How a bad economy can be a good opportunity.

By most indications, the economic outlook for 2008 is bleak. The housing and mortgage markets have melted down. Home foreclosures have soared to record highs.

Credit has dried up. Lenders have been forced out of business. And financial companies have wracked up billions of dollars worth of losses from bad mortgage investments. On Wall Street, heads continue to roll and come first quarter, many of the traders, brokers, bankers and analysts won’t be getting the bonuses they’ve already spent. Throw in the rising cost of oil (probably the most important long term influencer on our economy) along with a weak and volatile dollar, and it’s not surprising that the people who drive the financial markets are beginning to panic.

Consumer confidence is also slipping fast. And this is important. Consumer spending accounts for as much as 70% of all economic activity in the $13 trillion U.S. economy. High consumer confidence is considered an indication of future growth, while declining confidence is viewed as a warning that economic activity is destined to slow. A Reuters/University of Michigan index indicates that confidence has dropped steadily over the past several months. Now at 37.3% (people very confident or confident), it’s at its lowest level since June of 2006. Another report from BIGresearch states that 41% of consumers say they took fewer shopping trips and shopped closer to home in November.

Is a recession imminent? Is it already here? That depends on your definition of recession.

Classically speaking, the term is defined as “negative real economic growth for two or more successive quarters.” By this standard, it will be six to nine months before we’ll know for sure. But a more recent definition simply describes recession as a “significant decline in economic activity spread across the economy and lasting more than a few months.” By this standard the recession is already under way, in which case we’re now facing an economic crisis. Just how big a crisis is not clear. Determining the economic exposure triggered by the declining value of specialized funds including the structured investment vehicles (SIVs) and collateralized debt obligations (CDOs), is well beyond the expertise of this advertising agency. What concerns us the most is that it also seems beyond the expertise of most of the investment firms driving the markets. Just how much of a collapse will falling housing prices and rising mortgage delinquencies trigger? A piece in today’s Wall Street Journal estimates a total loss of 1 to 3% of GDP. What does that mean in real world terms? That’s what we don’t know. What we believe is that it’s bad and it’s going to get worse.

If we sound gloomy, we’re not. As president Kennedy once reminded us “When written in Chinese the word crisis is composed of two characters. One represents danger while the other represents opportunity.” It means opportunity for those who are prepared to take advantage and danger for those who aren’t.

So what should your company be doing to protect itself? What should you be doing to prepare?

Bottom line, how do you transform the negative into opportunity and succeed where others fail?

A survey of past recessionary periods yields some insights.

Since World War II, the United Stated has encountered 10 different recessions. The last occurred between late 2000 and 2003 triggered by the dotcom melt down and prolonged by the September 11th attacks. Ten years earlier it was the collapse of the junk bond market that sent the economy into the recession of 1991/1992. On average recessions last about eight months. But even as the economy starts to pick up, companies can be slow to recover—making the recession, for many, last much longer.

Our research also shows that in the run up to these last two recessions, a majority of companies operated with a false sense of security. During the 1990/1991 recession, only 35% of companies outperformed their industries. Most were not prepared for the downturn. The same is true today.

By one measure, 70% of companies are not fully prepared for an economic slowdown. Moreover, a survey of 100 US senior executives showed that only a handful of business leaders see an economic downturn as an opportunity that can be turned into a long-term competitive advantage.

As you would expect us to say, advertising often plays a key role in driving a company’s success during bad—as well as good economic times. Yet we’re the first to say that minus a sound business model, relevant and unique products/services and a core marketing platform (placement, pricing and basic promotion), advertising is a waste of money. The bygone dotcoms whose collective demise triggered the last recession are proof enough of that. But beyond the fundamentals, we’ve identified four ways enterprises have historically succeeded during tough economic times:

– By delivering product/service innovation
– By tapping new markets
– By acquiring undervalued assets that align with your enterprise
– By increasing advertising with a message that communicates value

Dell, Johnson & Johnson, PepsiCo and Staples are four examples of companies that did some or all of these things during tough economic times and advanced as their competitors faded.

