February 10, 2008
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As Giant Retailers Reel, Marketers Gird for Worst

Advertisers Will Have to Cut Costs to Keep Pace With Changing = Consumer=20 Purchasing Priorities, but Can They Afford to Slash Ad Spend?

By Ad Age Staff

Published: = February=20 11, 2008

Even the most optimistic had to stop and take a deep breath = last=20 week.

First came the retail industry's = January=20 sales, and the gain -- a meager 0.5% year over year -- marked the = slenderest=20 growth since "The Brady Bunch" ran in prime time. In announcing its = numbers for=20 the month, Wal-Mart made the almost apocalyptic pronouncement that = consumers=20 were hoarding their gift cards -- "more often for food and consumables = than=20 discretionary purchases." All of that was capped off by a Federal = Reserve report=20 that consumer credit-card borrowing was down sharply, along with reports = that=20 the credit is more often being used to fund the bare necessities. =

So=20 just how sobering is this news for marketers of just about anything = beyond food,=20 gasoline and home-heating oil -- and the agencies and media that subsist = on=20 their advertising? Ad Age looks at the implications for some of the key=20 marketing categories.

AutomotiveMore loan defaults, more trading down = and=20 deferred purchases might be on the way for the already beleaguered auto=20 industry. Morgan Keegan & Co. analyst Peter Hastings believes that = in 2008,=20 15.7 million automotive units will be sold. If that happens, it would = mark the=20 industry's second year of declines; 2007 sales slid by 2.5% to 16.1 = million=20 units, according to Automotive News.

If consumers need to buy a = new car,=20 they will step down in price and size, said Mr. Hastings.

Toyota = Motor=20 Sales USA's Bob Carter, group VP-general manager of Toyota Division, = admitted=20 that the auto industry will undergo "a lot of volatility in the first = four or=20 five months of the year." But, like the majority of other auto = executives, he=20 projected a stronger second half. Sophia Koropeckyj, auto analyst at = Moodys=20 Economy.com, said automaker finance arms have seen loan-default rates = rise since=20 the last downturn in 2001 and she predicted they would be more = conservative in=20 lending practices this year.

Package goodsUnilever CFO James Lawrence was = perhaps the=20 first industry executive to acknowledge a slowing economy may be having = an=20 impact on package-goods. "In the second half of the year, we've seen = slightly=20 weaker demand in personal care in the United States," he said on a Feb. = 7=20 earnings call. "There has been some softness in [food-service] channels, = but in=20 contrast, we have seen quite strong demand for food products which are = used in=20 the home, such as meal kits and side dishes."

Household and=20 personal-care industry sales grew an anemic 0.5% in the four weeks ended = Jan.=20 27, according to Information Resources Inc. data reported by Deutsche = Bank. That=20 was better than the decline of 0.9% in December, but still nowhere near = the=20 sales increases of 4% in the first quarter of 2007.

As the = economy=20 slows, U.S. package-goods players will have to rely on cutting costs for = the=20 vast majority of their earnings growth in 2008-2010, Sanford C. = Bernstein=20 analyst Ali Dibadj said in a research note last week, though he doesn't = expect=20 the knife to hit marketing spending. "Every company in our coverage," he = said,=20 "speaks passionately about its focus and ability to cut costs to offset=20 increasing commodities, inflation and marketing spend."

"A lot = of people=20 are using gift cards to buy food," said Burt Flickinger, principal at = Strategic=20 Resource Group, but "they may be trading up rather than using them to = buy pasta=20 and peanut butter sandwiches for dinner tonight. They might buy five or = six=20 steaks to treat the family."

