Carburton Street, London -- What is the first reaction from companies as soon as the "R" word is mentioned? Yup! At the first sign of a recession, out comes the highlighting pen and any form of discretionary spend is boldly emphasised for cutting. It is part of any company's survival plan, namely to ensure that costs are aligned with revenues. And usually the easiest costs to cut are also the first to go. Staffing levels often figure high on the list followed closely by advertising and promotional spend.
This morning Cordiant Communications (LSE: CRI), the company formerly known as Saatchi & Saatchi, told the market that all is not rosy at the advertising agency. Cordiant expects full year revenues to decline by 9% and is pencilling in a loss of £9.6m for the year. Cordiant said that the global economic slowdown had led to an unprecedented rate of decline in marketing expenditure, which has accelerated in the second half of the current year. In response Cordiant will be cutting jobs and plans to reduce headcount by 1,100 people.
But increasing (or simply maintatining) advertising spend is one of the best remedies in a recession. This is the time when advertising rates are low and companies can get much more 'bang for their buck'. It is thought that companies that are market leaders can use a recession to improve their profitability by improving market share.
Each percentage point in market share can be worth millions of pounds and those companies who cut back on advertising spend can be losing out big time. For example, the UK grocery market is worth around £100b so every percentage point is worth £1b in sales. The same goes for the airline industry, especially at the no frills end of the market, which might explain the higher level of promotional activity by certain operators to capture customer loyalty through free flight giveaways.
The Strategic Planning Institute found in a study that profit margins increase with increased market share. So what better way than for market leaders or those who have pretensions be market leaders to steal a march on the competition by stepping up promotion in a recession. And for investors, keep your eyes open for those companies who have not cut back on advertising spend because these are probably the companies whose profits will also recover fastest when the recession ends.
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