How to ride a recession
Introduction
A storm is coming.
On 23rd March 2020, UK Prime Minister Boris Johnson announced the country’s first COVID-19 lockdown. Over the following nine months huge swathes of the British economy ground to a halt.
And the results were dramatic.
17,000 retail stores shut down. A further 10,000 licensed premises did the same. Cinema attendance fell by 75%. Travel agencies’ turnover declined by more than 90%. And hotel revenues slumped to less than a quarter of those achieved in 2019.
All told, the pandemic’s effect on the country’s economy was calamitous. Britain suffered its deepest recession in over 300 years.
“The Office for National Statistics said gross domestic product (GDP) fell by 9.9% in 2020 […]. It was the biggest fall in annual GDP since the Great Frost of 1709.”
It is now two years since the first lockdown. Yet the UK’s economic picture is not much prettier. The public health crisis, it seems, has given way to a cost-of-living crisis.
Energy bills rose by a record 54% in March 2022 and a further increase is expected in October. Petrol prices have increased 49% in the two years to April 2022. Household disposable income is forecast to fall 1.75% in 2022, the biggest calendar-year drop since 2011 and the second-biggest since records began. In March inflation reached 7%, a 30-year high, and is expected to breach 10% by the end of the year. Interest rates rose from 0.75% to 1%, the fourth increase since December, and the fastest rise in 25 years.
In short, the UK economy is once again in for a rocky ride.
This article argues that whilst recessions are a threat to some businesses, they are an opportunity for others. It argues that brands can not only survive a downturn but thrive in one.
In a Harvard Business Review article titled ‘Roaring out of a Recession’, researchers analysed the performance of 4,700 public companies before, during and after three recessions. The team found that, on average, 17% of companies do not survive recessions. But it wasn’t all bad news. 9% of companies flourished, performing better on key business metrics after the recession than they did before it.
This article explores five principles that will help your brand be one that finds strength in the slowdown. The principles will help you increase your dominance during a downturn. The piece will help you be one of the 9%.
Let’s get started.
Principle 01: Prune your portfolio
In December 2003, Nirmalya Kumar published the now iconic paper ‘Kill a Brand, Keep a Consumer’.
Kumar, a Professor of Marketing at Singapore Management University, described how most companies spend vast sums of money launching new brands, extending existing ones and acquiring rivals. The result, Kumar argues, is that most organisations operate too many brands. And while a few of these are highly successful, most are anything but.
“The surprising truth is that most brands don’t make money for companies. My research shows that, year after year, businesses earn almost all their profits from a small number of brands—smaller than even the 80/20 rule of thumb suggests. In reality, many corporations generate 80% to 90% of their profits from fewer than 20% of the brands they sell, while they lose money or barely break even on many of the other brands in their portfolios.”
Kumar’s research shows that the profitability of the brands within a portfolio tends to follow a power-law distribution. A few brands make a lot but many make a little if anything at all.
During prosperous times, this “long tail” of low and negative margin brands can be tolerated by managers. But when times get tough this poor performing part of the portfolio provides a powerful lever for leaders to pull.
By losing the loss-making brands organisations can push up profits. By pruning their portfolio, companies can improve performance. By contracting, companies can grow.
Kumar puts it plainly:
“The implications are inescapable. Companies can boost profits by deleting loss-making brands.”
Recessions provide the perfect opportunity for businesses to make these tough choices. Big challenges, after all, justify big decisions. And few times were as challenging as the downturn of 2020.
In June, three months after the first COVID-19 lockdowns had been announced, Professor Mark Ritson made the case for companies to rationalise their ranges.
“If you like sales revenue, you’ll want as many products as possible. If you like profit, you’ll be ripping through the product mix like there is no tomorrow. Coronavirus offers a golden moment to review the product portfolio and make the hard calls. By the time consumers start buying again, the pointless stock keeping units (SKUs) will not only be gone, customers won’t even remember they existed. You’ll have the focus and improved margins to do so much better as a result.”
Kumar and Ritson’s point is clear. Culling brands protects profits.
Kantar Millward Brown, on the other hand, stop short of advocating for the killing of brands. Instead, the renowned researchers encourage a “triage approach” where a company focuses its resources on core brands while all others are left to fend for themselves.
According to the consultancy’s report, Marketing During Recessions: Survival Tactics:
“Concentrate on your core brands and products. Now is not the time to spread scarce resources across multiple brands or product variants. Recessions may call for a triage strategy. Concentrate your marketing muscle behind the brands that are most likely to survive and leave the others to sink or swim.”
