By Dave Chase, Published in iMedia Connection
How brands thrived during the Great Depression
With the recent meltdown on Wall Street and talk of a possible depression, I thought it would be instructive to do a bit of research on what happened with regard to advertising during the Great Depression. I have heard anecdotes over the years of great companies founded during recessions. What do GE, Disney, HP and Microsoft have in common? They were all startups during steep declines in the U.S. economy. GE started during the panic of 1873, Disney started during the recession of 1923-24, HP began during the Great Depression, and Bill Gates and Paul Allen founded Microsoft during the recession of 1975.
Little did I know that one of the best sources of information on this topic was written by an archaeologist and Egyptologist named Rod Polasky, who now runs an archaeology website -- archaeolink.com -- designed as a homework help site. To my surprise, this archaeologist covered the impact on advertising and the accompanying rise and fall of businesses during the Great Depression. As he noted, smart companies prospered during and coming out of the Depression.
To begin, not all was doom and gloom during the Great Depression. It was a time when those who knew what they were doing made great economic strides, and the very nature of the Depression was an economic boon for them. It was a time when several companies benefited from aggressive marketing while their rivals cut back. A good example of that would be Kellogg besting C.W. Post during that time. Consumers didn't stop spending during the Depression; most just looked for better deals, and the companies providing those better deals came out stronger after the Depression ended. When spending picked up, consumer loyalty to those companies remained.
Generally speaking, those companies that not only survived but also thrived during the Great Depression were those that continued to act as though there were nothing wrong and that the public had money to spend. In other words, they advertised. These are industries that didn't wait for public demand for their products to rise. They created that demand even during the most difficult of times.
Because so many companies cut spending during the Great Depression era, advertising budgets were largely eliminated in many industries. Not only did spending decline, but some companies actually dropped out of public sight because of short-sighted decisions made about spending money to keep a high profile. Advertising cutbacks caused many customers to feel abandoned. They associated the brands that cut back on advertising with a lack of staying power. This not only drove customers to more aggressive competitors, but it also caused financial mistrust when it came to making additional investments in the no-longer-visible companies.
Both anecdotal and empirical evidence support the case that advertising was the main factor in the growth or downfall of companies during the Great Depression. To put it bluntly, the companies that demonstrated the most growth and that rang up the most sales were those that advertised heavily. Brand marketers can take a page from history to see which purchases were most affected. No doubt, smart publishers and technology suppliers will adjust their account targeting based upon which industries suffer the least. Perhaps more importantly, they should assess which companies will be the Kelloggs or C.W. Posts of this era so that sales resources are properly focused.
Depression spending in action
The Great Depression offers classic examples of the power of brand advertising even during times of economic crisis. To show how this affects companies that sell a variety of products, let's look at a hierarchy of demand, from essential consumables to deferrable purchases to capital goods. In reality, there was no such hierarchy. The examples below are across the spectrum. Procter and Gamble represents essential consumables, Chevrolet represents deferrable purchases, and Camel represents non-essential products. As you can see, the so-called hierarchy of necessity and want was sidestepped by those who had the marketing chutzpah to ignore such distinctions. Naturally, for a business to capitalize on competitors' pulling back, they need a strong balance sheet. But a strong balance sheet alone didn't automatically determine behavior.
Procter & Gamble. To this day, P&G maintains a philosophy of not reducing advertising budgets during times of recession, and the company certainly did not make any such reduction during the Depression. It's not a coincidence that P&G has made progress during every one of the major recessions. While competitors cut ad budgets, P&G increased its spending. While the Depression caused problems for many, P&G came out of it unscathed. Radio took P&G's message into more homes than ever, and P&G became a pioneer in effective use of that medium, including its role in creating the notion of soap operas.
Chevrolet. During the 1920s, Fords were outselling Chevrolets by 10 to 1. In spite of the Depression, Chevrolet continued to expand its advertising budget and, by 1931, Chevrolet took the lead in its field. It is believed that Ford's weaker balance sheet entering the Depression rendered it unable to respond to Chevrolet.
Camel Cigarettes. In 1920, Camel was the top-selling tobacco product. American Tobacco Co. then struck back with the Lucky Strike brand, and by 1929 Lucky had overtaken Camel as the No. 1 brand. Two years later, in the heart of the Depression, Chesterfield also overtook Camel. Camel countered with a dramatic increase in ad spend and, by doing so, demonstrated the power of advertising during depressed times. By 1935, it was back on top.
As a marketer trying to forecast consumer behavior, it is useful to see how income levels during the Depression affected buying behavior. Data suggest that those with incomes well above subsistence continued to spend as they had. At the other end of the economic spectrum, those at the bottom income levels just declined on the margin. Those in the middle were the ones most likely to defer normal purchasing. Frankly, given the pictures and accounts of the Great Depression, I expected the spending levels outlined above to be starker. Clearly durable goods took a hit, but I had expected the other categories to be much worse and durable goods to be even worse. Industries that catered to marriage, births and career starts suffered, as all three life events were delayed.
The companies with strong balance sheets that survived the initial shock of the Great Depression did realize some benefits. Their purchasing power increased by 20-25 percent compared to just a few years later. For these companies, it would be a philosophical decision, as much as an economic one, to invest their increased spending power in maintaining a high public profile. There was a group that had strong balance sheets that suffered nonetheless. Either out of fear or stockholder pressure, they still cut their advertising budgets and slid out of public sight, thus losing market share.
It's too early to project what steps the government will take to boost the current economy. During the Great Depression, some industries -- such as steel, construction equipment and materials -- thrived as a result of the Works Progress Administration (WPA) doing countless construction projects for bridges, dams, highways and parks. Even before the current market shock, there have been discussions about overdue infrastructure projects and a movement toward energy independence and so-called clean technology. Already GE has invested in marketing programs to promote its "green" products. I fully expect that we'll see another HP, GE or Google that will emerge in these segments, and they will have marketing partners that prosper alongside them.
Implications for interactive marketing budgets
In general, it appears that direct marketing and interactive marketing will benefit the most -- or, at least, will suffer the least -- in today's tough economic climate. Investment bank Cowen and Co. looked at the last six recessions and found that spending on direct marketing actually grew during all six recessions. Understandably, when the budget axe falls, those channels with the least ability to measure ROI will lose revenue to measurable marketing channels.
I expect the impact for online marketing won't be as stark as the 2001 recession. At that point in time, interactive marketing was still unproven and got caught in the general collapse of the internet industry. Today, the trend of shifting advertising dollars to measurable online channels is proven and won't disappear anytime soon. Thus, I predict that interactive marketing won't crater as much as last time.
At the same time, interactive marketing isn't immune to a slowdown. In fact, eMarketer reduced its estimates for U.S. online advertising to $25.8 billion, a 7 percent reduction from its prior estimate, thus showing the impact of the downturn. But it's worth noting that the forecast is still 23 percent higher than 2007's total. In other words, the recession may slow down the growth of online marketing, but it's still growing at a significant pace by any historical measure.
Dave Chase is chief marketing officer with Altus Alliance.