Advertising during a recession.

(The following was excerpted from NW Ayer Inc.'s report: Advertising During a Recession: Key Issues anti Opportunities." The marketing department takes an on-depth look at the last 40 years, in terms of recessions and their effect on advertising.)

Whether to advertise during a recession is a question that has been raised by agencies and clients alike worldwide since the early 1920s. Unfortunately, to our knowledge, only the United States has examined and published data on the subject within the confines of a rigorous framework.

One might feel that the results 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 their investigations.

Some of the findings and examples are interesting. One example, which is noted by Wall Street analysts, for instance, attributes the 1975 setbacks of Avon Products and Hershey Foods at least in part to advertising cuts, and credits heavier advertising for the improved performance of Philip Morris and Revlon during the same period,

With these introductory comments, let us look at the data available on advertising during a recession.

The question of advertising during a recession is one that has been asked many times over many years. Interestingly, the answer still does not seem clear to enough marketers.

The answer to the question is that advertising during a recession provides a unique window of opportunity for investment purposes to:

1) Build equity;

2) Solidify your customer base;

3) Gain new customers; and

4) 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.

However, it is easily understood why many people do not view advertising as an investment, but treat it as an expense. It is because advertising frequently does not represent a fixed cost, like capital expenditures, which are investments.

Given the above stated opportunities, one would logically ask: Why do advertisers ers cut their budgets during recessions.

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, since competitors are doing the same"; and

"The money saved on advertising helps us to pay dividends to stockholders."

The following are three discussions that refute the above excuses:

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.

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.

For those who believe in fighting recessions with facts and figures, here are some pertinent ones. They have been culled from research and library files of the Advertising Research Foundation, the American Business Press and the McGraw-Hill Company.

On average, recessions are short. They typically last about 10 months, as the following breakdown indicates:

Recession Duration

1953-54 10 months

1957-58 eight months

1960-61 10 months

1969-70 11 months

1973-75 16 months

1980 six months

1981-82 16 months

median = 10 months

On the average, recessions are mild. During a recession, the GNP typically declines by about 3 percent The exception, of course, is the unusually severe 1973 to 1975 recession, when the GNP declined by 4.3 percent. (That recession also lasted longer than most other recessions of the post-war period-for a total of 16 months.)

Recession Decline

1953-54 3.0 percent

1957-58 3.5

1960-61 1.0

1969-70 1.1

1973-75 4.3

1980 2.4

1981-82 3.4

median 3.0 percent

*GNP at annual rate, adjusted for inflation.)

The effects of recession tend to vary regionally, as a result of industry concentration. For instance, the 1981 to 1982 recession had a lesser impact on the high-tech/defense/financial industries. As a result, the Northeast region was less affected during that recession. Consumer spending actually increases during recessions. In the previous postwar recessions, real consumers spending typically continued to increase. Of all post-war recessions, the one exception is the 1973 to 1974 recession, during which real consumer expenditures decreased by 0.9 percent.

Recognition decreases when advertising decreases. Likewise, an increase in advertising causes an increase in recognition. Several studies on this topic have been conducted by McGraw-Hill's Laboratory of Advertising Performance. A typical example: A manufacturer of electronics boosted 32 percent market recognition to 45 percent with 13 pages of advertising. When the ad campaign stopped, recognition fell to 37 percent. Steady ad spending during recessions results in higher sales. McGraw-Hill Research proved this conclusively, we believe, in their published study of advertising in the 198 1-1982 recession. For the six-year period from 1980 to 1985, those companies that did not reduce advertising spending during the two recession years collectively increased sales by between 16 percent and 80 percent. More importantly gains made during the recession were permanent and expanded during the three years following the recession.

Companies that cut back on advertising experienced little, if any, sales growth. Similar McGraw-Hill studies of the previous post-war recessions, conducted during the last 20 years, support these findings. Learning from past recessions. As mentioned earlier, the question of to advertise or not to advertise during a recession has been asked over many years, and the evidence indicates that advertising during a recession is smart business. The first known attempt to prove that companies should maintain advertising during bad times dates to the 1920s, when advertising executive, Roland S. Vaile, tracked the revenues of 200 companies before, during and after the 1923 recession. In April 1927 Vaile reported that the companies that had advertised the most had the biggest sales increases throughout the period. But Vaile's data, which failed to take into account such factors as profits or market share, convinced no one.

An ambitious study was begun after World War 11, It was a long-term project to plot the profits of a large group of companies through a series of recessions.

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 1974 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 that the companies that reduced advertising achieved minimal sales growth in 1974, suffered a sales decline in 1975 and increased sales by 70 percent during the five-year period. For companies that maintained their ad budgets, sales suffered no slowdown during the recession and grew 150 percent for the entire period. Profits showed a similar pattern. Most notably, the momentum gained by the steady advertisers during the recession helped them to grow at a faster rate in 1976 and 1977.

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 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.

Other companies that have taken advantage of advertising during a recession to establish strong market positions while developing brand equity include such diverse company names as BristolMyers, Campbell Soup, Coca-cola, Gillette, Nabisco, Pillsbury, Procter and Gamble, R.J. Reynolds, Rubbermaid, Levi Strauss, Stroh Brewery, United Airlines and Welsh Foods-among others.

During the 1973-1975 recession, however, some companies found it paid to shift advertising emphasis. Quaker Oats, for example, stepped up advertising of grain products as cheaper sources of protein. The company was able to reverse a long-term decline in sales of oats, grits and cornmeal. General Foods took much the same tact, shifting advertising from more expensive frozen food products to less expensive ones.

Other examples of shifting emphasis would include:

1) A-1 Steak Sauce: A-1 Steak Sauce isn't just for sirloin anymore." TV commercials show people pouring A-1 on "recession-staple"-Hamburgers.

2) Michelin: The Michelin cartoon character used to say that its steel-belted radial tires are expensive but worth it; during the recession, the cartoon character states how surprisingly affordable Michelins are.

3) Ziploc Food Bags: Ziploc food bags once boasted their air-tight seal (it still applies). During the recession periods, when food prices tend to be high, the emphasis becomes that leftovers need special treatment-a special plastic bag for storage.

In the midst of a recession, therefore, advertisers may retool their message to recognize that they are aware that consumers are under financial pressure. This retooling might include trying a new tact to reach the consumer. As the above examples illustrate, in many cases, advertisers actually increase their advertising budgets during a recession.

Many economists 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 economists 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 economists 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.