So whether you decide to cull your loss-making brands or simply withdraw their budgets, my first principle is clear. Protect your core. Prioritise your high margin brands and set aside those that are low-margin or loss making.
Principle 02: Increase your SOV
Pruning your portfolio has a secondary benefit. Not only does it improve profitability, but it also streamlines operations. Marketing fewer brands means employing fewer staff to manage them, fewer production lines to manufacture them and fewer trucks to distribute them.
During a downturn, these cost reductions are a welcome relief to senior management. But the search for savings doesn't stop there. According to Ebiquty's ‘Advertising Through a Recession’ report:
"Brands spend on average around 10% of revenue on marketing […] and media represents around a third of all marketing spend, making it the biggest single line item in many advertisers’ budgets. When the CFO comes looking for savings to protect margin and minimise damage to the bottom line, media and marketing budgets are an obvious and easy target.”
This, unfortunately, is more than a fleeting fear. During March 2020, a Marketing Week survey found 60% of marketers had either delayed their budget commitments or put them under review.
The decision to “go dark” is understandable. But it isn't always advisable. A raft of research shows that those who pause their promotions are dramatically outperformed by those who do not.
In an IPA report titled ‘Advertising in a Downturn’, econometric analysts modelled two budget-cutting scenarios:
"In the first scenario the budget was cut to zero for just one year and then returned to usual levels. In the second scenario the budget was halved for one year and then returned to usual levels. Sales recovery to pre-cut levels took five and three years respectively."
Broadly speaking, a brand’s post-recession recovery is proportional to the depth of the cuts that it makes.
Similar findings come up time and time again. There is, however, a major caveat. Whilst strong and stable companies should absolutely avoid freezing spend, more fragile organisations may have to. JP Castlin in Marketing Week:
“Asking companies looking at potential bankruptcy to invest in long-term marketing is akin to telling a starving family to water the apple tree in their garden instead of eating its fruit. Not only will they ignore your advice, if need be they’ll cut down the tree for firewood.”
Whist companies on the verge of collapse should cut their communications to ensure their survival, strong brands should not. Despite the evidence, however, the truth is that many will. This overall drop in demand causes media prices to plummet.
Les Binet writing in his essay, Navigating COVID-19: Survival, Adaptation and Recovery:
“Remember that media prices will fall. When times get tough, demand for ad media shrinks, but supply (measured in eyeballs and ears) does not. In fact, supply increases for some media. […] With less money chasing more eyeballs, cost per view plunges.”
Brands who maintain their advertising investments, benefit twice. Competitors reduce spend and their own spend goes further. With these benefits working in tandem, brands who continue to invest almost inevitably increase their share of voice.
This is important as a brand's share of voice (SOV) is closely correlated with its share of market (SOM). Back to Les:
“Remember that what affects your market share, particularly in the long term, is not the absolute weight of your advertising, but your share of voice.”
A brand’s SOV and SOM exist in equilibrium. When a brand's SOV exceeds their SOM, the latter rises until the equilibrium is restored. Research shows this dynamic is even more relevant during a recession.
Peter Field analysed every case study submitted to the IPA Effectiveness Awards during the 2008 financial crisis:
“During the 2008 recession, brands who’s share of voice was equal or less than their market share saw an average of 0.4 very large business effects (such as profit, pricing, share, penetration etc.) and an average market share gain of 1%. Brands with an excess share of voice between 0% and 8% saw 1.3 very large business effects and an average market share growth of 1.4% and those with an ESOV over 8% saw 2.1 very large business effects and share growth of 4.5%.”
So this is my second principle. Increase your share of voice. Those who maintain or increase spend capitalise on a rare opportunity to grow share whilst both competitor spend and media prices are depressed.
Principle 03: Balance brand and activation
Field’s analysis of case studies from the 2008 recession didn’t stop at share of voice. As well as looking at how much a brand should spend, Field studied how that spend should be allocated.
To understand the analysis, we first need to review Binet and Field’s classic text, ‘The Long and the Short of It’.
The title refers to the two types of advertising that the book outlines. Long term, “brand building” advertising has broad reach and uses emotional messaging. Short term, “sales activation” advertising has tight targeting and uses rational messaging. The former generates demand for tomorrow whilst the later fulfils it today.
By analysing 30 years of IPA data, Binet and Field have found the optimal balance between the two:
“On average, brands should spend around 60% of their budget on brand-building activity and 40% on activation. […] On average a 60:40 split appears to deliver maximum efficiency and maximum effectiveness.”
