Is your brand match-fit for Brexit?
When Mount St. Helens erupted on May 18th, 1980 in Washington State, over 200 square miles of vegetation was flattened in little more than an instant. I visited the blast zone in 1997 and saw trees blown over like matchsticks, stripped of their bark but only on the side facing the volcano. The blast and its consequences reportedly took with them more than 50 people and 250 homes. As tragic as such loss of life always is, the reason the toll wasn’t higher was that on March 20th that year Mount St Helens experienced an earthquake of 4.2 magnitude and by the end of the following month the side of the volcano had started to bulge. Further activity was confidently anticipated, and seconds before the mountain blew its top, David Johnston, U.S. Geological Survey volcanologist radioed "Vancouver! Vancouver! This is it!". Sadly Johnston was one of the those who did not survive as he couldn’t escape the eruption in time.
Harry R Truman, an 83-year-old who had lived near the volcano for more than half a century, also died from the blast - because he decided to stay put. Many other lives were saved because they evacuated the area, thanks to the efforts of Johnston and his colleagues. Truman is quoted to have said "I don't have any idea whether it will blow ... But I don't believe it to the point that I'm going to pack up.”
So, when a catastrophe or just a minor crisis is being confidently predicted by – dare I say it – experts, those whom it may affect have a binary choice: action or inaction.
We appear to be facing a similar binary choice in the face of the economic consequences we’re being told to expect when Britain departs the EU. Indeed, the UK government’s refusal to publish their own Brexit Impact/Risk Assessment on the grounds that it “would undermine our ability to negotiate the best deal for Britain”, suggests a pretty bleak outlook. In view of this, businesses have the choice. Either to prepare for what some predict will be a significant and long-term economic downturn, or for the more optimistic, believe there will be no downturn and stay put.
Some businesses started scenario planning for the consequences of Brexit even before the referendum, and many more made more concrete plans immediately afterwards. Some companies have already moved operations and people out of the UK to offices in continental Europe. It is true to say that it may yet prove they had been over-cautious. But the big question is: what if they’re right?
Brands, particularly national brands which rely solely on the UK market, and that haven’t started making contingency plans for Brexit would therefore perhaps be wise to ask themselves a few questions. Such as:
What would be the impact of an even weaker pound?
Would my sales be able to sustain an overall increase in their cost of goods?
If so, by how much?
If I had to increase the price of my product or service, would my customers bear it?
Which? the consumer magazine has already reported* a correlation between increases in the cost of food, new cars and indeed the CPI overall at the same time as the Pound has fallen against the Euro.
Warren Buffet’s point of view was quite clear on the subject of price elasticity when he said:
“… if you need to have a prayer session before raising the price by 10%, then you’ve got a terrible business.”
I suspect many brands fall into that category.
Now, with a huge amount of confidence surrounding some degree of negative impact on the UK economy from Brexit, there is a split reaction among advertisers. There are the Harry R Trumans who remain to be convinced that anything bad will happen. (Somewhat dismissively I admit, I would group them with climate change deniers.) And there are those that believe the economy will be in for a very rough ride – those who would heed the warnings of the David Johnstons. Of the latter, there are those will ride it out, assume the foetal position, batten down the hatches etc. and there are those that will want to prepare.
The logic around their choice of action vs. inaction is simple: If you plan for the worst and hope for the best, you’re more likely to survive or succeed. If you don’t plan for the worst and the worst happens – you’re toast.
So, what should brands be doing?
Well, there are a number more predictable business reactions to economic downturns which frustrate marketers, and now would be a good time to prepare arguments against them.
1. Marketing budgets, and advertising budgets in particular, are often cut.
2. Products’ cost of goods is reduced to protect their margins by making products smaller or cheaper.
3. Business leadership demands greater predictability of marketing ROI.
4. (Consequently) the proportion of marketing spend on activation goes up and brand spend goes down. Discounts, bundling and BOGOFs abound.
Let’s look at these briefly, one at a time.
1. Marketing budgets are often cut.
As much as business leadership often sees marketing expenditure as a flexible line on the balance sheet, cutting marketing budgets when times are tough is like fuel dumping when your plane is flying into a storm. Advertising won’t always promote growth in a downturn, but it will often mitigate decline of market share.
2. The cost of goods is reduced to protect margin by making products smaller or cheaper.
Already companies are reducing the size of their products while leaving the price to the customer unchanged. Toblerone is a notable example, and that didn’t go down well. And I’ve noticed that my usual brand of fruit juice is now only 850ml per carton, 15% less than usual - so I’ve have switched. Nobody likes to have a fool made of them and your consumers are no exception. Making products smaller or cheaper is to deliberately diminish their value to your customers.
3. Business leadership demands greater predictability of marketing ROI.
The desire for greater predictability to justify marketing spend in an economic downturn is perhaps the trickiest of all. To paraphrase, the request would be to say: “As we experience a period of heightened uncertainly and unpredictability, I expect you to your ability to predict our returns on marketing investment.” The greatest irony is that the more predictable the return the lower the return generally is. In that respect marketing is little different to any other investment.
4. The proportion of marketing budget spent on activation goes up and brand spend goes down.
While the temptation is obvious, we know now from the work done by Binet and Field, in The Long and the Short of It, that the optimal ratio of activation to brand investment is 40:60 respectively. The overall trend in this ratio is already going in the wrong direction for long term brand growth, and likely promises to get worse if we face a recession without reversing that trend.
So, what does all this mean for brands today? How does a brand get match fit for Brexit?
There are several things I believe marketers can start doing now:
a) Get in front of the problem
The first and simplest is to start the conversations with their business leadership early. It is far harder to convince somebody that their strategy of cutting marketing spend is wrong at the very moment when they are depending upon it to save their P&L. So, talk theory before practice.
b) Do your homework.
Your agencies may be able to help you here. For example, there are some advertisers who exploit the unusually low cost of an excess share of voice during recessions, so use them as precedents for protecting your own media investments. Either to do as they do, or to protect your brand from your competitors’ exploitation of the opportunity.
c) Make price elasticity a strategic objective.
How much do you have currently? How much would you need if the British Pound tanked? Better loved brands enjoy greater price elasticity. Better loved brands are a result of numerous factors, including of course a superior or at least top-parity product. But they are also built with great advertising.
Which brings me neatly to my final point: now more than ever is the time for your brands to be brave. Heaven knows that brands can’t bore customers into buying them, especially if we are in recession. Now is the time to set out your brand’s case for investment in the best possible brand engagement through advertising. If done well, advertising creativity is itself a brand differentiator. Great, breakthrough advertising can inspire love and loyalty from your existing consumers and new customers, even through recession.
Now is the time to buy a gorilla. Advertising that inspires, engages, works harder to cut through the clutter and achieve a share of mind greater than your share of voice. It can take time to build strong brands, but it’s not too late. Although the Chinese proverb says:
“The best time to plant a tree is 20 years ago.” It also advises: “The second-best time is now.”
David Meikle. Author/Founder How to Buy a Gorilla.