Are we in a Depression or a Recession... and what are the Implications for Marketing Strategy?

There are a lot of articles on the value of marketing in a recession. Most of these were written around three recessions: 1982; 1991; and 2001. These recessions ranged from severe (1982) to mild (1991 and 2001). The current "downturn" is definitely a "severe recession"--the question is, is it a depression? I'll set the following rules, somewhat arbitrarily, about separating a recession from a depression. A depression must satisfy 4 of the following 5 conditions:

• Negative GDP growth for at least eight consecutive quarters
• Unemployment > 10%
• Stock market down > 50% from peak
• Real Estate values down > 40% from peak
• Deflation in corp CPI for at least two consecutive quarters

So, using my definition above, which probably passes a sniff test and little else, are we in a depression? We'll have to use probabilities, because these data aren't complete yet.

Negative GDP growth for at least eight consecutive quarters. We're at three now. It'll definitely be five (no one sees growth in the 2nd quarter.) Bernanke says we "might" see growth this year... I'd put the chances at 33%. So let's call this 66%.

Unemployment > 10%. Most are calling 9% this year. I'd argue we could easily see 10% late this year or early next year. I'd put the chances at 50%.

Stock Market Down 50% from Peak. Dow peaked at 14,164 and hit 7,114 yesterday. Good enough for government work. Bingo.

Real Estate Value Down 40% from Peak. Home prices are down 27% since the 2006 peak. Most see 30% as inevitable. I'd put 40% at a 25% chance.

Deflation in Core CPI for at least 2 Quarters. Core CPI slowed to 0.8% in 4th quarter. It'll probably be slow in the current quarter too, but I doubt it'll go negative. So let's call this one 5%.

So I'd put our chances of being in Depression at about 10%. (.66 * .5 * .25). So, one in ten. Unsurprisingly, that's better than Joe Biden's 30% comment, into which probably no thought went. The hair spray probably just got into his brain for a few seconds and he was overwhelmed.

Why all this analysis? It's because if we're in a recession, there's a lot of past data to rely on, but if we're in a depression, we don't have much to go on. So, I'd argue we have to follow recession marketing rules. Here are some snippets gleaned from the press with the help of our friend Dr. Spekman at UVA / Darden about recession marketing rules of thumb / observations:

• An American Business Press / Meldrum and Fewsmith study showed that companies that increase / establish an aggressive market stance coming out of recessions (the 1970 one, in this case) do much better coming out of the slowdown.
• A similar study showed the same thing for the 1974-75 recession.
• A McGraw-Hill study found that 600 B2B companies that increased their spending in 1981-82 grew significantly more than competitors that did not.
• A Cahners and Strategic Planning Institute study of the 1981-82 recession showed that larger companies who spend more on marketing do better in downturns than their smaller competitors. Not surprisingly, this is already being borne out in 2008-09, with Ford and Sears taking share from sick competitors (Ford from GM and Chrysler; Sears from Circuit (bankrupt) and local appliance shops).
• AMA found a similar trend in 1990-1991, with larger / healthier companies spending more and taking share.
• BMW grabbed share after 9/11 in 2001 and credited its success to taking an aggressive market stance with advertising and event marketing. Good quote from BMW: "We change before the market forces us to change."
• After the 2001 recession, B2B Magazine found B2B ad spending recovering and focused on three areas: Supporting established brands, focusing on integrated marketing campaigns (multi-tactic, same creative and targeting) and measuring ROI.
• In 2005, Arvind Rangaswamy and Gary Lilien at Penn State did an analysis of the 2001 recession and found that well positioned companies benefit from increasing spend in downturns. A good analogy was "Athletes often choose times of stress to mount attacks; strong runners and bicycle racers may increase their pace on hills or under other challenging conditions."

The message is both (1) don't cut back on advertising, because that's silly. But it's also that larger, healthier companies with cash get a triple effect in recessions:

1. There is less ad spending out there so your ads / DM get more attention.
2. Ads are cheaper because media companies are struggling for business.
3. You force weaker competitors into an arms race they can't win, forcing them to choose between bankrupting themselves or losing share.

This sounds an awful lot like the arms race in the 1980s. Ronald Reagan's 600 ship navy, high-tech fighters and bombers, and stealthy submarines never fought the Soviets, but because we had more cash, we basically forced them to either (1) lose the arms race or (2) bankrupt themselves. So, if you're strong, now's the time to beat your competitors to a pulp. Not sure I have much insight for the weak in this post. I'll try to think on that problem though.