Clients only spend when they have to – as Estee Lauder and others show

For what seems like decades agencies and trade bodies like the UK’s IPA have been beating themselves up trying to persuade clients to spend more – or like they used to do.

Advertise in a recession says the IPA at regular (recessionary) intervals and you’ll do better than your competitors – honest.

Indeed there’s some research that suggest you will but clients won’t do it, they’ll only spend more on advertising and marketing (or even maintain budgets) if they have to, in good times as well as bad. It’s money after all.

But there are a few signs around that some clients at least are realising that they might need to return to the days when they had to spend a lot to stay in the game. One such is US cosmetics firm Estee Lauder which admitted to Wall Street analysts last week that it would need to up its ad budget to compete with rivals Avon and Revlon.

“There has been some intense spending from prestige cosmetics competitors,” CEO Fabrizio Freda said. “Our plans call for us to expand our advertising budget this year.”

Estee Lauder’s shares promptly tanked, dropping 9.5 per cent at one point following the announcement. Wall Street, like the City of London, hates such admissions. To financial analysts more marketing spend means less for shareholders.

But Estee Lauder isn’t on its own. Much bigger consumer goods companies like Unilever and Procter & Gamble have had to own up to bigger marketing spends. P&G’s most recent earnings were hit by the decision to spend $1bn more on marketing.

Big advertising used to be the classic way to grow market share and hence profits. It was the US business model that took over the world after the end of Word War Two.

Then, in the late 1980s and thereafter such companies ‘discovered’ a new business model, financial engineering (kindly supplied by the big investment banks) allied to savage cost-cutting and heavy borrowing.

All of a sudden the company’s capital base shrunk, its overheads reduced (pro rata) so the huge borrowings could be supported and shareholders found that the share price soared.

But this only works for so long. If you’re not growing your market you die ultimately – and you certainly can’t afford huge levels of debt.

So these huge companies are finding (again) that they need to grow their markets and some of them, at least, seem to be prepared to take on the once all-powerful analysts who, wittingly or not, push the slash and burn policies of their paymasters.

Does this signal a new boom in advertising?

It might do.

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About Stephen Foster

Stephen is a former editor of Marketing Week and London Evening Standard advertising columnist. He wrote City Republic for Brand Republic and is a partner in communications consultancy The Editorial Partnership.