How marketers are navigating a downturn that’s hit consumers hard
July 28, 2008
-By Noreen O’Leary

Even as agency execs say they’re not seeing signs of major cutbacks from marketers, forecasts tell a grimmer story.
The bad news keeps coming, fast and furious. Houses are worth less, home-equity lines of credit are being suspended, jobs are at risk, wages aren’t keeping up with inflation and energy prices continue to soar, eating away at Americans’ disposable income. And while previous down cycles saw declining stock markets affecting a small portion of the population, this time around, things are getting personal.

“People are viewing this not as ‘a’ recession, but ‘my’ recession,” says Lori Senecal, president of McCann Erickson in New York.

And even as agency execs say they’re not seeing signs of major cutbacks from marketers, forecasts tell a grimmer story.

Earlier this month, Interpublic Group’s Bob Coen, a forecaster at Magna, declared the industry was in a “severe slump” and revised downward his estimate for full-year growth to 2 percent from his previous one of 3.7 percent. Earlier this year, Forrester Research foreshadowed that retreat, saying 77 of nearly 100 global-marketing chiefs expect their budgets to be flat or shrink this year, posting on average a decline of 3 percent.

Even the quadrennial bounce of a presidential election and the Olympics may not be enough to offset cuts from marketers struggling under the double punch of their own rising production and distribution costs amid waning consumer confidence.

Cuts in marketing budgets, of course, fall straight to the bottom line. In times like this, agencies generally have to argue their worth as an investment, not an expense. In many cases, they also need to reconsider how best to sell a product at a time consumers are delaying purchases, buying less, trading down and looking for incentives to take out their wallets.

The value proposition

By some estimates, consumer spending on essential goods now accounts for 57 cents out of every dollar spent in the U.S., the highest since record keeping began in 1960 — and a percentage expected to grow. That’s evident in big shifts and small details. In June, for instance, discount stores like Wal-Mart and Costco posted a category increase of 6 percent in sales compared to full-price department stores, which saw a 3.8 percent drop; while consumers are giving up their Starbucks lattes, they’re turning to cheap staples like pasta and peanut butter, which saw respective increases of 13 percent and 5 percent in the 12 months to June; and coupon redemption — in decline since the last recession — is back, with food products showing the biggest usage.

It’s not surprising, then, that “value” has gone from an advertising buzzword to a brand imperative.
“The main thing is to make sure the value proposition is right for these times,” says Senecal. “More then ever, you have to be an advocate for the consumer.”

Gary Stibel, CEO of The New England Consulting Group, makes the case that downturns are opportunities to build share at the expense of competitors who are cutting back. The major challenge for marketers, he says, is to strike the right balance between pricing and marketing support.

“Pricing decisions are almost a daily, certainly weekly, focus of discussion for marketers now. It’s no longer a monthly consideration,” Stibel notes. “These are the times when the best marketers thrive. The smart money takes more aggressive pricing than average and then spends it back to grow share, even if it means taking a hit on earnings.”

Wal-Mart, which increased its measured media ad spending 82 percent from January through May 2007 to $234 million January through May 2008, per Nielsen Monitor-Plus, reported its best monthly sales gain in June in four years. The company had a jump on the current downturn: After straying from Sam Walton’s founding edict of low prices, the retailer returned to its roots last year after hiring The Martin Agency, which crafted the “Save money. Live better” strategy.

“Save is not a four-letter word. We’re seeing that with higher-income consumers as well,” adds Katherine Wintsch, group planning director at The Martin Agency. “There’s a different tonality and sentiment in advertising in general with more promotions and discounting.”

This year, Wal-Mart continued to expand its $4 prescription program, started in September 2006, and offered incentives like cashing government tax stimulus checks for free.

“We’re clearly in a heavy promotional environment right now,” says Stacy Janiak, U.S. retail leader at Deloitte LLP. “We’re seeing retailers pulling out all the stops, with sales earlier in the season. … Back-to-school sales started the second week in July. That’s never happened before.”

Past recessions have actually created new opportunities for marketers. Charles Schwab, for one, introduced the concept of a discount brokerage in 1974 amid economic decline, and tough times continue to serve the company well. As a result, it uses a significant portion of its media budget to respond quickly to volatility and market time lines such as changes in interest rates.

“As the markets get more difficult, consumers become more engaged,” says Ben Stuart, svp, brand strategy, advertising and media at Charles Schwab. “It’s not a high-involvement category and when consumers get more involved, it’s a good thing.”

When quality comes first

In a promotionally driven marketing environment, what happens when you’re selling a premium brand that needs to maintain an image of quality?

Responding to customer Web requests for a price break, Starbucks is currently introducing deals aimed largely at its card users and those who visit its stores more than once a day. Among them: In certain urban markets it’s offering free small iced coffees on specific days, with restrictions, and a cold grande beverage for $2 if you have a Starbucks receipt from a morning purchase.

For its part, Haagen-Dazs is linking its brand to consumers’ current interests in environmental responsibility with its “Help the honey bees” strategy. The company is drawing attention to disappearing bees critical in pollinating many of the ingredients in the company’s products. Through purchase of Häagen-Dazs products consumers are supporting the company’s donations to sustainable research programs at Penn State and the University of California at Davis.

“As money becomes scarce, consumers face tough choices,” says Claudine Cheever, deputy director of brand strategy at Häagen-Dazs’ agency, Goodby, Silverstein & Partners. “They’ll spend where their money is doing something of value.”

One of the few bright spots on the current industry horizon is digital investment from marketers.

“We’re seeing growth in online because it’s a proven channel,” says Josh Bernoff, a principal analyst at Forrester Research. “In a comfortable economy, it makes sense for advertising to generate awareness. Now it’s hard to get someone interested in a new car. … In that kind of environment, you spend down the funnel at the consideration and preference stage. It’s more valuable to reach people at that stage and the best way to do that has been word of mouth and peer recommendations. Now you can actually do it through social technology. It’s more innovative, doesn’t cost so much and you move consumers at a stage of decision making.”