best interest to
develop and maintain an aggressive advertising policy, assuming they can expect a
favorable effect on the company's sales and income.

First determine whether ROI (Return on Investment) is positive or negative.

If you pay Rs1000 for a newspaper ad, and make Rs2500 off the ad, then you have
a positive ROI, and you should seriously consider keeping the ad. If you only make
Rs800, and have a negative ROI, then cutting the ad may be something to carefully
consider and look to the Internet and social networking sites for less expensive and
more effective options.

A great point to keep in mind when you advertise is to make certain that the
channel you are using is dense with your audience. Attack (showcase your ads)
when and where the target audience is 'densest' and most receptive. This will save
you money and effort. you need to systematically analyze your target market -
including your existing base - so you can determine the best methods to reach out to
them.

It's important to remember that your customers are probably being impacted
by the economic 'reset' as well - so you want to present solutions that show how
dealing with your business can actually help their financial picture maybe by making
their buying choices more informed, or showing that your product is a sensible
option and not a luxury.
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Cause and Effect

Today, there exists a large body of data that clearly shows there is a direct
cause and effect of increasing or decreasing advertising during recessionary
periods. These include the IBM personal computer in 1981 and the iPod twenty
years later. But, one of favorites is the story of the Kellogg’s brand because it
illustrates how a small company can make it big through smart marketing.
During the Great Depression, Post was the leading cereal brand. In fact it was
the only cereal brand people would have thought of at the time. But, due to the
Depression, money was tight and sales were falling. Post figured they did not need
to continue advertising because they “owned” the market (for cereal) and they
needed to cut expense. Cereal was considered a luxury anyway. Kellogg’s, on the
other hand, took advantage of the economy that was suffering. They created a
positive ad campaign featuring Tony the Tiger and the very positive and enthusiastic
Kellogg’s slogan “They’re GREAT!” They DOUBLED their ad budget, and bought ad
spots in newspapers and radio time across the nation. Americans loved Tony the
Tiger and the positive message he sent during a very negative time. Kellogg’s brand
bucked the trend, and grew quickly, in a time when money was tight by keeping their
brand top-of-mind. Today, Kellogg’s remains a top cereal company in the US—
perhaps even the #1 cereal company, because they unleashed the power of
advertising.
Even during the Great Depression major companies Chevy, Camel
cigarettes and Proctor & Gamble (which helped foster soap operas during this time)
kept advertising because they realized they needed to just to maintain brand loyalty.
They also created much brand loyalty during this time, as people saw stability in
these brands that kept advertising.

Advantage over competition

People are still buying essentials they just aren’t spending it on extravagant
items right now. People that have been saving money for big-ticket items might even
be more apt to buy them with all the price slashing that many big companies are
intending for the festive season.
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People are staying at home more, reading magazines and watching TV. That
means they’re seeing more advertising. What they do figure out about the economy
comes from advertising – those companies they continually see must be doing well,
they figure, and those companies that can’t afford to advertise, don’t.The companies
that keep on advertising during hard times are the ones that fit this image.

A major study, by the Strategic Planning Institute, of corporate behavior during

the past thirty years found that reducing ad spending during recessions did improve
companies’ return on capital. It also meant, though, that they grew less quickly in the
years following recessions than more free-spending competitors did. But for many
companies recessions are a time when short-term considerations trump long-term
potential. It’s true that the uncertainty of recessions creates an opportunity for
serious profits, and the historical record is full of companies that made successful
gambles in hard times: Kraft introduced Miracle Whip in 1933 and saw it become
America’s best-selling dressing in six months; Texas Instruments brought out the
transistor radio in the 1954 recession; Apple launched the iPod in 2001. Then again,
the record is also full of forgotten companies that gambled and failed. The
academics Peter Dickson and Joseph Giglierano have argued that companies have
to worry about two kinds of failure: “sinking the boat” (wrecking the company by
making a bad bet) or “missing the boat” (letting a great opportunity pass). Today,
most companies are far more worried about sinking the boat than about missing it.
That’s why the opportunity to do what Kellogg did exists. That’s also why it’s so
nerve-racking to try it. The statement of propositions can be postulated as under.

Statement of Propositions

Proposition I – Increase expenditure on advertisement budget to ensure brand

image building and long term growth of the company.

Proposition II - Decrease expenditure on advertisement budget to reduce costs to

maintain profits in recessionary market.
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Methodology

In this paper quantitative methods have been selected with case study approach.
Data of change in advertising budget by various companies during recessions since
1920 has been collected and there subsequent growth data has been collected to
study the propositions. Selected proposition has been validated by collecting
advertising budget data and sales data of various Indian companies in present
recession. Data collection: most of secondary data has been collected from various
companies’ financial reports and other sources.

