Getty
Even if the U.S. economy is not sliding into full blown recession this year, the Coronavirus is likely to bring about a slowdown in economic activity. Goldman Sachs recently revised its earnings estimate for the year for U.S. companies to 0% growth in 2020.
This may be the direst economic development since the 2008-2009 recession, although the circumstances are different. The last recession, in 2008, was caused by lack of liquidity and the banking crisis. This time, companies have plenty cash, although some of it was siphoned by stock buyback programs. Still, companies were unprepared for the epidemic and, so, it requires rethinking our current business practices.
Goldman Sachs stated that the reduced profit forecast for this year reflects the severe decline in Chinese economic activity in Q1, plus lower end-demand for U.S. exporters, disruption to the supply chain for many U.S. firms, and elevated business uncertainty.
The U.S. economy is driven by consumer spending, which accounts for more than two-thirds of GDP. A lot would depend on consumer confidence, which rose last month, but, that was before the epidemic reached our shores. Realistically, one has to prepare for a slowdown. Travel, retail, restaurants and hospitality are already under pressure.
If marketers around the world see leaner times ahead, it will be critical to focus on profitable effectiveness, pursuing ROI-driven growth. More than ever, the principle of opportunity-cost mandates optimizing investment allocation. Having gone through a few downturns in my career, this is the course of action that I recommend.
Do not cut ad spend
Advertising is usually the first area to cut. During the 2008 recession, advertising outlays fell by 13%. Research shows that firms that cut their ad spend during recession typically see significant sales and income decline in double figures. This will also increase the pressure to cut prices and distribution will become harder to maintain without advertising support. Furthermore, companies that cut advertising take much longer to recover, as such action will not only depress sales and market share.
Spend more than your market share
Because big brands have an advantage of scale, they enjoy an advantage over smaller ones in terms of attracting repeat purchase and recouping their marketing investments. Therefore, a brand that increases share during a recession stands to benefit from this multiplier once the economy rebounds. There is ample evidence that maintaining SOV (share of voice) at or above SOM (share of market) will result in longer-term improvement in profitability.
Cut the right costs
Since the company may cut budgets across the board, all investment in the area of marketing must have a clear-cut rationale and compelling business case for the board and CEO to go along with it. Review your budgeting and rebalance it strategically for growth and efficiency, while cutting non-essential areas. That means increasing support for marketing, R&D, and new product development. Maintain, or even cut, working capital and definitely take a long, hard look at your administrative cost and fixed assets expense.
Stick with your customers
Double-down on your current customers. It is not easy to get new customers even when the economic clime is normal, let alone in periods of economic downturn. Ask current customers what they need from you. Make customer service a priority. Enable the sales teams to be more effective as the competition might get tougher. Do care for your current customers as they will likely stick to you if the going gets tough.
But, Invest in new ways to reach them
In any recession, there are market segments that grow faster than others. Being able to locate and understand these market segments presents an opportunity to quickly win businesses in the fast-growing market segments. Medium term, we’ll see increased “cocooning” as people avoid socializing due to the virus could result in an acceleration of a shift out of store and into e-commerce.
Focus on core brands
Concentrate on your core brands and products. Tough times favor multi-purpose goods over specialized products. Reliability, durability, safety and performance are what consumers are looking for during a recession. New products that address these concerns should be introduced, and advertising should stress superior price performance.
Most important, dial-up creativity
Creative impact is crucial in a downturn. The key to maintaining a profitable brand is hiring a great agency that can build and maintain a strong emotional bond with customers. However, don’t forget that this crisis is, first and foremost, a humanitarian issue. Brands must be empathic to avoid reputational damage.
A recession can become a great opportunity. Because media space supply exceeds demand and prices fall, the ROI from advertising often increases in a recession. The combination of low media prices and weak competition gives companies a unique opportunity to fight for market share effectively.
If the chief marketing officer is not deeply involved in strategy formulation of the company, the marketing budgets are always disproportionately cut. The result of this is that marketing plays less important roles during a slowdown, leading to the company to losing out to the competitors. It is marketing’s responsibility to fight for its resources.
