Advertising in a Downturn: Case Study

The common wisdom, the man on the street, the wiseacre in the crowd and their various ilk at the major media outlets say: in a recession, advertising spend goes down. I’ve been arguing for six months that certain sectors of the advertising market won’t, even though their industries are troubled: mortgages and cars have been my examples. Today the New York Times grudgingly reports that mortgage lenders have continued to advertise.

The mortgage market may be in a historic upheaval, but mortgage companies continue to pump out upbeat advertisements… Despite rising foreclosures, defaults, lawsuits and investigations by state and federal regulators, the mortgage industry has not reduced its ad spending… Mortgage experts say spending will be strong into the spring.

“There’s been huge scrutiny on these companies, but they are continuing to advertise… many of these companies are bleeding, and these ads are a way to get more money into the door.”

But advertising spend is related to GDP growth. So, why is mortgage advertising immune? Why do I think car advertising (especially on the internet) will be immune? My thesis is that brand advertising and sales/transactional advertising react very differently to near-term microeconomic factors.

Brand advertisers (consumer packaged goods, car manufacturers, etc.) can cut back their advertising spend in the short-term and not suffer too much from it. Brand advertising is an investment in the future: brand advertising today has a long tail, so a cutback today doesn’t mean that sales suffer tomorrow. But transactional advertisers (mortgages, car dealers) advertise today for a sale tomorrow. There is no long view. So if a transactional advertiser stops advertising, sales stop. (Of course, everybody is a bit brand advertiser and a bit transactional advertiser, it’s not black and white, but most are more one than the other.)

My prediction: transactional advertisers will continue to advertise through a downturn. Brand advertisers will slow. The internet is primarily transactional advertising, so should weather a downturn better than other media. Network television is primarily branded advertising, so should suffer more.