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BCG The Boston Consulting Group

Against the Tide

Value Creation through Countercycl ical Brand Development

The Bos ton Consu l t ing Group (BCG) i s a genera l management consu l t ing f i rm tha t i s ag loba l l eader in bus iness s t ra tegy. BCG has he lped compan ies in eve r y majo r indus t r yand marke t ach ieve a compet i t i ve advantage by deve lop ing and implement ing un iques t ra teg ies . Founded in 1963, the f i rm now opera tes 54 o f f i ces in 36 count r i es .

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C O N T E N T S

I N T R O D U C T I O N 2

1 . S T R O N G B R A N D S I N C R E A S E V A L U E : TOP BRANDS WITH BETTER PERFORMANCE ON CAPITAL MARKETS 5

2 . C O M M O N P R A C T I C E I N T I M E S O F C R I S I S :REDUCING ADVERTISING EXPENDITURES 11

3 . E X P E R T S C A U T I O N : SHORT-TERM MAXIMIZATION OF PROFITABILITY PUTS LONG-TERM GOALS AT RISK 15

4 . R E C O G N I Z I N G O P P O R T U N I T Y I N C R I S I S : SOME EXAMPLES OF COUNTERCYCLICAL ADVERTISING IN 2001 19

5 . I M P R O V I N G M A R K E T P O S I T I O N D U R I N G P E R I O D S O F C R I S I S : INDUSTRY ANALYSES 1991–2001 23

6 . C O N C L U S I O N : SEIZE THE OPPORTUNITY—ACT COUNTERCYCLICALLY 29

M E T H O D O L O G Y 31

C R E D I T S A N D C O N T A C T S 32

2

“There are times when taking the greatest risk can beconsidered the wisest course of action.”

Carl von Clausewitz

In 2001, after decades of prosperity and growth,the German advertising industry was caught up inthe tide of a general economic downturn.

It was in this context that The Boston ConsultingGroup, in cooperation with Gruner + Jahr and IPDeutschland, wrote and presented the study“Against the Tide—Value Creation throughCountercyclical Brand Development” betweenDecember 2001 and March 2002.

The study concludes that in spite of recession,there is no immediate cause for panic. Clausewitz’insight applies particularly well to actors engagedin economic competition: in periods of crisis theyshould actively seek out opportunities to redistrib-ute the cards in their own favor. Advertising playsa central role in this process.

This study focuses on the interdependenciesbetween advertising, market position, and corpo-rate value. Examining as many different industriesas possible, the study tests the thesis that continuousbrand cultivation forms the foundation for long-term growth, leading to superior value develop-ment in capital markets. This is especially true dur-

ing periods of recession or crisis. The resultsshowed that continuity as a principle of success isparticularly valid in times of crisis. These situationsalso provide major opportunities for efficiency:managers who maintain or increase their advertis-ing investment against the general trend canstrengthen their brand relative to the competition,build up long-term brand value, and secure theirposition in both the market and in capital markets.

The focus on advertising investment should notblind us to the fact that other factors also exert amajor influence on commercial success, mostimportantly the attractiveness of the productrange as well as the company's innovation pipelineand sales strength. To have considered all of theseindividual aspects within a single study would haveexceeded its scope. Our message is clear: counter-cyclical advertising offers enormous possibilities,but countercyclical action should not remainrestricted to advertising alone.

“Against the Tide—Value Creation throughCountercyclical Brand Development” is aimed atindividuals with responsibility for the economicsuccess of a company and who have an influenceon the importance of advertising communicationwithin this context. It is also directed towards mar-keting and advertising managers, media andadvertising agencies, and all those with an interestin advertising and competition.

I N T R O D U C T I O N

We would like to express our gratitude on behalfof all the partners—Gruner + Jahr, IP Deutschlandand BCG—for the huge commitment of all thoseinvolved in the preparation of this study, above allYunfeng Cui, Helma Spieker, and Michael Walterfrom Gruner + Jahr and Dr. Gitte Katz, GuidoModenbach, and Matthias Süßlin at IP Deutsch-land. Our thanks also go to the BCG project teamwho conceived and drew up the study: Dr. BerndtHauptkorn, Oliver Merkel, Sabine Ruff, Dr.Claudia Tourneau, and Dr. Jens Willenbockel. We

would furthermore like to thank the numerousspecialists in the advertising industry who provid-ed invaluable contributions in individual discus-sions and thereby greatly enriched the study.