DELL

In the early 1990’s, while many businesses were responding to declining sales and shrinking revenues by slashing spending and cutting payrolls, Dell did just the opposite.

In 1990, the economy was cooling off fast and Dell’s competitors were cutting back. Dell was feeling the same pressure reporting a 64% drop in profits. But the Round Rock, Texas computer maker was undeterred and saw opportunity. Rather than trim R&D, they stuck to their plan of developing proprietary technology. They committed to a new generation of products and opened a new plant in Ireland to deliver on it. They also stretched their distribution approach by adding new channels including a deal with Staples (a risky move given their direct to consumer formula). Even more aggressive, they focused on expansion into new markets. Their focus and tenacity lead to the introduction of 22 new desktop and laptop PCs that year.

Dell supported the new product lines and fueled their market expansion programs with a heavy investment in marketing and promotion. In 1991 advertising spending in the computer hardware category was down by 17.5% year-on-year. The category’s leaders including IBM, Apple, Digital and Tandy cut advertising expenditure by 25 to 40%. Dell’s increased from half a million dollars in 1989 to $1.4 million in 1990 to $6 million in 1991—an increase of 346%.

In its messaging, Dell stuck to a clear value proposition “by eliminating the middleman and offering superior customer service, you the customer are the winner.” The value message resonated with consumers and the reduced spending by their competitors gave Dell’s marketing program even more impact. Dell got a big share of mind among mainstream American consumers and sales more than doubled.

As they were growing their presence in the US market, Dell was also pushing hard into Europe and formed a partnership with Xerox to sell their machines in South America. With sales up in the US and new markets paying off overseas, Dell’s combined efforts transformed the company from a US challenger brand into a global powerhouse in the personal computer space. Dell continued to leverage its momentum by opening subsidiaries in Japan and Australia in 1993.

“It’s as important to figure out what you’re not going to do as it is to know what you are going to do” said Michael Dell in his book Direct from Dell. As competitors implemented restructuring plans and slashed spending, Dell broke out of the pack by delivering innovation and value to customers around the globe. In 1992, Fortune magazine included Dell Computer Corporation in its list of the world’s 500 largest companies. The following year, the company was among the top five computer system makers worldwide. In 200 Dell became number one in global market share.

JOHNSON & JOHNSON

During an economic crisis, prices drop and companies become less expensive to acquire. Diversified health care giant Johnson & Johnson is an example of a company that anticipated the 2000 economic downturn and turned it to their advantage. “We saw this recession coming three years ago,” said Ralph S. Larsen, CEO of J&J at the start of the 2000 slow down. As others pulled back, J&J went on a buying spree. In 2001 they bought minimally invasive heart-surgery equipment maker Heartport, online parenting resource BabyCenter, drug-delivery system maker ALZA and the diabetes-care businesses of Inverness Medical Technology.

On the consumer side, J&J supported its products and brand by spending over $1.6 billion on advertising. In 2001 they were the 10th largest advertiser in the U.S. Most impressive was that they earned a $12.50 per advertising dollar expenditure. The J&J brand message was reassuring and the voice was empathetic. Their warm family oriented messages resonated with consumers during the tougher and uncertain economic times. The brand and its portfolio of products gained traction and sales increased as others lost their way with consumers.

In 2002 J&J’s acquisition strategy and commitment to innovation continued with the purchase of OraPharma—a maker of oral antibiotics and other periodontal therapies. That same year they also introduced the INDEPENDENCE iBOT, a robotic wheelchair capable of climbing staircases and traversing rough terrain. It was an innovation that caught the attention of the press and generated tens of millions of dollars worth of free PR. J&J emerged from the recession with unmatched momentum. Today J&J’s annual sales are more than $53 billion. The company has a market cap of $193.85 billion.