So how is this optimal allocation of spend affected during times of recession? Does it stay the same or does it tip in one direction or the other? Field’s analysis of case studies submitted during The Great Recession offers a tentative answer:
“The IPA data argues for a balance between brand and activation spend in the ratio 60:40 for maximum business effectiveness. The IPA data on how campaigns balanced brand and activation spend was less extensive back in 2008, so there is some uncertainty in the findings, but the data suggests that a slight shift from the 60:40 optimum towards 50:50 might have been sensible in the 2008 recession.”
In short, reallocating about 10% of your budget away from long term, brand building advertising and towards short term, sales activation is recommended. This, I think, makes intuitive sense. When times are tough, worry a little bit more about today and a little bit less about tomorrow.
It’s worth remembering, however, that this 50:50 recommendation is based on an aggregation of many different case studies spanning many different categories.
This is an important caveat, because industries react very differently during times of recession. Companies who operate in “consumer discretionary” categories, for example, tend to lead declines, while those in “consumer staples” lag or experience no effect at all.
Mark Ritson, in his 9 step recession playbook, tackles this point head on:
“Consider maintaining the shorter spend too. This one is a little less definitive because it will depend on your category and the impact the recession will have on it. If you market a consumer staple then it should be performance spend as usual. But if you work in an area which will be hit by recessionary head winds – luxury retail, restaurants, etc – then it may make sense to cut back on your shorter-term marketing spend while the recession impacts your target customers. Note, this is the reverse of traditional corporate logic which maintains short marketing spend at the expense of longer-term branding.”
In Ritson’s view, the more your short-term sales are impacted, the less should be spent trying to convert them.
So this is principle number three. Balance brand and activation. Use the 50:50 rule of thumb as guidance whilst diving into the specific dynamics of your category and its context.
Principle 04: Communicate optimistically
Early on in the 2020 pandemic, many brands decided to pause their campaigns for fear that their bright and uplifting executions would not suit the sombre and serious tone of the times. We quickly saw a series of ads supported by slow, soft piano tracks, recordings of video calls, and heartfelt messages of support.
Orlando Wood and the team at System 1 Research, however, wanted to test this assumption. To understand how a brand should speak to consumers during a time of recession, the researchers conducted an interesting experiment:
“System1 re-tested 100 ads — mostly B2C — in the UK (50 ads) and the US (50 ads) from January and February 2020 (the period before the pandemic hit these countries) to investigate whether these ads are connecting any differently today. The ads were chosen at random from across the sectors covered and the re-test was conducted over the weekend of 21-22 March. The results of the retest show that, on aggregate, ads from January and February 2020 are connecting just as strongly today as they did then.”
According to System 1’s methodology the 100 ads received an average star score (a predictive measure of long-term growth) in the period preceding the pandemic of 2.3. In the retest conducted after the pandemic had hit, the score fell just 0.1 stars to 2.2. Wood also measured two other metrics, spike core and fluency. The sample averages remained exactly the same on both, at 1.1 and 0.6 respectively. For all three metrics, the correlation coefficient between the before and after test results was between 0.89 and 0.95.
Whilst the nation’s mood had changed, its response to advertising had not. Advertising that performed well before the pandemic, did similarly well after.
The next step in the study was perhaps even more interesting.
Wood and his colleagues analysed the creative content of the ads whose performance had significantly increased and decreased between the two tests.
“The ads that are performing better today feature many of the right-brain features that are so effective at connecting with audiences and eliciting an emotional response. Conversely, the ads that perform slightly less well today are those ads which feel distinctly left-brained — those focused on things over people, those that are direct, self-conscious, and reliant on words and rhythm, those that are competitive, those that focus on control and performance, and those that are more aggressive in tone.”
During dark times people look for brightness. When people are down, they don’t want advertising to reflect their mood but to lift it. When you are struggling with the economy, you look for entertainment. Back to Wood:
“Brands must today, more than ever, show their generosity, spontaneity, humility and self-awareness, even give people something to smile about. It is these most human of characteristics that advertisers need to adopt, if they are to come out of the crisis, and come out of it stronger.”
I’ll finish this chapter with a word from an Ipsos report titled ‘Marketing Your Way Through an Economic Downturn’. The study’s findings are remarkably consistent with System 1’s:
“In difficult times people value security, familiarity, family, and friends. It is no surprise that nostalgia, an idealised yearning for the past, has been resurgent in advertising of late.”