Hopefully, we have contributed to a necessarychange of attitude regarding continuous branddevelopment and enduring corporate value cre-ation—during the current crisis and beyond.

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Dr. Friedrich WehrleMember of the Board of ManagementPublishing HouseGruner + Jahr

Dr. Walter NeuhauserManaging Director IP Deutschland

Dr. Antonella Mei-PochtlerSenior Vice President BCG

Strong brands are central to increasing theirowners’ corporate value—especially as partof a clear growth strategy. Continuous highadvertising investment plays a decisive rolein this.

The capital markets reflected a clear trend: from1990 to 2001, the five multinationals with thelargest advertising spending—Unilever, Procter &Gamble, Nestlé, Coca-Cola, and Ford—all per-formed impressively. On average, their share pricerose by a full 437 percent. This is almost double

the growth rate of the S&P 400 U.S. share priceindex (diagram 1). A difference of this magnitudeleads us to conclude that there is a causal connec-tion between brand portfolios, brand cultivation,and the performance of a company in the capitalmarkets.

As was shown in the BCG study entitled “ValueCreators 2001: Dealing with investors’ expec-tations”, the value of a company is made up of twocomponents: fundamental value and expectationpremium.

5

1 S T R O N G B R A N D S I N C R E A S E V A L U E :

T O P B R A N D S W I T H B E T T E R P E R F O R M A N C E

O N C A P I TA L M A R K E T S

200120001999199819971996199519941993199219911990100

200

300

400

500

600Share pricetrend,index

(1) Multinationals with the highest advertising spending worldwide: Unilever; Procter & Gamble; Nestlé; Coca-Cola; FordSources: Advertising Age; Datastream; BCG analysis

Top 5 advertisers worldwide(1)

S&P 400

+219%

Top brands+437%

P&G

UnileverNestlé

Coca-Cola

Ford

S T R O N G B R A N D S I N C R E A S E V A L U E

D I A G R A M 1

Fundamental value is defined as the net presentvalue of future cash flows, with the company-spe-cific cost of capital used as the discount rate. Cashflow projections are based on current profitabilityand the previously achieved growth rate of grossinvestments. They are not linear since no compa-ny grows faster than the market average in thelong term. Growth rates and yields tend towardsmarket averages due to competitive pressure.

If calculated fundamental value is compared withthe value of a company on the market(1), fundamen-tal and corporate values do not normally coincide.

In fact, the fundamental value is frequently lower.We refer to the difference between fundamentalvalue and corporate value as the “expectation pre-mium”. This part of a company’s value is based onexpectations that its future development willeither exceed or remain below its fundamentalvalue. A company’s growth potential is influenced,amongst other things, by its quality of manage-ment, brand strength, and capacity to innovate.

Our study demonstrates that expectation premiumsare particularly high as a proportion of corporatevalue amongst the top performers in an industryand usually exceed the average for that particularindustry as a whole (see diagram 2). At the begin-ning of 2001, for instance, L'Oréal's expectationpremium amounted to 84 percent of its 67 billioncorporate value, while the average proportion inthe cosmetics sector was 67 percent.

The automotive sector follows different rules. Theaverage level of expectation premiums in thisindustry is a meager two percent of corporatevalue. Top performer BMW, however, exceeds thisfigure significantly: its expectation premiummakes up seven percent of corporate value.

Corporate value in the automotive industry reflectsmoderate growth expectations. Many areas of con-sumer goods, however, are subject to extreme pres-sure due to high expectation premiums.

6

(1) Corporate value: market capitalization and liabilities at the beginning of 2001(2) Fundamental value: net present value of future cash flows based on current profitability and growth(3) Expectation premium: difference between corporate and fundamental values(4) Cosmetics: Avon, Marbert, L'Oréal, Revlon, Beiersdorf, Wella, Procter & Gamble; Auto and Trade: BCG Study of Top Performers 2001Source: Datastream; BCG analysis

Corporate value(1)

67 billion€

33% 49%

Fundamental value(2) Expectation premium(3)

98% 2%67% 51%

Corporate valuebillion€11

Corporate valuebillion46€

Top brands

Industryaverage(4)