PEPSICO

Like J&J, the beverage and snack food giant PepsiCo combined an aggressive acquisition strategy with robust spending on consumer advertising through the 2000-2003 downturn. It certainly helped that in 2001, Pepsi’s main competitor Coca-Cola was vulnerable. The Atlanta soft drink giant was implementing huge cutbacks and in the process of slashing nearly 5,000 jobs. Coca-Cola was also bogged down in a nasty race-discrimination law suit.

Recognizing that the fizzle was starting to fade on traditional colas, PepsiCo pressed its advantage. In 2001 they spent $13 billion to acquire The Quaker Oats Company, adding the Gatorade sports drink brand to its lineup. PepsiCo followed up by buying a majority of South Beach Beverage Co, maker of SoBe drinks (fruit blends, energy drinks, teas, sports drinks). “In a recessionary economy, innovation is as important or more important for products like ours,” explained Steven S. Reinemund, then CEO of Pepsi Co. Targeting the millions of thirsty teenagers, the company launched Pepsi Blue, new berry-flavored cola in 2002 and followed with Pepsi Vanilla in 2003.

In 2001 Pepsi spent $2,210,000 on consumer advertising. Their revenue per advertising expenditure was a healthy $8.20, and the brand was living up to its campaign line of being “The Taste of a New Generation”. That year Pepsi’s ad spend put them firmly in the top five advertisers and while industry earnings were in an overall decline, Pepsi’s per-share earnings climbed from 13% to 14%.

STAPLES

After being fired from his senior position with Connecticut supermarket Edwards-Finast in 1985, Thomas Stemberg went looking for a retail niche he could exploit with the super market concept. At the time, big companies could buy their office supplies from bulk dealers while smaller businesses were served mainly by mom-and-pop office supply stores that charged much higher prices. Sternberg opened the first Staples store in a Boston suburb in 1986 and the following year took his concept to New York. By 1989 Staples had 23 locations and had launched its private label business. Staples broke into profitability in 1990—earning $6 million on sales of
$182 million.

Staples aggressively expanded over the next few years: three stores in Southern California and the introduction of two new concepts: Staples Direct (delivery operations for medium-sized businesses) and Staples Express (downtown stores offering smaller merchandise selections). In 1991 as the economy was cooling and most businesses were feeling the effect, Staples kept to their strategy, buying 48% of MAXI-Papier—a European office supply store chain. By the end of 1993, Staples had more than 200 stores. Staples basically expanded their way through the recession. They entered Arizona, Virginia, and Kentucky (by acquiring selected Office America
stores).

Staples expansion was spurred on by the awareness and demand created by an equally aggressive advertising program. In 1992 Staples hired a new advertising agency (this agency, Cliff Freeman & Partners). The campaign “Yeah, we’ve got that” grabbed share-of-mind with an empathetic message that spoke directly to the interests of small business owners. Sales continued to rise for 11 straight quarters elevating Staples to category leader by the late 1990s. A particular point of pride for us is that Staples was the 1998 Gold EFFIE winner for advertising efficacy and in 2001 was inducted into the Marketing Hall of Fame.

STARBUCKS, WHOLE FOODS, MYSPACE

Dell, J&J, PepsiCo and Staples were not alone. Many companies grew their way through recession emerging bigger and better than ever. A few more notable examples:

– In 1991 Starbucks was struggling through its expansion and to keep its employees motivated became the nation’s first privately owned company to offer stock options to all employees.
– Whole Foods had just 12 stores in 1991, the year they introduced their first private label products and the year they went public.
– MySpace.com was born out of the ashes of the dotcom melt down in the Fall of 2003. News Corp. of course paid $580 million for it in 2006.

To download whitepaper CLICK on link below (Adobe Acrobat Reader required):
http://www.clifffreeman.com/new/CF&P-RecessionWhitePaper.pdf>