It Pays To Advertise

A recent study by an Ohio-based marketing research firm found that 48% of adult Americans believe a brand and/or company is struggling if it isn't advertising during a recession. Some attest that it makes sense to spend on marketing when a company's competitors are spending less, as it places the advertising brand front and center. Others will argue that increased ad spending in leaner times can be compared to pouring money down the drain, and should be avoided at all costs.

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Top Advertisers Spent Less in 2008
Advertising Age Magazine reported, in its annual report on advertising spending by the top 100 advertisers in America, that overall spending was down 2.7% for only the fourth time since 1956. Not coincidentally, the other three down years were also during recessions. What are we to make of this unusual occurrence? Companies, even big ones, are scared to death of the current economic reality, and are doing what comes naturally to them: cutting expenses. Below are the top and bottom five advertisers, in terms of increasing or decreasing their advertising dollars in 2008. All trade on a U.S. exchange. It's likely that the effect of these increases or decreases won't be felt for several quarters or even years. Nonetheless, once you wade through the numbers, it's pretty clear that it pays to advertise, especially in the tough times.

The Five Biggest Increases in U.S. Ad Spending in 2008

It Could Have Been Worse
Mercedes Benz owner Daimler upped its U.S. spending in 2008 by 39.7%, likely to remain in the minds of its well-to-do clientèle (save for the affordable Smart car) until their disposable income and overall wealth improves. It appears to have worked, as revenues in the U.S. were off slightly less than 5% in 2008 and excluding the -1.7 billion impairment charge for Chrysler loans gone bad, net income only dropped 22%, which isn't awful, considering the upheaval in world automotive markets. It's possible earnings would have been lower had it not spent more in its weakest market. (Learn more about impairment charges in our article, Impairment Charges: The Good, The Bad, and The Ugly)

The other decline in an otherwise impressive list comes from drug maker Eli Lilly, whose net earnings were off $170.2% in 2008, actually losing $2.1 billion. Cause for the large decline: it realized significant pre-tax charges of $1.48 billion related to its settlement with the U.S. Attorney for the Eastern District of Pennsylvania over its schizophrenia drug Zyprexa in the third quarter, and a $4.7 billion charge in the fourth quarter for in-process research and development costs associated with its Imclone Systems acquisition. Excluding these two one-time costs, its net earnings would have been $4.1 billion, up 36.7%. Off to a strong start in 2009, its first quarter worldwide revenues were up by 5% and earnings by 24%. With the exception of Gemzar, Lilly's top five drugs all experienced large sales increases in the U.S. in Q1 - more proof positive that advertising pays.

The Bottom Line
The most interesting part of Advertising Age's report is where it breaks down the top 10 spenders in 10 different measured media categories. With the exception of General Mills, which makes the list only twice, none of the top five increasing spending is on it. This tells investors that that, even though these companies are increasing spending, they're doing so in a tactical manner. Unless history doesn't repeat itself, these measures should translate into greater market share and improved profits. (For a related reading, take a look at Four Tips For Buying Stocks In A Recession.)