Memo to the CEO: Do not turn off the marketing tap

by Kheepe Moremi. Marketing expenditures co-vary with economic activity and company fortunes. When economic activity or company performance decelerates, firms cut back on their marketing activities. This also happens in the face of exogenous shocks. With COVID-19 and associated policy responses that halted economic activity in consumer discretionary and industrial GICS (Global Industry Classification Standard) sectors (Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Health Care, Financials, Information Technology, Real Estate, Communication Services and Utilities), and partially left consumer staples and health care open, most firms switched off their marketing activities altogether. This paper argues that the best strategic response under these circumstances is to find innovative ways to maintain flows into mission-critical marketing assets that aid or facilitate customer lifetime value. The business case for doing this makes sense.

Marketing is a discretionary profit and loss statement item – one of the first to go in tough times in most companies. In many firms and geographic markets, the marketing budget co-varies with economic activity and/or company fortunes. Marketing budgets generally go up or down, in line with economic activity and/or company performance. Unfortunately though, to remain in the game or to retain a winning position, in good or bad times, the business or brand franchise must be strong enough hang onto, grow or bounce back pre-exogenous shock.

Customer Lifetime Values (CLV) activity is realised through and facilitated by off balance sheet, intermediate brand-related intangible assets such as, prompted or unprompted awareness; confidence; trust; and interest, etc. All assets, intangible or otherwise, depreciate (not in the accounting sense) over time; or are subject to normal wear and tear, and these marketing assets need to be maintained or upgraded in good or bad times. Some level of re-investment needs to be maintained, regardless.

In the face of the COVID-19 pandemic outbreak, most countries instituted social distancing and varying forms of lockdown. As a consequence of this, economic activities in consumer discretionary GICS  industry sectors, as well as some categories within the industrials sector, were halted; whilst some essential GICS sectors were left either fully or partially open. As a result of this, most firms in most industry groups and categories were caught between a rock and hard place. On the one hand, demand side activity and revenue dried up or reduced; whilst on the other hand, they continued to incur expenses (COGS, operating expenses and financial expenses).

Faced with the above situation, some firms, especially those with high asset betas, were left with no choice, but to de-leverage their operational load factors. Since the marketing budget, a part of SG&A, is largely a discretionary item, some firms switched off their marketing activities altogether whilst waiting for some signals to ascertain whether the second wave will materialise and what the policy response will be. There is no guarantee however, that the off-balance sheet, and intermediate intangible assets that facilitate customer and consumer activity will stand still during this “wait and see” period.

As the saying goes, nature abhors a vacuum and during a business franchise’s absence, something may pop up and fill the space, especially during this time when consumers are dealing with their health, economic and social anxieties, fears and uncertainties.

The reality is that volatility, ambiguity and uncertainty induced by combinations of exogenous factors acting in concert, are now becoming a new future, as Darwinian patterns of change (stable periods followed by small or incremental variations over long periods resulting in something new) either give way to or live side with punctuated equilibrium (stable periods followed by rapid bursts of change); as well as, technological change at an industry level that follows what Tushman and Rosenkopf referred to as an era of ‘incremental change’; followed by an era of ferment and then a dominant design.

Indications from “rapid bursts” of exogenous and industry level shocks; as well as firms’ attempts to adapt to these shocks, suggest that most GICS industry sectors, categories and stocks/firms are now in an era of ferment. At some point however, industry sectors and stocks/companies will emerge with a fit for purpose “dominant design”; whether that be in the form of new business or operating models, with some elements of either being reinforced and others being reoriented.

Instead of switching off the tap altogether, marketing should find innovative ways to maintain optimal flows to keep the mission critical “marketing assets” alive and current. This is more so because the lockdowns and the slews of health related pre-cautions, temporarily changed customers and consumers’ established habits and practices. Your business franchise absence could reinforce the new habits and practices that consumers picked up during the lockdown period. In addition to the above, the business case to find innovative ways to maintain flows into mission-critical marketing assets, makes sense. Since many categories and firms would have cut back on their promotional activities and marketing spend, this means that:

• There is a strong possibility that it would cost less now than pre-Covid to buy the same exposure.
• Since there is reduced promotional clutter, you may need fewer exposures to breakthrough and be seen or heard.
• Empirical evidence shows a strong link between increased marketing spend and increased market added value during recessions than non-recessionary periods.

Sources: https://www.we forum.org/agenda/2020/06/coronavirus-advertising-marketingcovid19- pandemic-business/ (Date accessed, 02 July 2020); List of references: https://www.researchgate.net/publication/342658815. [This research paper is published with the permission of the author.]

Kheepe Moremi is a strategy analyst, LBO investor, non-executive director and sessional lecturer designate at a premier business school in Johannesburg. He is also the founder and Managing Partner at Mark To Market, a boutique advisory firm and investment firm. He has a proven track record of working with boards of directors, entrepreneurs and owners and has also worked with or for blue chip companies that include; Procter & Gamble, Deloitte, FNB Business Banking, and others.

– Receive the Retailing Africa newsletter every Monday and Thursday • Subscribe here

– Take advantage of Retailing Africa’s ‘Pay-what-you-can’ business support package • Read more