Consumer electronicsA move by Americans to buy = only=20 necessities doesn't worry the Consumer Electronics Association. "There's = certainly a discussion about whether tech today should be considered=20 discretionary vs. necessary," said the trade group's economist, Shawn = DuBravac.=20 "Consumers continue to allocate away from other categories for = technology." He=20 said it's more likely that consumers will buy cheaper diapers and = groceries than=20 cut off a mobile phone or deprive their kids of a computer. =

Forecasts=20 for 2008 -- from CEA and other CE researchers such as iSuppli and = in-Stat --=20 bear that out, with predictions of overall electronics growth, albeit = slower=20 than last year. Computer analysis from researchers IDC and Gartner = predicts=20 similar softer growth in that sector.

"Last year, when oil = prices were=20 going through the roof, we saw that people said, 'Since we're not = traveling,=20 let's spend some of that money on buying a flat-panel TV,'" said iSuppli = analyst=20 Riddih Patel.

But not everyone is buying that argument. "I've = found the=20 greatest correlation in PC shipment levels is overall economic = indicators of GDP=20 and consumer confidence," said analyst Roger Kay of Endpoint = Technologies=20 Associates, and formerly of IDC. "There is some shifting in buying where = people=20 who were going to buy a new PC now content themselves with an MP3 = player. ...=20 It's the delay scenario that's most troubling. People still want it, but = they=20 decide to put it off, wait to see how things go."

Fast foodTwo words: value menus. In the next six = months,=20 they're likely to become even more important to the nation's biggest = chains. "I=20 think you're going to see more options for the dollar," said Darren = Tristano,=20 exec VP of Technomic. He added that if consumers are paying with a = credit card=20 for their burger fix, it isn't necessarily bad for the industry. "Your = check=20 average goes up with credit-card purchases."

Gift-card purchases = were up=20 16% at Starbucks during the first quarter ended December 2007. Reloads = were also=20 up 12% during the same period. Spokeswoman Tricia Moriarty said some = customers=20 use its gift cards to keep spending under control. "The reload feature = can be an=20 effective way to help people ... enjoy their daily latte while = maintaining their=20 budget."

Retail"Marketers are doing the one thing that = they=20 should not be doing right now," said Zain Raj, global practice = leader-retail=20 brands at Euro RSCG. "They are out there trying to promote and discount = their=20 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=20 'Here's why you need these things.'"

"You've got to play = offense. Now is=20 the time to be aggressive and go out and get market share," said Mike = Boylson,=20 exec VP-chief marketing officer, J.C. Penney. The retailer remains = committed to=20 the biggest launch in its history later this month, an exclusive brand = created=20 in partnership with Polo Ralph Lauren called American Living that will = be=20 supported with a splashy campaign debuting during the Academy Awards.=20

Others are trying to do more with less. ""People are going to = have less=20 disposable income, so that's going to change the way we do advertising," = said=20 Jose Docabo, senior advertising manager for Home Depot. "We're also = going to=20 have to get more creative with less budget."

"Retailers need to = take=20 part of their budget and block and take part of it and experiment," said = Ric=20 West, exec VP-marketing promotion and production at Sears Holdings. =

TelecommunicationsBad economy or no, = telecommunications=20 marketers can't afford to trim back $5 billion in spending with cable = companies=20 breathing down their collective necks. "We could see more aggressive = advertising=20 by cable companies trying to drive customers to their all-in-one plans," = said=20 Ross Rubin, directorindustry analysis at NPD Group. He added that = consumers may=20 switch plans to take advantage of promotional offers.

It's also = possible=20 consumers will drop optional services that tend to run up phone bills, = such as=20 call waiting or caller ID, and some may be pushed to consider = lower-price=20 options to long distance, such as phone service provided over internet=20 connections.

On the wireless side, a downturn could fuel = acceleration in=20 the growth of prepaid-wireless services, primarily for those who can't = meet=20 credit requirements for post-paid plans, said Roger Entner, senior=20 VP-communications sector, IAG Research. Yankee Group estimated the = number of=20 pre-paid wireless customers will grow from 41.8 million last year to = 61.7=20 million in 2011. Among the phone companies that would benefit from the = shift=20 would be TracFone, Boost Mobile, and AT&T pre-paid products such as = the Go=20 Phone.

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