what to do in turbulent times - ft

7/29/2019 What to do in Turbulent Times - FT

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February 2008

What to do in turbulent times

Prepared by Simon McDonald


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Advertising in tough times

If youre in a room full of twenty people,

and theyre all talking, all you hear is

noise.

But if 19 stop talking, suddenly the one

person whos still talking can be heard

the loudest



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The Premise

The main reasons for advertising in tough times can be summarised as:

increased share of voice

increased market share

increased profitability in the long run

emerging quicker, fitter and more profitably than the competition when a

"recessionary" period ends

long term shareholder value

"eating" the competition

being inventive and doing things differently

taking of advantage of reduced rates in the media market place



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Why keep advertising in tough times?

A recession is when your

neighbour loses his job.

When you lose your job, its a

depression


A joke from an Economist!


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Are we in turbulent times?

Or recessionary times?

The technical definition of a recession can be expressed as two consecutive quarters of

negative or zero growth in GDP.

Economies of OECD countries have averaged annual growth of about 3.0% since 1983.

Forecast for 2008 is growth of 2.1% - below the long term average, but certainly notrecessionary. Even in 2001, real GDP growth was measured at 1.1%.

CONCLUSION we are not currently in a recession, and current forecasts suggest belowtrend growth, but still growth for 2008, although Mervyn King and the Bank of England believe

a technical recession in 2008 is possible.

THEREFOREwe may be heading for tough and turbulent times in comparison to what weare used to

Also, the technical definition of recession does not take account of factors such as

unemployment rates or consumer confidence. Individual industries or sectors may be hit by

recessionary feelings while the broader economy emerges relatively unscathed see

advertising recession of 2001.


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Consumers dont stop spending

when economies go throughdown cycles.

They look harder for value

Kevin Roberts, Saatchi and Saatchi



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Tough times the usual reaction

What do companies often do in tough times?

In order to offset a fall in sales revenue, many firms often;

Cut investment

Cut costs

Cut spare capacityCut prices

Marketing costs are seen as quick and cheap to cut, so get cut early sometimes

before sales even fall!



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Increased share of voice

Instead of waiting for business to

return to normal, you should be cashing

in on the opportunity your overly

cautious competitors are creating for

youthe fact that your competitors are

pulling back can make your advertising

dollars look and act even biggerCharles Bower, former president of BBDO



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Increased share of voice

Easier to gain share of voice when competitors cut back

Value for money is even better when competitors cut back

If you do cut back, make sure you cut back less than your rivals

Why does share of voice matter?

There is a clear correlation which shows that share of voice is a good predictor ofquality perceptionamongst consumers

PIMS data shows that perceived quality is single most important factor affecting profitability

High quality ratings allow companies to boost market share AND charge premium pricing



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Increasing quality perceptions through increased share of voice and market share

Below Equal Above Much higher

Quality perception v share of voice

ADSPEND relative to competitors

Relative

qualityofoffering

Worse

Same

Better

Much better

PIMS analysis quoted byButterfield

Companies with the largest share of voice, and market share correlate with those who have the best

perceived quality ratings among consumers.

Quality ratings are also proven to be a good indicator of profitability, market share and premium pricing

think BMW in the UK over 25 years.



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Share of voice and its effect on perceived quality, profit and market share

Share of voice

Market Share

Profitability

Perceived Quality

Brandimage

Salience

Economies ofscale

Pricepremium



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Gain and maintain market share

A time of recession is the most

favourable time for a change ofcompetitive positionsby applying

extra pressure and devising creative

strategies, companies can gain

advantages that they can carry intotimes of prosperity

Marion Harper, former president of McCann-Erickson



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Why keep advertising in tough times? Increased market share

Firms maintaining ad budgets during recession significantly outperform their

rivals in the following years

27%

30%

131%

256%

0% 50% 100% 150% 200% 250% 300%

1974/75 USrecession

1981/82 US

recession

Sales advantage over 4 years

Sales advantage over 2 years

Source; McGraw Hill Study

Companies who increased

advertising budgets during

recession



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Short term profitability v increased profitability in long run

Evidence suggests that cutting advertising in the short term wont boost profits by much AND will damage

long term profitability

10%9%

8%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

cut marketing maintained marketing increased marketing

Real Return on Capital Employed during recession

Source; Hilier analysis of PIMS data 2001



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Short term profitability v increased profitability in long run

Evidence suggests that cutting advertising in the short term wont boost profits by much AND will damage

long term profitability.

Companies which cut their marketing budgets saw a decline in ROCE in post recession years.

