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Thursday, August 11, 2022

A recession will tempt firms into short-term cuts and sacrifice of future growth

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Companies should continue to invest in their image and brand, even during a difficult economic period

Throughout the history of recessions and periods of high inflation, when businesses have felt compelled to cut back to protect their margins, they’ve often looked at marketing spend with a raised eyebrow. It’s usually one of the biggest line items and certainly one of the easiest to cut.

It’s a deep shame, therefore, it has taken so long to build enough evidence to show why this is almost always the wrong strategy.

When businesses cut marketing investment in response to tough economic periods, they weaken their brands in the near-term and limit growth and profitability in the longer term.

Data from the Institute of Practitioners in Advertising (IPA), which assesses how more than a thousand businesses invested throughout different recessions, shows that brands that didn’t make cuts were able to record five times as much profit, share and penetration and four and half times the annual market share growth.

Meanwhile, brands that invested more heavily in their public image, meaning their share of voice was greater than their actual share of the market by more than 8 per cent, were “significantly more likely” to report higher profit growth. They were also more likely to record larger increases in market share.

Cutbacks also strengthen competitors that hold their nerve. Businesses that maintain or only lightly trim marketing budgets can grow their relative share of voice within their market, often by taking advantage of lower media rates.

We saw this play out during the pandemic. Businesses able to communicate corporate and social responsibility effectively with their customers were repaid with greater loyalty. Digital marketing investment helped many others support the necessary pivot to online and e-commerce models.

The UK economy faces new economic pressures, with inflation currently standing at 9.1 per cent and set to rise further still. But unlike previous financial crises, we still have a tight labour market and low unemployment. There is pressure on wages and standards of living, but people do also, still have jobs – and some cash to spend.

Previous political strategies to generate economic growth did so by imposing austerity; today there is much more direct government aid. In the lockdowns, through furlough, and now, through financial help on bills.

Despite obvious problems with standards of living, the poorest households are, on average, being “approximately compensated” for the rising cost of living this year, according to the Institute for Fiscal Studies. This should help support consumer spending.

Ordinarily, GDP has been the defining predictor for both marketing and broader business expenditure. However, in 2020 we are starting to see this decouple – with consumer spend becoming a more relevant and useful measure. This is an increasingly precise measure for businesses to enable them to make investment decisions with more confidence.

The economic crisis won’t be felt uniformly. Some brands, such as discount retailers or fast food businesses, naturally do well during the worst stages of recession. Others, such as travel businesses, suffer early then perform better when demand skyrockets nearer the recovery period.

The worst course of action is short-termism in order to improve quarterly statement in exchange for long-term growth. Invest throughout a downturn, and businesses have a much better chance of profiting in the recovery.

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