Close-Up: Live issue - Should advertisers be cutting spend?

With a rumoured downturn on the way, can a fall in adspend do more damage, Claire Billings asks.

With talk of an economic slowdown gathering pace, the timing of the IPA's research last week about the impact of cutting marketing budgets during a downturn could not have been better.

The general feeling is that a slowdown is on the way. Sir Martin Sorrell recently predicted that while events such as the Beijing Olympics and the US elections would buoy the market this year, it would only stave off a slowdown until 2009. Although media stocks such as ITV and GCap, whose shares were hit as a result of the impact that the collapse of Bear Stearns had on global financial markets, are already feeling it.

"There will be less spending on the high street because consumers are servicing mortgages and utility bills and putting expensive petrol in their cars. But when they get made redundant, we will start to experience it. The market is a discounting mechanism and it is telling you that it's going to happen next year," Lorna Tilbian, the executive director at Numis, says.

Ad budgets are often at the top of a cost-conscious finance director's hitlist because it's an easy decision to make. "It's a cut you can make that can have an immediate impact and, unlike mothballing factories or firing people, it doesn't incur costs," Tilbian explains.

Some advertisers, such as Homebase, which has been feeling the pinch from the pressure on the high street, have put their accounts up for pitch in an attempt to drive down advertising costs.

But according to the IPA research, which brings together lessons from previous slowdowns to help marketers build a case to maintain their spends, cutting marketing budgets can cause long-term damage to a company's brand.

"When a decision is taken by a finance director to disinvest in marketing communications, they are disinvesting in one of their shareholders' main assets. We want the board of directors and investment analysts to become much more conscious of that decision-making process," Hamish Pringle, the IPA's director-general, says.

In addition, he argues that a tough economic climate can be an effective time to spend. "In a downturn, if all around you are cutting their budgets and you don't, your spend as a percentage of the market rises. By just holding the line, you get a de facto increase in share of voice in relation to market share - the key ratio to watch," he adds.

For non-premium brands, raisiing marketing spend in a downturn is a no-brainer because that's when consumers tighten their belts. Dominic Stinton, the marketing director at Talk Talk, explains: "We'll be investing more in marketing in the coming year because in a downturn we can capitalise on it to help increase our share."

But not all companies will be in a position to spend heavily in a recession and, as Tilbian points out, companies whose "backs are against the wall" will inevitably cut back in a downturn. "Because, in the short term, all you can think about is survival," she says.

Tim Lindsay, the TBWA president of the UK and Ireland, adds: "The evidence says that brands that continue to spend, prosper mightily when the recession ends. But it tends to be the bigger brands that can afford to continue spending, so this is something of a circular argument."

As the research suggests, spending through a recession is a good idea for brands as well the agencies producing ads for them. But as it is not a realistic option for everyone, it could ultimately result in the strong brands getting stronger.

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AGENCY HEAD - Robert Senior, chief executive, Saatchi & Saatchi Fallon Group

"When there's a recession, it is a moment in time when there's a clear distinction between tacticians and strategists.

"In the eye of the storm, cutting the marketing communications budget can seem like the responsible, sage action to take. But with the benefit and clarity of hindsight, it almost always turns out to add to an advertiser's longer-term problems.

"The really smart clients are those who cut their budgets a bit because they have to, but then turn to their creative partners and demand that the creative bar be raised. So that whatever they do run with delivers disproportionately for them."

CLIENT - Dominic Stinton, marketing director, Talk Talk

"Talk Talk is a value brand, so we'd be mad to cut our marketing budgets in a downturn or a recession. The credit crunch is the best thing to happen to us. It's exactly the time when we should be investing in marketing because it's when people look to cut back on their expenditure and look to brands like ours.

"Part of our brand appeal is that you can cut costs without cutting corners, which is counterintuitive during a recession.

"Strong brands will typically invest heavily in marketing during a recession, because they gain disproportionately high market share while other brands are cutting back on their expenditure."

So when you come out, you're ahead of the curve. That applies whether you're a value brand or a premium brand."

ANALYST - Lorna Tilbian, executive director, Numis

"It's easier to win market share in a downturn when your competitors are under pressure and there's less noise.

"Whether or not you should cut back your spending depends on the severity of the downturn and how long and how deep it is, and it depends on how strong your financials are. The people who cut in a downturn do it because their back is against the wall. And although longer term it is deleterious to your business, in the short term, it's a quick fix. "The repercussions are long term, but, on average, chief executives are only in their jobs for three years, so it's the next person who has to pick up the pieces."

TRADE BODY HEAD - Hamish Pringle, director-general, IPA

"There's a constant battle in every marketplace, and part of that battle is between the communication about that brand to customers. If one falls silent, the relative shout of those remaining gets louder. If, in a recession, one stays talking while the others go quiet, it will stand out.

"If everyone in the marketplace understands this, then nothing will happen. But history shows that not everybody does that, and that quite a few brands cut their spends.

"Brand managers need to look at the history of spends in a downturn and look at who makes cuts. If lots of brands hold the line, there's probably less opportunity to gain market share in a downturn than in an upturn."