Those which maintained budgets saw a modest increase.

The largest increase in ROCE in recovery years were those who increased their marketing activityduring recessionary times

0.6%

4.3%

-0.8%

-2%

0%

2%

4%

6%

8%

10%

cut marketing maintainedmarketing

increased marketing

Increase in ROCE during recovery

Source; Hilier analysis of PIMS data 2001



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Enhanced long term shareholder value

I was asked what I thought

about the recession.I thought about it and decided

not to take part.

Sam Walton, founder of Wal-Mart



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Enhance long term shareholder value

Maintaining advertising during a recession has a minimal effect on profitability, and boosts profits in the long

term

THEREFORE, maintaining advertising and marketing activity should boost long term shareholder value,

and data suggests that stock markets understand this.

Corporate Branding LLC analysed factors influencing share prices and concluded that corporate brand

image shown to significantly effect share price

All other things being equal, markets value firms with strong image more highly

This is backed up by other research (Haigh) showing that prices of strongly branded stock outperform

others

Corporate brand image to boost share price



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A business strategy

It costs much more to get

advertising momentum goingagain than it costs to keep it

going. Once you let momentum

die you must start almost from

scratch againCharles Bower, former president of BBDO



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Business strategy during tough times.

Good costs, bad costs*

Analysis shows that some costs must not be cut during times of recession, some costs can be cut, and

some depend on the strategic strength of the company and brand.

*There is no business panacea which dictates that one strategy will work for all businesses, and these

strategies are generated from analysis of averages across different sectors, brands and businesses


DO NOT CUT

Marketing

Quality

Product Development

/R&D

IT DEPENDSRetain spare capacity

Price aggression

Out-sourcing

CAN CUTFixed capital

Working capital

General and admin


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A few words from McKinsey

McKinsey advises investing in advertising during a recession

Study of 1,000 companies show that leaders and challenger companies

that invest during a recession emerge stronger & more highly valued:

Advertising was a key component identified, along with M&A and R&D

Successful leaders spent more money as a % of sales than their peers

Investing during recession results in a a wider gap between competitors

post-recession vs. pre-recession

Source: McKinsey: Learning to Love recessions, June 2002


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The final word.

All the evidence suggests.

when times are good,

you should advertise.When times are bad,

you MUST advertise

Major business to business

advertiser

What to do in turbulent times the final word


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Appendix Case Studies


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February 2008


Prepared by Simon McDonald


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15 years of consistent advertising helped BMW treble sales without losing prestige

In 1979, BMW (GB) was set up with the objective of trebling sales of BMW by 1990, while maintaining profit

margins (replacing the existing distributor)

By 1993, BMW had expanded distribution network by just 10%, and had increased prices, but still managed

to;

Treble sales volume

Treble market share

Maintain price premiums during the recession years

The quality of the BMW product had undoubtedly improved, as had the quality of dealerships, but this was

also the case outside the UK. Sales rose in France, Italy or Germany but not by the same rate as the UK

BMW (GB) case study

How did they do it?

Advertising strategy which changed the perception of BMW from performance cars to a richer view of thebrand by revolving around four key concepts;

Core Brand Values

Sniper Strategy

Centre of gravity

BMW tone of voice


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Core Brand Values

BMW (GB) case study

Performance

Advancedtechnology

Quality

Exclusivity

Four key brand values were identified, and these values shaped all BMW communications


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Sniper Strategy

BMW (GB) case study

The sniper strategy is characterised by the large numbers of ads produced each year, showing different

aspects of the core values and targeted at a particular group in the market place (e.g. quality aimed at

older man who values this attribute most, performance aimed at younger executive)

Centre of Gravity

Recognition that BMW brand contains many different brands with varying prices and performance, but all

sharing a common driving experience identified as BMW.

This is manifested as a greater proportion of the advertising budget being spent on models with a lower

sales volume thus spending more on advertising the 5 series than the 3 series, despite accounting for

lower sales volumes. This had the effect of raising the desirability of the less expensive models, by

imparting a halo effect on the models further down the range.

Tone of Voice

Essentially the strategy was to place the car at the centre of everythingmaking it the master of all ads.


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The effect on BMW sales of the strategy - quantified

Actual sales of BMW from 1980 93 were 6.3bn. The extra strength of the BMW brand has been

quantified as being worth between 2.7 and 3.2 billion of ADDITIONAL sales.

