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The 2020 Public Services Trust Blog

Thursday, April 16, 2009

To spend or not to spend…

By Ashish Prashar

Since my experience volunteering on the Obama campaign I regularly keep an eye on news from the US and have a subscription to the New Yorker – where I spotted this in The Financial Page. New Yorker financial columnist James Surowiecki discusses the possibilities made available to bold companies that don’t shy away from marketing their products and services during a recession.

In the late nineteen-twenties, two companies – kellogg and Post – dominated the market for packaged cereal. It was still a relatively new market: ready-to-eat cereal had been around for decades, but Americans didn’t see it as a real alternative to oatmeal or cream of wheat until the twenties. So, when the Depression hit, no one knew what would happen to consumer demand. Post did the predictable thing: it reined in expenses and cut back on advertising. But Kellogg doubled its ad budget, moved aggressively into radio advertising, and heavily pushed its new cereal, Rice Krispies. (Snap, Crackle, and Pop first appeared in the thirties.) By 1933, even as the economy cratered, Kellogg’s profits had risen almost thirty per cent and it had become what it remains today: the industry’s dominant player.

You’d think that everyone would want to emulate Kellogg’s success, but, when hard times hit, most companies end up behaving more like Post. They hunker down, cut spending, and wait for good times to return. They make fewer acquisitions, even though prices are cheaper. They cut advertising budgets. And often they invest less in research and development. They do all this to preserve what they have. But there’s a trade-off: numerous studies have shown that companies that keep spending on acquisition, advertising, and R. & D. during recessions do significantly better than those which make big cuts. In 1927, the economist Roland Vaile found that firms that kept ad spending stable or increased it during the recession of 1921-22 saw their sales hold up significantly better than those which didn’t. A study of advertising during the 1981-82 recession found that sales at firms that increased advertising or held steady grew precipitously in the next three years, compared with only slight increases at firms that had slashed their budgets. And a McKinsey study of the 1990-91 recession found that companies that remained market leaders or became serious challengers during the downturn had increased their acquisition, R. & D., and ad budgets, while companies at the bottom of the pile had reduced them.

Recessions come and go, and some are more severe and last longer than others. But history shows that recessions invariably end, and when they do, an economic recovery follows, interestingly, enough Kellogg, the cereal company, established its market dominance during the Great Depression when it doubled its advertising budget, at the same time Post, its leading competitor at the time, cut its own ad budget. Since then Kellogg has become the best selling cereal company in the United States and Europe.

So it seems the worst thing that we could do in a recession this severe is to try to cut government spending at the same time as families and businesses around the world are cutting back on their own spending. While tackling our deficit, the government can’t afford to significantly cut investments in health care and education, which will generate long-term prosperity.

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Posted by Ashish Prashar at 1:48 pm
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