Case Description
The smart marketers acknowledge that economic cycles are elements in the
marketing battlefield that have to be used to advantage if the firm is to improve its
position and increase market share. A few examples include:

• Procter and Gamble - During the Great Depression they pushed Ivory soap.
• Intel - In 1990-1991 during economic difficulty they pushed out the campaign
"Intel Inside".
• Wal-mart - Walmart launched their "Every Day Low Prices" campaign in
2000-2001.

Even when there are difficult times well-positioned companies can in fact
survive and thrive in them. It truly is about being SMART and taking marketing
seriously now more than ever. A major key is to know your consumer. Know them
inside and out. Know what they think and know where they are. Know how these
economic times are hitting them. Create your message around that pain. Reach out
to them. Look and revise your product line if necessary. Look at developing lower
cost solutions if possible. Be flexible, but at the same time be aware and always
assessing.

In fact if you cut your marketing budget, how will your consumers find you?
You have severed your business lifeline and future hope of potential growth.
Perhaps you have a secret that I'm not aware of and can reach that success without
marketing.
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For example, Meldrum & Fewsmith Advertising and the BPA studied 64
business-to-business companies that advertised during a recent recession. Thirteen
firms cut advertising an average of 20 to 50 percent during the two years of
recession, while the remaining firms increased their advertising investment 30 to 70
percent during the period. Those firms that increased their advertising stance not
only continued to grow but also grew at a more rapid rate when the country's
financial picture improved. This growth was achieved in both sales and net income.

The results have been similar in every advertising investment study

conducted since the 1920s. The first study, conducted by Roland S. Vaile, covered
advertising and sales of 200 firms between 1920-1924. He concluded that a definite
spread occurs between sales of firms that increase their advertising and those that
decrease it. He added that, when intensive advertising during the depression was
part of the sales technique, sales were maintained in better volume than when
advertising appropriations were cut.

One company that certainly seemed to prove the point is New Britain,
Connecticut's Stanley Works. In 1974, one of the world's largest manufacturers of
hand tools, sensed a softening in demand for its consumer products. So, in the heart
of the recession, it launched the biggest advertising campaign in its history-a blitz of
network TV and magazine ads aimed at driving home the Stanley name to the
consumer market. The campaign worked. While sales of Stanley's heavy industrial
tools fell sharply during 1974 and 1975, its consumer business was able to take up
the slack, giving the company a large sales and profit increase in 1974 and
preventing a substantial decline in 1975. Additionally, its hand tool business has
continued to grow at an 8 percent annual rate-twice that of its competitors.

Another example is General Motors' Chevrolet division, which faced

mounting inventories in 1975 due to the recession and high fuel prices. The
company abandoned its traditional practice of setting its advertising expenditures as
a fixed percentage of sales. While volume fell 10 percent because of the economic
slowdown, Chevrolet maintained its ad budget and actually increased advertising for
its fuel-saving economy models. Ford Motor Company, on the other hand, slashed
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advertising by 14 percent in an attempt to shore up profits. That may have achieved

its goal, but it permitted Chevrolet to increase its market share by 2 percent.

10

0
GM
-5 FORD

-10

-15
Ad Budget Market share

Recession in 1975

Thus, proposition that Increase in expenditure on advertisement budget

during recession ensure brand image building and long term growth of the company
is selected. Let us validate this proposition by studying data of Indian companies in
present recession.

• Hindustan Unilever Ltd (HUL) is planning to increase its ad expenditure this

year.
• Godrej Industries Ltd is tripling its ad budget to gain high visibility for all its
products. Last year, the Godrej Group’s advertising budget was around Rs 60
crore.
• Tata Tea and Marico Industries have also hiked their advertising budget to
pump up volumes.
• Emami, the Rs 700-crore FMCG major, is targeting Rs 300 crore, ensuring a
30 per cent growth in sales from its summer care brands. Emami, which owns
brands such as Boroplus and Navratna, has declared a 25 per cent growth in
FY09. Emami will invest Rs 60-70 crore on advertising and promotions for its
brands.
• In spite of a slow year for consumer electronics industry in 2008, LG
Electronics India managed to clock revenues of Rs 10,730 crore, a 15 per
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cent growth over 2007, in line with its 2006 growth rate. The net profit margin
was at 4 per cent of sales despite severe pressure on raw material costs. LG
will increase ad and marketing budget by 10 per cent to Rs 400 crore in 2009.
In line with its strategy, LG grew by 20 per cent in January and February. The
company hopes to save $384 million through cost cutting and efficiency-
improvement measures in 2009.

