Apr

1

I drive a lot. Easily putting 35,000+ miles/year on my SUV. As a result, I see a lot of billboards. Over the last several months I have noticed that a large number of billboards that are either blank or have some sort of message that says they are available, e.g. "Ten thousand people per day see this billboard — shouldn't your message be here?"

Having been involved in marketing and sales most of my life, one thing I've learned is the last place you want to cut expenses is in your marketing and advertising budget. Good companies adhere to this rule but most companies don't. Those that cut their marketing budget end up being hurt because of that cut. Advertising and marketing is the equivalent of planting a crop so you can eat tomorrow. Sure, you can save money today by not spending the money needed to grow tomorrow's crop, but come tomorrow you're gonna be hungry.

Based on what I'm seeing as I drive down the highways of America, there are a lot companies cutting their advertising budgets. They will find that tomorrow they will not have the new sales to feed their company. Their company will end up hungry and weak, they will be forced to make further cuts, — and the downward spiral to starvation begins. Cutting advertising budgets is not a good sign for the economy.

Russ Sears comments:

My guess is that you are correct for individual businesses, it makes sense to advertise the most when things are bleakest. But like PE ratios (make sense for an individual stock, but not for the index) my guess is that this does not apply to the whole.

For example many businesses shut their doors during a recession, leaving much ad space. Also fewer start-ups, and most smart start-ups advertise heavily. Once they establish a client base they often let up.

Further, it could be that billboards go first out the budget, because they are hard to change to meet the changing environment. For example you don't see many billboards touting prices of cars, refunds, etc. but you do see some, in better times, with cars on them.

Riz Din writes:

With respect to the issue of marketing during recessions, the literature confidently supports Scott's experienced take:

Harvard Business School's Working Knowledge site says 'Maintain marketing spending. This is not the time to cut advertising. It is well documented that brands that increase advertising during a recession, when competitors are cutting back, can improve market share and return on investment at lower cost than during good economic times.'

mailto:knowledge@wharton comments 'Research shows that companies that consistently advertise even during recessions perform better in the long run. A McGraw-Hill Research study looking at 600 companies from 1980 to 1985 found that those businesses which chose to maintain or raise their level of advertising expenditures during the 1981 and 1982 recession had significantly higher sales after the economy recovered. Specifically, companies that advertised aggressively during the recession had sales 256% higher than those that did not continue to advertise.'

Regarding the question of whether it is better for a company to have been born in a time of hardship, in a short paper titled 'Entrepreneurs and Recessions: Do Downturns Matter?' Paul Kedrosky looks at 8,464 companies that have gone public between 1975 and 2006. Using the IPO as a yardstick of success, Kedrosky concludes:

'Knowing that a company was successful—at least as evidenced by having gone public—does not give us any information about whether that company was founded during a recessionary or non-recessionary period. At least in a general sense, that is suggestive in that, given smaller numbers of companies founded during recessionary periods, the implication is that companies founded in such times have a higher likelihood of turning out to be economically important'

(the study doesn't look at death rates of companies in different periods).


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