SHOULD YOU CUT COSTS OR INVEST IN GROWTH IN A RECESSION? YES TO BOTH.
At a speed that shocked the country and the world, the coronavirus pandemic has reshaped our everyday lives. Billions of people are sheltering in place and social distancing in public, and countless businesses have been forced to close their doors.
Several huge segments of the global economy have been particularly hard hit. The travel, hospitality, and entertainment industries lost $332 billion in market capitalization in March alone.
As businesses face uncertain times and many take on a defensive posture, downstream industries will feel ripple effects. Advertiser Perceptions reported that two-thirds of advertising executives expect major ad spend cuts will take place in the second quarter of 2020.
Yet, students of business history know that at times like these, withdrawing from the marketplace greatly diminishes the odds of survival.
A New Definition of Essential
The overall economy is in turmoil, but some companies have seen their brands suddenly thrust into the spotlight because they provide products and services vital to combating the pandemic, facilitating remote work, or simply making quarantine life a little more tolerable:
- Videoconferencing services, including Zoom, Cisco’s Webex, GoToMeeting, and Google’s Hangouts, have become a lifeline for organizations and individuals.
- Workplace collaboration platforms like Microsoft Teams, Slack, and Basecamp are adding millions of new users so that employees can work remotely.
- Streaming sites Netflix, Disney+, and Hulu are breaking their all-time stream records.
- Home improvement companies like Lowe’s, Home Depot, and Ace Hardware have been classified as essential services in at least 16 states.
- Food delivery options like Domino’s pizza and Grubhub implemented contact-free delivery.
- Home cleaning products, like Dyson’s air purifier, are in peak demand, leading the company to boost its ad spend by 78-percent in March.
Other brands are taking this moment to put up defenses, cut headcounts and salaries, and postpone major acquisitions, expenditures, and marketing initiatives. It’s a strategy we’ve seen before. After the 2008 recession, domestic ad spend declined by 13-percent.
“History shows that a full retreat during times of economic difficulty is a recipe for disaster.”
The losses weren’t felt equally across channels. Predictably, brands took that opportunity to rebalance their marketing to shrink investments in legacy mediums like newspapers and radio. Still, history shows that a full retreat during times of economic difficulty is a recipe for disaster. The evidence from every major recession in U.S. history is indisputable.
Companies that pull back too far, however, rarely return to their original position when the lean times end, and those that pivot and make strategic investments in growth, overtake their more reactionary competitors and thrive in the boom that often follows a bust.
Pure Defense is a Losing Play
In 2010, the Harvard Business Review examined 4,700 public companies to see which fared best after the 2008 recession. 17-percent didn’t survive (they liquidated, were acquired, or became private companies). Of the survivors, 80-percent hadn’t managed to regain their prerecession sales or profit growth rates. But, 9-percent were not only outperforming the competition, they were doing even better than they had before the downturn.
HBR determined that it wasn’t the companies that made the fastest or deepest cuts that flourished. In fact, the most defensive companies had the lowest probability of thriving. Rather, the winners had managed to balance cutting costs to face immediate challenges and investing in future growth.
Certainly, they did cut costs, but not arbitrarily and not across the board. The changes they made were focused on improving operational efficiency while increasing spending on marketing, research and development of new products and services, and the infrastructure they would need to ramp back up their operations when the time came.
These decisions don’t just affect the dollars and cents of a business. They filter down the organizational hierarchy and influence corporate culture. When a company’s first instinct in times of trouble is to cut losses, scale back needed upgrades and investments, and preserve cash on hand, pessimism and fear run rampant. Employees become disengaged, quality begins to drop, and the customer experience is deprecated.
Companies that do the opposite and maintain their commitment to their employees and customers safeguard their morale and are more creative about finding ways to cut costs that don’t unacceptably impede future growth. When demand returns in full, they are primed to outperform everyone else.
“These decisions don’t just affect the dollars and cents of a business. They filter down the organizational hierarchy and influence corporate culture.”
For example, when the dot-com bubble burst in 2000, Office Depot was the market leader in office retail, but the company responded to the event by immediately cutting 6-percent of its workforce. Staples, the number two player, closed down underperforming stores but increased its workforce by 10-percent to support newly introduced products and services.
Between 1997 and 2003, Staples’ sales more than doubled (from $7.1 to $14.6 billion). In the same period, Office Depot’s sales only increased by 50-percent. Staples was not only outgrossing the former category leader, it had become 30-percent more profitable thanks to its efficiency-improving measures.
Rising to the Challenge
When established brands pull back from a market, it inevitably creates opportunities for challenger brands.
In a famous study published in 1927, advertising executive Roland S. Vaile tracked 200 companies through the recession of 1923. The companies that continued to market themselves proactively during the downturn were 20-percent larger after. Those that hadn’t shrank by 7-percent.
Before the Great Depression, Post was the category leader in breakfast cereal, but it cut its budgets sharply to reduce expenses. Kellogg’s, by contrast, doubled its advertising and introduced a new product, Rice Krispies. Kellogg’s profits grew by 30-percent and overtook Post, which trails them to this day.
An energy crisis caused the 1973 recession. That same year the EPA first started publishing miles-per-gallon ratings for new cars. Toyota, which was producing smaller, cheaper, and more efficient cars than other automakers, saw the opportunity those two events created for them and implemented a long-term growth strategy.
“If anything, the temptation has been to spend less on advertising because we’ve got such a built-in demand for our vehicles,” a Toyota executive told Ad Age. “We haven’t succumbed to that temptation.” By 1976, Toyota overtook Volkswagen as the biggest importer of cars to the U.S.
The Right Move for Your Brand
These lessons from history are no doubt illuminating, but the optimal strategy for each individual brand today will require a deeply personal analysis. Every company has its own unique challenges and resources to grapple with. Generally though, it’s clear that going all in on cost-cutting is almost always a self-defeating practice.
We have tools today like analytics-driven marketing plans, finely-targeted digital campaigns, and monitored sales funnels that can keep the furnaces going through uncertain times, and these aren’t things that can be turned on and off like a light switch. They are methods of creating and nurturing relationships, and that process takes time and continual investment.
This is not a moment for retreat, it’s an opportunity for brands to make strategic pivots, because, as history shows, the ones that won’t will be left behind.
Do you need help navigating your brand through turbulent times? Take action today.