The study, covering 250 public listed companies across sectors whose annual
data is available, revealed that 140 companies hiked their ad and marketing budget
last fiscal. The aggregate revenues of this set of companies rose 26% year-on-year,
while net profit adjusted for extraordinary expenses rose 20%. In contrast, the 110
companies that pruned their ad-marketing budgets saw a revenue growth of only
17% and a net profit growth of just 10%.

The companies spread across diverse sectors such as food and other
consumer items, pharmaceuticals, consumer durables, IT, engineering, cement,
paints, banks and financial services together increased their marketing spends by
36% to Rs 6,544 crore last year (depending on their individual financial years ended
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September 2008, December 2008 or March 2009). Companies that hiked their ad-
marketing budget more than 25% last year include ITC, State Bank of India, Piramal
Healthcare, Union Bank, Subex, Ambuja Cements, Crompton Greaves, Aventis
Pharma and Merck.
Hindustan Unilever dominates the list of higher ad-spenders. But even after
excluding the consumer goods major, which declared results for 15 months as it
changed its financial year, this set of companies shows higher earnings growth. HUL
profit rises 20% to Rs 457cr in Jan-Mar 09 on a 6% growth in net sales which stood
at Rs 3,988 crore and advertising and sales promotion which was up 2.5% in March
quarter. The financial year ended March 31, 2009, HUL's PAT grew 15% to Rs 2,065
crore, on a similar growth in its net sales at Rs 16,477 crore.

The group of firms that cut their marketing spends saw net profits shrink by
two-thirds and revenue growth halve last year. This list includes Apollo Tyres, MRF,
Eicher, Kinetic Motor, Escorts, Goodyear, Marico, Aditya Birla Nuvo, Raymond,
Novartis, Siemens, Thomas Cook, Century Textiles, ICICI Bank, HDFC Bank and
Axis Bank.

Conclusion
The company which maintains normal level of promotion when competitors
have reduced theirs, soon finds that they gain a similar increase in competitive
market share. It provides a rare opportunity for management to change market
position. Then when business improves, they will grow at a much higher and more
profitable rate. In today's refinement of marketing warfare, the winner is the one who
takes optimum advantage of every strategic and tactical marketing blunder by his or
her competition. In summary, we can conclude as under:
• Advertising builds strength: Companies that invest more in advertising over a
period of years experience faster growth than those that spend less.
• Advertising speeds recovery: Companies that have increased their
advertising during a recession have recovered more rapidly than their
counterparts that have maintained or reduced advertising.
• Advertising affects sales: Organizations that have continuously increased
their advertising investment have enjoyed similar increases in sales.
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Recommendations

It's time to get smarter about your marketing budget and spend it to bring
results. The key is to look at your marketing budget as an investment not an
expense. Use the customer knowledge and implement SMART marketing during
these times of financial distress. SMART marketing consists of the following

S - Strategize
M - Maintain market spend
A - Assess and allocate the budget
R - Research your customer thoroughly
T - Target and reach out to them

Stand fast during this time. The importance of seeing marketing spend as an
investment during this time and not an expense can not be over stressed.
Companies have survived difficult times and have come out strong. A recession
provides a unique window of opportunity for those firms that are market driven.
Charles Brower, former president of BBDO, stated, "Instead of waiting for business
to return to normal, you should be cashing in on the opportunity your overly cautious
competitors are creating for you ... the fact that your competitors are pulling back
can make your advertising budget look and act even bigger. There are few things as
detrimental as a lapse in advertising. It costs much more to get advertising
momentum up than it costs to keep it going. Once you let momentum die, you must
start almost from scratch again."

• Reduce the size of print ads instead of eliminating them

• Advertise for free through social and business networking websites
• Make sure that your signage is doing its intended purpose of bringing in new
customers.

Write a press release and publish it somewhere (especially your PR.com account) at
least every month, during tough times. If you do it yourself by following the
Associated Press style, it will save money.
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References

Publication: Economic Times Mumbai; Date: Jul 13, 2009; Section: Front Page; Page: 1
ET Study Shows Cos That Hiked Ad Spend Saw Higher Sales
Vivek Sinha & Ratna Bhushan NEW DELHI
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Blog by MaryAnn on 10/14/2008 1:19:00 PM
Article by Shannon Smith