16% 24% 93% 7%84% 76%

L’Oréal H&M BMW

C O R P O R A T E V A L U E I S T H E R E S U L T O F C O M P A R A T I V E L Y H I G H E X P E C T A T I O N S — T O P B R A N D S H A V EH I G H E R E X P E C T A T I O N P R E M I U M S T H A N T H E I N D U S T R Y A V E R A G E

D I A G R A M 2

(1) Company value includes own and outside capital

“A high expectation premium does not mean acompany is seen in too positive a light by capitalmarkets,” stresses Dr. Daniel Stelter, a vice presi-dent with the Boston Consulting Group andauthor of the BCG study “Value Creators 2001:Dealing with investors’ expectations”. Initially, hestates, a high expectation premium shows onlythat “the market has confidence in the competitivestrength and management of the company inquestion.” He goes on to say, “Top performers inparticular, with their extraordinarily positive fun-damental increases, regularly face an equallyimpressive increase of expectation premiums.”Companies with strong performance are trusted toproduce even better results in the future. In thepast, this confidence has proven well founded withthe majority of top brands. Our analyses haveshown that Beiersdorf, for example, fulfilled thevalue of its 1993 expectations within five years onthe basis of the company's increased fundamentalvalue (diagram 3). H&M reached its fundamentalvalue in just three years, while BMW took only oneyear. This finding poses an important question forthe strategy of corporate management: what exact-

ly are the crucial drivers of value creation? In thiscontext, we differentiate between two types ofinfluencing factors (see diagram 4):

■ Efficiency impact: describes the increase incorporate value in the time period being ana-lyzed through measures designed to reducecosts and increase capital productivity.

■ Brand impact: describes brand- and innova-tion-driven growth of turnover, profits, andgross investments in the time period beinganalyzed. Brand impact includes all invest-ments in product innovation, sales, and adver-tising.

We were able to prove through detailed analysis thata general improvement in the fundamental data ofa company does not increase its value to the sameextent. The left-hand table in diagram 5 shows that,statistically speaking, the correlation between thedevelopment of fundamental value and that of cor-porate value is relatively low (R = 0.28).

7

H&M: 1993 expectationsmet after three years

Source: Datastream; BCG analysis

t = 1993 +1 +2 +3 +4 +5 +6 +8+7

BMW

H&M

Vodafone

Beiersdorf

LVMH

L’Oréal

T O P B R A N D S F U L F I L L E X P E C T A T I O N S — N U M B E R O F Y E A R S B E F O R E I N C R E A S E S I N F U N D A M E N T A LV A L U E M E E T C A P I T A L M A R K E T E X P E C T A T I O N S

D I A G R A M 3

8

"Companies that increase theirfundamental value also raise theexpectation premium, thereby leading to thecreation of corporate value."

Source: BCG analysis

Brand impact

Price increase and growththrough

- product/innovation- sales- advertising

Fundamental value Expectation premium Corporate value

Efficiency impact

Cost reductionIncrease in capitalproductivity

L'Oréal

H&M

etc.

W H A T D R I V E S V A L U E C R E A T I O N ? A S C H E M A T I C I L L U S T R A T I O N

D I A G R A M 4

Efficiency impactBrand impact

Price increase andgrowth through:

L'OréalH&Metc.

R = 0.28

Development of fundamental value 1996–2000 in %(3)

0

(1) BCG analysis for consumer goods and retail companies(2) Defined as corporate value 2000 ÷ corporate value 1996(3) Defined as fundamental value 2000 ÷ fundamental value 1996(4) In percent of development of fundamental valueSource: Datastream; BCG analysis

Low correlation of fundamental and corporate values(1)

Development of corporate value 1996–2000 in %(2)

350

100 200 300 700

300

250

200

150

100

50

0

L'OréalH&Metc.

Brand impact 1996–2000 in %(4)

0

High correlation of brand impact and corporate values(1)

Development of corporate value 1996–2000 in %(2)

350

40 60 80 100

300

250

200

150

100

50

0

R = 0.90

L’Oréal

Fielmann

BeiersdorfJ&J

RevlonNike Holsten

Adidas

Sony

GAPAvon

Gerry WeberH&M

Estée LauderBoss

Henkel P&GBenetton

Shiseido

Elizabeth Arden

20

Elizabeth Arden

HolstenNike

Adidas

Gerry WeberBeiersdorf

Avon

L’Oréal

Sony

Fielmann

GAPH&M

BossBenetton

Estée Lauder

P&GHenkel

Wella

RevlonJ&J

Product/innovationSalesAdvertising

V A L U E I N C R E A S E D R I V E N B Y B R A N D I M P A C T — H I G H C O R R E L A T I O N W I T H D E V E L O P M E N T O F C O R P O R A T E V A L U E

D I A G R A M 5

The right-hand table in diagram 5 clearly demon-strates the connection between an increase inbrand impact and the creation of additional cor-porate value. Consider the following examples:

1. Holsten: Between 1996 and 2000 the companywas hardly able to increase its fundamentalvalue through brand impact, while its corpo-rate value also remained virtually constant.

