Consumer confidence has reached an all-time low this month. Economists estimate the probability of a recession in the eurozone in the next twelve months at 80 percent. At such a moment, the question also arises whether it makes sense to continue to invest in marketing campaigns. Contrary to popular belief, historical research on major recessions over the past 100 years shows that companies that invested more in advertising during a recession saw their sales, market share and profits increase during and after a recession.
All against one
"History does not repeat itself, but it often rhymes", the American author Mark Twain knew long ago. Although there are recognizable patterns running through crises and recessions, each crisis and recession has its own specificity. During the corona crisis of 2020, there was hoarding among consumers and shops were struggling with supply problems. During the financial crisis of 2008, large banks were on the verge of capsizing and people threatened to lose their savings due to failures, resulting in a "run on the bank". During the oil crisis of 1973, the petroleum tap was closed and 'white products' made their appearance in supermarkets.
In this respect, the current crisis bears many similarities with the events of half a century ago. A war that culminates in an energy crisis with an infernal inflation spiral and recession as a result. Characteristic of this crisis is that the energy bill is becoming increasingly expensive. This at the expense of other needs and expenses. It means that cheap private labels of supermarkets peak without precedent and that other spending is also cut (leisure, restaurant and café, travel), or that purchases are postponed (from cars to construction).
For companies and their brands, which are themselves severely affected by the rise in energy prices, an unprecedented situation is also emerging: they no longer only compete with other companies and brands within their own sector. They are now all competing primarily with the energy sector. A battle of all against one. With only one winner for the time being: the energy companies.
What does research teach?
However, with this caveat in mind, it remains useful to look back at the effects of marketing and advertising in times of recession, based on independent scientific research from the past. Does it make sense to invest in marketing and advertising during a recession?
Professor Gerard J. Tellis (Marshall School of Business, Los Àngeles) delved into the answer to that question through a meta-study of existing empirical research on the matter that was published in 2009 in the Journal of Advertising Research. Tellis analyzed ten reports from various studies conducted between 1920 and 2005, mainly at companies in the U.S. They could be classified into two main themes: the effect of economic cycles on advertising and the effect of advertising by individual companies on their sales, market share and profitability.
Unsurprisingly, advertising in several major economies around the world is heavily influenced by economic cycles. For example, a 1 percent change in gross domestic product (GDP) in the positive or negative sense would be accompanied by a 1.4 percent change in advertising spending in the same direction. This cyclicality is more pronounced in countries that are more likely to focus on the short term. According to this research, advertising in the written press would also be more subject to economic change than TV advertising.
Studies also showed that private labels of supermarkets behaved acyclically. Unlike regular brands, they do better when the economy shrinks. Moreover, the increase in their market share in times of recession is greater than its decline in economically better times. A number of these private labels also stopped giving up their market share after a period of recession. The launch of so-called white products by then market leader GB in Belgium in the aftermath of the oil crisis of the 1970s laid the foundation for the structural breakthrough of 'private labels'. They represent 70 percent of the purchases in our supermarkets today.
Advertising makes you buy
As for the effects of advertising itself on sales, a majority of the empirical studies studied by Tellis indicated that cutting advertising budgets during a recession can have a negative impact on sales during and even after the recession, without yielding significantly more profit. Companies that invested more in advertising during a recession saw their sales, market share and profits increase during and after a recession. Several studies showed that the advertising strategy during a recession still had a positive effect many years later.
In terms of the impact on profitability, the results in the studies studied were also similar. Two studies showed that there is no more profit when advertising spending is cut in times of recession. According to one study, not scaling back advertising budgets even led to a growth in net revenue, while increasing advertising efforts during a recession led to more revenue than if those efforts were increased during a period of economic expansion. Yet two studies also showed that more advertising in times of recession would not lead to more return on investment.
The various studies Tellis examined cite different advantages and disadvantages of conducting or ramping up advertising efforts during a recession. According to Tellis, the strongest argument for scaling back advertising in economically harsh times is to 'optimize' or adjust advertising budgets in function of lower sales, which is typical of economic recessions.
