Tuesday, February 12, 2008
As Giant Retailers Reel, Marketers Gird for Worst
Advertisers Will Have to Cut Costs to Keep Pace With Changing Consumer Priorities, but Can They Afford to Slash Ad Spend?
By Ad Age Staff
Even the most optimistic had to stop and take a deep breath last week.
First came the retail industry's January sales, and the gain -- a meager 0.5% year over year -- marked the slenderest growth since "The Brady Bunch" ran in prime time. In announcing its numbers for the month, Wal-Mart made the almost apocalyptic pronouncement that consumers were hoarding their gift cards -- "more often for food and consumables than discretionary purchases." All of that was capped off by a Federal Reserve report that consumer credit-card borrowing was down sharply, along with reports that the credit is more often being used to fund the bare necessities.
So just how sobering is this news for marketers of just about anything beyond food, gasoline and home-heating oil -- and the agencies and media that subsist on their advertising? Ad Age looks at the implications for some of the key marketing categories.
More loan defaults, more trading down and deferred purchases might be on the way for the already beleaguered auto industry. Morgan Keegan & Co. analyst Peter Hastings believes that in 2008, 15.7 million automotive units will be sold. If that happens, it would mark the industry's second year of declines; 2007 sales slid by 2.5% to 16.1million units, according to Automotive News.
If consumers need to buy a new car, they will step down in price and size, said Mr. Hastings.
Toyota Motor Sales USA's Bob Carter, group VP-general manager of Toyota Division, admitted that the auto industry will undergo "a lot of volatility in the first four or five months of the year." But, like the majority of other auto executives, he projected a stronger second half. Sophia Koropeckyj, auto analyst at Moodys Economy.com, said automaker finance arms have seen loan-default rates rise since the last downturn in 2001 and she predicted they would be more conservative in lending practices this year.
Unilever CFO James Lawrence was perhaps the first industry executive to acknowledge a slowing economy may be having an impact on package-goods. "In the second half of the year, we've seen slightly weaker demand in personal care in the United States," he said on a Feb. 7 earnings call. "There has been some softness in [food-service] channels, but in contrast, we have seen quite strong demand for food products which are used in the home, such as meal kits and side dishes."
Household and personal-care industry sales grew an anemic 0.5% in the four weeks ended Jan. 27, according to Information Resources Inc. data reported by Deutsche Bank. That was better than the decline of 0.9% in December, but still nowhere near the sales increases of 4% in the first quarter of 2007.
As the economy slows, U.S. package-goods players will have to rely on cutting costs for the vast majority of their earnings growth in 2008-2010, Sanford C. Bernstein analyst Ali Dibadj said in a research note last week, though he doesn't expect the knife to hit marketing spending. "Every company in our coverage," he said, "speaks passionately about its focus and ability to cut costs to offset increasing commodities, inflation and marketing spend."
"A lot of people are using gift cards to buy food," said Burt Flickinger, principal at Strategic Resource Group, but "they may be trading up rather than using them to buy pasta and peanut butter sandwiches for dinner tonight. They might buy five or six steaks to treat the family."
A move by Americans to buy only necessities doesn't worry the Consumer Electronics Association. "There's certainly a discussion about whether tech today should be considered discretionary vs. necessary," said the trade group's economist, Shawn DuBravac. "Consumers continue to allocate away from other categories for technology." He said it's more likely that consumers will buy cheaper diapers and groceries than cut off a mobile phone or deprive their kids of a computer.
Forecasts for 2008 -- from CEA and other CE researchers such as iSuppli and in-Stat -- bear that out, with predictions of overall electronics growth, albeit slower than last year. Computer analysis from researchers IDC and Gartner predicts similar softer growth in that sector.
"Last year, when oil prices were going through the roof, we saw that people said, 'Since we're not traveling, let's spend some of that money on buying a flat-panel TV,'" said iSuppli analyst Riddih Patel.
But not everyone is buying that argument. "I've found the greatest correlation in PC shipment levels is overall economic indicators of GDP and consumer confidence," said analyst Roger Kay of Endpoint Technologies Associates, and formerly of IDC. "There is some shifting in buying where people who were going to buy a new PC now content themselves with an MP3 player. ... It's the delay scenario that's most troubling. People still want it, but they decide to put it off, wait to see how things go."
Two words: value menus. In the next six months, they're likely to become even more important to the nation's biggest chains. "I think you're going to see more options for the dollar," said Darren Tristano, exec VP of Technomic. He added that if consumers are paying with a credit card for their burger fix, it isn't necessarily bad for the industry. "Your check average goes up with credit-card purchases."
Gift-card purchases were up 16% at Starbucks during the first quarter ended December 2007. Reloads were also up 12% during the same period. Spokeswoman Tricia Moriarty said some customers use its gift cards to keep spending under control. "The reload feature can be an effective way to help people ... enjoy their daily latte while maintaining their budget."
"Marketers are doing the one thing that they should not be doing right now," said Zain Raj, global practice leader-retail brands at Euro RSCG. "They are out there trying to promote and discount their way to growth. When you have a consumer-confidence issue, it's not about spending less money, it's about spending any money. Marketers need to say 'Here's why you need these things.'"
"You've got to play offense. Now is the time to be aggressive and go out and get market share," said Mike Boylson, exec VP-chief marketing officer, J.C. Penney. The retailer remains committed to the biggest launch in its history later this month, an exclusive brand created in partnership with Polo Ralph Lauren called American Living that will be supported with a splashy campaign debuting during the Academy Awards.
Others are trying to do more with less. ""People are going to have less disposable income, so that's going to change the way we do advertising," said Jose Docabo, senior advertising manager for Home Depot. "We're also going to have to get more creative with less budget."
"Retailers need to take part of their budget and block and take part of it and experiment," said Ric West, exec VP-marketing promotion and production at Sears Holdings.
Bad economy or no, telecommunications marketers can't afford to trim back $5 billion in spending with cable companies breathing down their collective necks. "We could see more aggressive advertising by cable companies trying to drive customers to their all-in-one plans," said Ross Rubin, directorindustry analysis at NPD Group. He added that consumers may switch plans to take advantage of promotional offers.
It's also possible consumers will drop optional services that tend to run up phone bills, such as call waiting or caller ID, and some may be pushed to consider lower-price options to long distance, such as phone service provided over internet connections.
On the wireless side, a downturn could fuel acceleration in the growth of prepaid-wireless services, primarily for those who can't meet credit requirements for post-paid plans, said Roger Entner, senior VP-communications sector, IAG Research. Yankee Group estimated the number of pre-paid wireless customers will grow from 41.8 million last year to 61.7 million in 2011. Among the phone companies that would benefit from the shift would be TracFone, Boost Mobile, and AT&T pre-paid products such as the Go Phone.