Advertising as an Anti-recession Tool

Good reading, in these tough times, is cogent analysis published 40 years ago in the prestigious Harvard Business Review (HBR).

Recessions have been fueled by underconsumption, says author Nariman K. Dhalla. Caution snowballs as inventories build up, production is reduced, and workers are laid off.

“The most suitable way to get out of this vicious circle is to go to the source and stimulate demand for goods and services,” wrote Dhalla. “To accomplish this task, what is a better tool than advertising, the mass-selling equivalent of mass production.”

(William “Bill” Reagan, immediate past chairman of OAAA, shared this prescient article with us. Thank you, Bill, for your knowledge of the past as we deal with today’s crisis.)

Companies that raised ad budgets during the 1974-75 recession gained market share and increased sales or at least prevented erosion, said research published in HBR. Those who cut advertising in both years experienced sales drops and loss of share.

Advertisers cited these common reasons for cutting ad budgets during hard times:

1. Advertising would be wasted because people don’t have money

2. Competitors are slashing ad spending, so we can do likewise

3. Money saved on ad spend can help pay dividends

Each argument is fallacious, Dhalla wrote.

“Rather than wait for business to return to normal, top executives should cash in on the opportunity that the rival companies are creating for them. The company courageous enough to stay in and fight when everyone else is playing safe can bring about a dramatic change in market position.”

We’ve seen more recent proof, long after this piece was published by Harvard Business Review. On March 17, in a thoughtful opinion post in Ad Age, Bradley Johnson recalled that after 9-11, “GM’s campaign worked. U.S. auto sales broke a record in October 2001, powered by the automaker and copycat promotions from rivals; 2001, a recession year, ended up as what was then the second-best year ever for U.S. auto sales.”

Last year, Forbes published a reminder that Pizza Hut and Taco Bell “took advantage of McDonald’s decision to drop its advertising and promotion budget” in the 1990-1991 recession. McDonald’s sales declined; Pizza Hut and Taco Bell saw sales growth.

Forbes media contributor Brad Adgate wrote that “Amazon sales grew by 28 percent in 2009 during the ‘great recession.’ The tech company continued to innovate with new products during the slumping economy, most notably with new Kindle products which helped to grow market share. In a first, on Christmas Day 2009, Amazon customers bought more e-books than printed books.”

The causes, severity, and duration of economic downturns vary. But regardless of the variables, the fundamentals published four decades ago in the Harvard Business Review remain sound.

Advertising is a counter-cyclical lever . . . and advertisers should pull that lever for the sake of quicker recovery, stronger sales, and market position.