By Dr Grace Kite

It depends. Budget setting in the covid recession

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It’s an uncomfortable truth that the right answer to big questions in marketing strategy is nearly always “it depends”.

What should the brand vs activation mix be? It depends. Which media channels have the strongest return on investment? It depends. And on the question of the moment: How much should I spend on media during the coronavirus recession? It depends.

The thing it depends most on is the health of your category. If you invest during a recession you can get cheap share of voice, which over time will bring increased share of market.

But whether that additional market share is worth it depends on how big your category is during and after the recovery. Buying a larger share of a category that continues to struggle might not pay back – even in the long term.

So far, different categories are experiencing very different crises because of the practicalities of lockdown and social distancing. Sectors that involve in-person interactions – education, hotels, restaurants, and construction – are all down by more than 70% in Q2. Agriculture, where people work alone outside, and financial services, where people can easily work from home, are broadly unaffected.

But the outlook as the crisis recedes is equally important for the decision about investment now. Different categories will be very different on this too, and there are three reasons why.

First is the extent of knock on effects, particularly reduced demand from newly unemployed or insecure workers. This is likely to be damaging in categories where purchases are a treat rather than a necessity. And it is particularly detrimental wherever the target market is under 30 years old or in low income jobs because these are the demographics most affected by redundancies and wage cuts.

Second, and pulling in the other direction, some categories will see a growth spurt driven by pent-up demand. This will likely benefit manufacturing and retail categories where purchases can be delayed. But service categories won’t see the same benefit; however many haircuts we miss, we’ll only need one when lockdown is over.

Finally, there’s the question of in person vs online shopping. During lockdowns a much larger proportion of shopping is taking place online, and based on past experience it’s likely that ecommerce categories will emerge stronger from covid 19 too.

Source: ONS

The chart shows % of all retail sales that take place online. Growth each year is triggered by an event – Christmas – that prompts trial of online shopping, and afterwards the % settles at a higher level. This suggests that ecommerce is a better technology for some people, and it also suggests that after lockdown, the % will settle at a higher level again.

Economists are working through these issues and putting figures against how they’ll affect different categories. There is always uncertainty around forecasts, and no-one knows whether covid 19 will have second or even third peaks. But we do know enough to make some educated guesses about the range of trajectories different categories might experience.

An example at the worst-affected end of the scale is branded restaurants. This category is badly affected by social distancing restrictions and also set to suffer from weaker demand as its relatively young customer base foregoes treats in coming years. There isn’t much hope of pent-up demand either, we won’t be hungry for missed meals when lockdown lifts.

Source: Magic Numbers (based on MCA, PWC, Neilsen)

This outlook has a direct bearing on the decision about whether to invest into advertising. Excess share of voice buys market share points, but the category is smaller, so revenue per point of market share is lower.

With an estimated profit margin in hand, it’s possible to solve for how cheap media needs to be to make the investment pay off. In branded restaurants, if profit margins can be held at 5%, the rule of thumb is that 10% excess share of voice is only worth it if it costs less than £1m to secure.

A category at the other end of the scale is online fashion. In our scenario, increased use of ecommerce more than offsets slightly lower general demand for clothes, so that there is actually a net benefit from covid 19.

This is also a sector where pent-up demand has been building. The weather will be different in summer when lockdowns lift than it was in March, and many people’s spring wardrobe update will happen, albeit late.

Source: Magic Numbers (based on ONS, PWC, Neilsen)

The category trajectory is very different to branded restaurants, and so is the conclusion about advertising. For online clothes brands, the return from investing into excess share of voice is likely to be higher than it was pre-covid, so that – rule of thumb – it might be worth purchasing 10% excess share of voice even if it costs as much as £8m.

Scenarios like these will never be 100% right, but they are a powerful way to navigate the nuance. Every CFO knows that this time the recovery will not be the same for everyone, that there are no short cuts, no blanket rules.

Combining category scenarios with knowledge about available media buys and the options for smart context-sensitive campaigns is the only way to make the right decision about whether or not to go dark.

In marketing we are in the business of providing clean, clear messages that are easy to understand. We know that in most cases, a punchy message is easier to act upon than a nuanced one.

We apply that principle to decisions about investment now at our peril.

This article was first published in marketing week.

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