6.3

3.6 3.1

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

Actual BMW sales 1980 - 93 If increased at same rate asall car sales

If increased at same rate asBMW sales in Germany, Italy

and France

billions

BMW (GB) case study

2.7 bn

ofmissing

sales

3.2 bn

ofmissing

sales} }

The advertising strategy was also believed to have resulted in a large number of prospects to convert into

sales. In 1993 for instance, BMW estimated that their advertising had been responsible for creating 35,000

enquiries to dealers.


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Why keep advertising in tough times?Barclaycard Case Study

Barclaycard re-launched as new product in early 90s

In the late 80s Barclaycard were facing a maturing market, competition from debit cards and a looming recession. In 1989

profits halved and Barclaycard made a loss in 1990.

A new product was launched which charged a small fee in return for benefits such as slightly lower interest rates, payment

protection and free international rescue.

The marketing objectives of the campaign supporting the new product were to halt and reverse the market share loss and lost

share of new cardholders.

At the same time that Barclaycard doubled its adspend, Access halved adspend in response to turbulent marketconditions. Barclaycard saw advertising awareness almost triple while Access saw its awareness half;

13%

34%

30%

20%

0% 5% 10% 15% 20% 25% 30% 35% 40%

First burst

End of 1991

Ad Awarness

Barclaycard

Access


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Why keep advertising in tough times?Barclaycard Case Study

Effect on ratings of Barclaycard and Access

Barclaycard also managed to create real daylight between itself and Access on a number of customer dimensions;

% agreeing with statement Barclaycards holders view ofBarclaycard indexed v Access holders of Access

Pre advertisingDec 1990

Post advertisingDec 1991

Provides special benefits and services

for customers

118 143

Provides a high quality customer

service

112 124

Cares for its customers needs 103 152

Additionally more than twice as many people who held both types of card chose to keep a Barclaycard rather than Access if

they could only choose one.

Econometric analysis shows that advertising in 1991 was directly responsible for adding 508 million of turnover to

Barclaycard.

We can conclude that investment in the right product and aggressive marketing support

can enhance market share and profitability, regardless of the conditions, and that in this

instance tough times may create an opportunity for the brave.


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Other case studies which show the value of advertising strategies, and successful implementation through

times of recession include:

Other case studies - summary

De Beers; Selling Diamonds in a recession

JWT created a unified campaign (Shadows) across 23 countries which helped maintain viability for De Beers and stability for

an entire industry at a time of economic recession in the early 90s.

Over three years, the campaign is estimated to have increased sales by an annual average of 8% and De Beers profits

recovered by 21% in 1993 compared to the previous year.

Renault Clio

Renault launched the Clio as successor to the Renault 5 in 1991, the same year that new car sales in the UK declined by

21%. The objectives of the campaign were to retain loyalty of a high percentage of Renault 5 customers and steal share from

the competition to allow the Clio to take 5.5% of the sector and 33% of Renault sales.

Advertising awareness through the Papa and Nicole campaign peaked at 56% and stabilised at 40%, and earned it a

Millward Brown Awareness index of almost double the average, as well as a long term above average share of voice, brand

image and driver appeal.

The Clio succeeded in recapturing volume share for Renault in the small car segment and delivering increased profit through

premium price positioning. In the first full year of trading the Clio gained Renaults highest ever small car sector share, and

highest overall marque share in ten years.


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In the US, a number of studies of brands have shown that cutting advertising spend has created an opportunity for

competitors to gain market share in dramatic fashion by increasing adspend*

Other case studies - summary

In the 1930s depression Kellogg maintained its marketing spend while Post did not, and Kellogg's gained

domination of the dry cereal market which lasted for half a century.

Miller doubled its advertising spend during the recession at the end of the seventies. Schlitz a major rival,

and the number two beer brand in the US responded with too little extra spending too late, and by 1979 was

spending 25% less than Miller having spent approximately the same in 1976. Miller gained significant

market share and Schlitz became almost obsolete.

In 1975 Ford cut its advertising budget by 14% in an attempt to increase profits. Chevrolet abandoned its

practice of linking adspend to a percentage of sales and increased its spend. Chevys market share rose by

2% and five years later Ford had not regained its market share.

In 1978 79 recession, Ford, and the other major manufacturers learnt their lesson and did not pull back on

advertising budgets, increasingly them significantly.

In the 1989 91 recession Jif peanut butter increased its adspend and saw sels rise by 70%. The following

brands all increased adspend and recorded exceptional sales growth; Bud Light (+15%), Coors Light

(+16%), Pizza Hut (+61%), Taco Bell (+40%).

* There are of course other factors at play on a macro and micro economic level, but all these

cases are supported by major research into the effects on sales of advertising and marketing.

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