The strongest argument for advertising more in times of crisis was that companies can campaign more effectively because there is simply less competition from other campaigns. If others advertise less, you stand out faster as an advertiser. Incidentally, Tellis argued, several studies did not distinguish between strong or weak companies. For example, it may well be that strong companies are more likely to increase their advertising spending in times of recession, while weaker companies are more likely to lower them.
Greater effect during recession
The conclusions from Tellis' research were also confirmed to some extent in a study by Jan-Benedict Steenkamp and Eric Fang, which was published in Marketing Science in 2011. Their research spanned 1175 U.S. companies within a three-decade time period.
They concluded that increasing advertising share in times of recession has a stronger impact on profits and market share than when advertising was inflated in times of economic expansion. However, the results also showed that the effectiveness of advertising depends on the degree of cyclicality of the sector. For example, the effects of advertising in highly cyclical sectors would be up to 50 percent greater in terms of market share and up to 200 percent greater in terms of profit than in sectors with average cyclicality. This factor 'cyclicality' – which indicates the impact of the business cycle – would manifest itself especially in times of recession.
Other research shows that the effect of advertising expenditure in times of recession mainly depends on the financial strength of a company. The greater the financial strength of the company, the more an increase in advertising investments during a recession increased profitability. It is a wisdom of all times: a nest egg ("a war opportunity" for companies is the best weapon to get through a crisis unscathed
There are many old and recent examples of companies that continued to advertise in spite of economic times. Procter & Gamble, the world's largest advertiser, increased its advertising efforts during the Great Depression of the 1930s, including to market its Ivory soap. More recent examples include chipmaker Intel, which launched the Intel Inside campaign in the early 1990s. Or the launch of Volvo's XC60 model in the aftermath of the banking crisis in autumn 2009. One of Volvo's most successful marketing campaigns ever.
Good for the share capital
Empirical research has shown that advertising can be linked to better financial performance and in times of recession can lead to better sales results, a larger market share and more profitability. As I said, this is about the direct consequences of advertising. But does advertising also have an indirect impact, especially on the financial markets? Does it influence the evaluation that investors make of companies and shares?
Professors Amit Joshi of the University of Central Florida and Dominique Hanssens of the UCLA Anderson School of Management conducted research on the effects of advertising on a company's stock market value, which appeared in the Journal of Marketing in 2009.
According to Joshi and Hanssens, advertising not only has an impact in the short term, in terms of sales and profitability, but also has a positive effect in the long term, namely on the return of shares of companies. They see two possible causes for this. First, there is the spillover effect. This means that investors have a preference for strong and well-known brands, because they think that brand awareness and quality perception can have an influence – a spillover – on the demand for shares of companies that have strong brands in their portfolio. It has been the success formula of Warren Buffett, a major shareholder of Coca Cola and Apple, among others, for many years.
A second cause is the signalling effect. That means that investments in advertising come across to investors as a sign of financial health of the company. Companies that invest in marketing and advertising give the signal that they are following a growth strategy that will increase the value of the company in the long term.
What is my conclusion? Contrary to what is often believed (and done), it is economically responsible to continue to invest in marketing and advertising in times of recession. The effect will be even greater than in normal times. The condition is that the brands must be available to consumers (in stores or online). After all, consumers adjust their buying behaviour during a recession and those who remain absent risk falling out of the shopping basket. Moreover, a strong brand is always at the side of its customers, in good times and in bad times. A crisis is a moment of truth for the relationship between a brand and its customers.
This is a slightly reworked version of the chapter on ROI of marketing and advertising in times of recession from my book: 'Advertising: dead or alive' (in French: 'La publicité: morte ou vivante'), published in 2013 and published by Lannoo Campus, and still available through most (online) stores. The English version is published by Kogan Page under the title: 'Advertising Transformed' (2014)