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Somebody always makes money during a recession. Might as well be you.

27 September 2007
The R-word keeps popping up in the newspapers, and as consumers get skittish about spending, so do the businesses they frequent.
 
Here’s a quote from an article in Business Management Magazine. “Under pressure to maintain earnings during recession, too many companies panic and heavily retrench at the cost of substantial long-term losses of markets or growth opportunities. . . The need for short-term actions to counteract the recession must be evaluated against long-term market opportunities. When wielding the shears, companies should pay attention to the long-term implications of reductions in sales force and its salaries, advertising and promotion, and new product development.” This article was written by John Faulkner, and it was published in December, 1970.
 
Research conducted between 1971 and 1993 by Lamey, et. al. (2007), and risk research by McAlister, Srinivasan and Kim (2007), both demonstrate how closely decisions to reduce marketing correspond to reduced market-based assets (brand equity) and market share. In the McAlister study they state that “the results strongly support the hypotheses that higher advertising/sales lower a firm’s systematic risk” (2007, p. 36).  The Lamey study further claims “manufacturers can mitigate the effect of an economic downturn on their shares by intensifying their marketing-support activities in recessions” (2007, p. 1).
 
What does this mean for you? If you’re a wholesaler or manufacturer, the temptation to cut back trade advertising will be great if the economy continues to slump. If the advertising in question is neither building brand recognition nor specific product sales, or if it does not increase customer awareness of your product offering, then you would be right to cut it. But this should not be a cost-saving measure. Change it to something that creates ongoing awareness of your brand. During recession customers become more cost conscious – which is not the same as price conscious (though they will become that as well). The cost-conscious customer waits too long to order inventory, reluctant to part with their cash. When they do order, it will be last-minute and there is evidence to suggest that they will go with the supplier who is top-of-mind, particularly if that supplier has inventory.
 
For brand-name manufacturers there is even greater risk. The price conscious customer is likely to look toward secondary and private-label brands during times of economic uncertainty. The Lamey (2007) study documents direct correlation between initial economic uncertainty and rapid customer shifts to off-brands. If brand-name manufacturers cut back on marketing at the same time, the likelihood of reclaiming those customers when the early panic passes is very low. Customers tend to be surprised at the quality of off-brand products, having underestimated the quality to begin with. Only an ongoing conversation with the customer will keep them from leaving permanently.
 
Retailers share this brand risk, and it will translate to customer migration to big-box or discount retailers. In addition to risks associated with reducing marketing budgets, another big risk retailers face is associated with reducing product selection. A number of articles in the early 2000s – and a book called The Paradox of Choice by Barry Schwartz – have explored the over-abundance of choice across all product categories and the stifling effect too much choice has on consumer decision-making. Many retailers began the process of cutting their SKUs. But until 2005 no quantifiable research had been published on the subject. Then, research was published that demonstrated that, while offering large assortments is costly, reduction in the number of SKUs reduces overall store sales. Specifically, “more frequently purchased categories were less adversely affected in terms of the impact on sales, category incidence, and share of basket. . . Having more items to choose from seems to matter most in categories shoppers visit infrequently” (Borke, et. al, 2005, p.621).
 
One option for retailers to consider at the onset of recession is to combine a resolute marketing campaign with messaging that makes it clear to consumers that they have excellent (better-than) product selection. Resist the urge to slash prices or compete on price – but don’t be afraid to tout competitive offerings or to make it known that you have a broad range of price points. Do cut SKUs, but carefully. The Borke (2005) study indicates that it is safe to cut the lowest-performing 10% of SKUs in the high frequency (bread & butter) categories.
It’s never a good idea to waste money on advertising and marketing. But if you limit yourself to the options of either wasting marketing money or cutting marketing to save money, you’ve failed to claim the opportunity to market well – which is what you’ll need to do to maintain your position in an economy headed into recession.
 

Post-script to niche players and under-dogs: Now is your chance. Only the most enlightened of your major competitors will heed this advice. Most will cut back on marketing if they haven’t already. Why do I say this? Because this advice isn't new, and I'm not the first one to offer it. Yet every industry exits every recession with very different players than the ones who entered it, and the case studies demonstrate that cutting back in all the wrong places is a primary reason. Somebody always makes money during a recession. Might as well be you.

References

Borle, S., Boatwright, P., Badane, J., Nunes, J., & Shmueli, G. (Fall 2005). The effect of product assortment changes on customer retention. Marketing Science, 24(4), 616-622.
Lamey, L., Deleersnyder, B., Dekimpe, M., & Steenkamp, J. (2007). How business cycles contribute to private label success: Evidence from the United States and Europe. Journal of Marketing, 71(January 2007), 1-15.
McAlister, L., Srinivasan, R., & Kim, M. (2007). Advertising, research and development, and systematic risk of the firm. Journal of Marketing, 71(January 2007), 35-48.
 
(c) 2007, Andrea M. Hill
 
 
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