So this is my fourth principle. Communicate optimistically. Don’t use your advertising to mirror the mood of the nation, use it to improve it.
Principle 05: Invest in innovation
It is popularly believed that during times of recession, shoppers seek the safety and familiarity of products that they have previously purchased. It is an understandable assumption. When things are uncertain, why would consumers expose themselves to even more risk?
It seems, however, that this idea is nothing more than a myth.
A report from TNS Global called ‘Finding Growth in an Economic Downturn’ makes the case clearly:
“As marketers and business strategists, we tend to assume that consumers with shrinking shopping budgets and falling confidence retreat into their shells and buy only the products they know. In fact, our research shows no evidence of consumers in a downturn becoming more risk averse or habitual in their purchases. […] People think about what they are buying more in a downturn […]. Conscious consideration actually weakens entrenched shopping habits and increases the likelihood of consumers looking beyond one simple, decision-making factor, such as price. As such, it provides a powerful opportunity for new and innovative propositions.”
When shoppers are forced to tighten their purse strings, autopilot purchases are replaced by more active evaluation. Products that were once bought without thought are now consciously considered and, as a result, we see a greater degree of switching behaviour.
This propensity to trial new brands and products is also driven by the emergence of a new set of needs. A paper by McKinsey & Company looked at how three different crises led to new needs, and thus the widespread adoption of new innovations:
“The sharing economy rose out of the 2009 financial crisis as technology enabled the creation of marketplaces for underutilised assets just as people were seeking much-needed new sources of income, catching incumbents unprepared. The SARS epidemic that ravaged Asia in 2002 and led its citizens to shelter in place was the impetus for growth and widespread adoption of e-commerce in that region, making China the epicentre of innovation around social commerce. The more recent focus on the climate change crisis has driven significant growth in solar equipment and electric cars, as well as innovation around more “earth-friendly” foods such plant-based meat substitutes.”
During recessions we can expect shoppers’ consideration sets to expand; partly because they pay more attention to their purchases and partly because new needs will arise.
Despite this, evidence suggests that during downturns innovation gets deprioritised by the c-suite. McKinsey’s ‘Innovation in a Crisis’ paper found that the portion of executives who classed innovation as one of their top two priorities fell from 55% before the 2020 pandemic to just 23% one month into it. Digging deeper into the data, this deprioritisation of innovation can be seen in 7 of the 8 industries that McKinsey measured.
The disparity between the behaviour of businesses (reduced innovation) and the propensity of people (increased switching) presents brands with an opportunity. Mindful marketers can invest in innovation to meet the mindsets and new needs of recessionary audiences.
Those that do, stand to reap the rewards.
McKinsey studied the market capitalisation of 50 companies that innovated throughout the 2008 financial crisis and compared them to that of the S&P 500 (an index of 500 large public companies, listed on American exchanges). Towards the end of the crisis, the innovators had outperformed the index by 10%. But perhaps more impressive is the difference in fortunes that could be seen during the post-crisis recovery.
“In past crises, companies that invested in innovation delivered superior growth and performance postcrisis. Organisations that maintained their innovation focus through the 2009 financial crisis, for example, emerged stronger, outperforming the market average by more than 30 percent and continuing to deliver accelerated growth over the subsequent three to five years.”
So this is my fifth principle. Invest in innovation. Capitalise on consumers increasing openness to shopping around and use innovation to serve their new and unmet needs.
Conclusion
There you have it. Recessions pose a threat to many businesses but offer an opportunity to many others. Brands that seize this opportunity can come out of a slowdown stronger than they went into it. To do so companies must follow five guiding principles.
They must prune their portfolios, prioritising high margin brands and setting aside those that are low-margin or loss making. They must increase their share of voice, pushing up their market share whilst competitor spend and media prices are low. They must balance brand building and sales activations, using the 50:50 rule as guidance whilst considering the specific context of their category. They must communicate optimistically, using advertising to lift the mood of the nation, rather than reflect it. And finally, they must invest in innovation, capitalising on shoppers’ openness to switching whilst simultaneously serving new needs.
By following these five principles brands can not only survive the storm, but harness its energy. They can find strength in the slowdown. They increase their dominance during the downturn. They can be one of the 9%.
Or as the great A. G. Lafley once put it:
“When times are tough, you build share.”
Notes
This article was featured in Episode 530 of Neil Perkins’ Only Dead Fish newsletter. Thank you Neil.