The Danger of Cutting Marketing

“I was asked what I thought about the recession. I thought about it and decided not to take part” Sam Walton Wal-Mart Founder

1

Don’t waste a good recession

The market has fallen by 42%

Ad spend swings more dramatically than GDP in recessions & upturns Source: UK Treasury, ZenithOptimedia (Year-on-year % change in constant prices)

The correction this time is disproportionate USAEUROPEIRELAND Source: Govt statistics / Core Media GDP Vs Ad spend since 2007

Time of great opportunity

Brand count is down Cost of media is down

The worst is over Source: National Bureau of Economic Research (USA)

….and recessions are always followed by expansions and prosperity Source: National Bureau of Economic Research (USA)

2

Investing in a recession works

“The rationale that a company can afford to cutback in advertising because everybody else is cutting back is fallacious. Rather than wait for business to return to normal, executives should cash in on the opportunity that rival companies are creating for them”

The evidence is overwhelming

The actions taken during a recession decide the future growth or decline of a company

25% of companies see an opportunity to expand market share in a recession 25% 70% of these companies will maintain their growth for 5 years after the recession. The majority reach a new & sustained high Source: Duane Sprague, Bain & Co., Coopers & Lybrand, McGraw-Hill, The American Business Press, Strategic Planning Institute/Cahners Publishing, Fortune Magazine

75% will cut staff, advertising, customer service, R&D, product launches & acquisitions Source: Duane Sprague, Bain & Co., Coopers & Lybrand, McGraw-Hill, The American Business Press, Strategic Planning Institute/Cahners Publishing, Fortune Magazine 75% Less than 30% of these will ever regain the market share and profitability lost during the recession

Based on the performance of 600 industrial companies in USA for 6 years from 1980 to 1985 “3 years after the recession, sales of companies that were aggressive recession advertisers had risen 256% over those that didn't keep up their advertising”

Sales Indices (1980= baseline of 100). ‘81 and ‘82 were recession years © 2009 Larry H. Miller Communications Corporation / McGraw Hill The evidence from the U.S. is clear

Source: IPA Business Effects Paper (UK) Data collected on 1000 businesses during periods of market downturn and subsequent market recovery …and from the UK

3

Understand how much to spend

Share of voice has a direct impact on market share

Forevery 10 points that SOV exceeds SOM you can expect to gain 1 point of market share per annum For every 10 points that SOV exceeds SOM you can expect to gain 1 point of market share per annum Source: IPA Datamine (UK) The opposite is also true – a brand can expect to lose 1 point of market share for every 10 points it allows its SOV to fall below its SOM

“The short-term result of cutting expenditure looks attractive for a short while but hides the considerable damage being done to longer-term profitability“ Drawn from analysis of 880 case studies from the IPA Databank

Let’s look at an example where panic set in & the budget was cut completely Source: IPA Datamine (UK) Year Brand X Spend£7.9m£0m Competitor Spend£117m£120m£123m Market Spend£125m£120m£123m Share of Voice (SOV)6.3%0% Excess SOV-0.7%-7.0%-6.3% Share Growth-0.07%-0.7%-0.6% Share7.1%7.0%6.3%5.7%

The loss in share slashes profits over time Year Brand X Sales£317m£314m£282m£269m Fixed Costs (ex mktg)£68m£70m£72m£74m Variable Costs (ex mktg)£202m£200m£180m£171m Mktg Spend£7.9m00 Total Costs£278m£270m£251m£253m Operating Profit£39m£44m£31m£16m Source: IPA Datamine (UK)

Even with a more moderate 20% cut, the profit is hit hard Year Brand X Sales£317m£314m£306m£313m Fixed Costs (ex mktg)£68m£70m£72m£74m Variable Costs (ex mktg)£202m£200m£195m£200m Mktg Spend£7.9m£6.3m £7.9m Total Costs£278m£276m£273m£281m Operating Profit£39m£38m£33m£32m Source: IPA Datamine (UK)

4

Why do 75% of companies ignore the evidence?

The answer..... human nature

Many business leaders cut back on variable costs, including marketing, in order to meet the profit expectations of their shareholders and financial markets The next 3 months The next 3 years

“Businesses that maintain aggressive marketing programmes during a recession, outperform companies that rely more on cost cutting measures”

5

Government has a role to play

“Advertising fueled about 15% of growth in GDP for the major G20 economies over the past decade, yet it only accounted for 2% of economic spend”

WFA Findings Advertising speeds up the spread of innovation Advertising is a multiplier of economic growth Advertising is essential for competition Source: World Federation of Advertisers (France) WFA study proved the positive impact of advertising on global economy

There is a strong correlation between ad spend & household consumption Source: WFA, World Bank, Ad Barometer, WARC Averages for the period

....and GDP Source: WFA, Ad Barometer, WARC

“The Government should introduce a scheme where advertisers receive a tax credit on incremental spend for one year” There is a precedent for this. A similar scheme was introduced in 2008 whereby companies received a tax credit of 25% on incremental R&D investment Our view

6

Top Ten things to remember

Top ten things to remember 1) Consider marketing spend as an investment and not an expenditure 2) Take a leadership position in the media that you use, the share of voice that you achieve and how you phase your activity 3) Have a consistent level of activity throughout the year 4) Take advantage of lower media costs 5) Gain a deep understanding of who your target consumer is 6) Have a specialist examine your website to ensure that it is optimised to improve its ranking in search engines 7) Look overseas for inspiration 8) Up-skill your team in idea generation techniques 9) Invest time in analysing the effectiveness of your marketing communications 10) Learn from the large retailers – they know the power of advertising

“There are only two things in a business that make money - innovation and marketing. Everything else is cost.” Peter Drucker