2. H&M: The 50 percent share of the increase infundamental value attributable to brandimpact was accompanied by the creation ofadditional corporate value on the capital mar-ket equal to 200 percent of the initial value.

3. L'Oréal: The proportion of the increase infundamental value resulting from brandimpact is over 80 percent, and corporate valuegrew to 300 percent of initial value.

The correlation coefficient R = 0.91 demonstratesthe precision of this descriptive model.

The question of which drivers impact value cre-ation can be answered clearly: it is primarily thelevel of brand impact that creates value at a com-pany—a firm's investment in new products, effi-cient sales channels, and persuasive brand com-munications. The formula for commercial successof top brands is continuous brand cultivationthrough advertising, as demonstrated by the exam-ples of H&M, BMW, and L'Oréal (diagram 6).

As an individual measure, of course, advertisingcan only increase company value where it isemployed in support of the unattractive range ofproducts and services. Then, however, it is thebrand that creates the added value; the strongerthe brand, the higher this value will be.

9

(1) Cumulative advertising investment indexed, 1995 = 100Source: AC Nielsen; Datastream; BCG analysis

H&M

Index(1)

1,800

1,200

600

01995 1996 1997 1998 1999 2000 2001

BMW

Index(1)

1,800

1,200

600

01995 1996 1997 1998 1999 2000 2001

L'Oréal

Averagegrowth p.a.

Turnover : 9%Corporate value: 27%Advertising: 26%

(1)

Index(1)

1,800

1,200

600

01995 1996 1997 1998 1999 2000 2001

Continuous advertisinginvestment

Averagegrowth p.a.


(1)

Averagegrowth p.a.


(1)



C O N T I N U O U S A D V E R T I S I N G I N V E S T M E N T I S T H E T O P B R A N D S ' F O R M U L A F O R S U C C E S S

D I A G R A M 6

Although brand cultivation is regarded asimportant in most companies, advertisingspending still comes under severe pressurein times of crisis. Brand value and sharehol-der value are put at risk for the sake ofshort-term improvements in profit. This wasnever more true than in the year 2001.

In 2001, total advertising investment in Germanyfell by 6.3 percent compared to 2000. This meantthat for the first time since 1981, advertising

expenditures fell below the levels of the precedingyear (diagram 7). Even in the recession year of1993, when the German reunification boom cameto an end, the advertising industry still managed torecord a slight increase over 1992. In 2001 almostall industries reduced their advertising expendi-tures (diagram 8). The reduction in spending wasgreatest in telecommunications, with investmentsdown 38 percent compared to 2000, althoughadvertising spending in detergent goods and thetravel industry also recorded double-digit falls(down by 23 percent and 11 percent, respectively).

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2 C O M M O N P R A C T I C E I N T I M E S O F C R I S I S :

R E D U C I N G A D V E R T I S I N G E X P E N D I T U R E S

TrendDAX30

Source: AC Nielsen; Datastream; BCG analysis

Change on previous year in % Downturn1992/93

Advertisinginvestment

Crisis2001

GDP

81 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 0182

16141210

86420

-2-4-6-8

2001: Advertising: -6.3%

C H A N G E I N A D V E R T I S I N G I N V E S T M E N T M O R E P R O N O U N C E D T H A N G E N E R A L E C O N O M I C T R E N D

D I A G R A M 7

Merely three of the largest industries increasedtheir budget: pharmaceuticals with an increase of3.3 percent; insurance with increased spending of15 percent due to the “Riester pension”, and softdrinks where a 43-percent increase in advertisingspending from Coca-Cola alone was enough toensure a 17 percent average rise across the indus-try as a whole.

A comparison with average annual growth inadvertising investment from 1990 to 2000 showsjust how dramatic the collapse in spending hasbeen. During this time period, advertising invest-ments clearly increased. The reason for the cur-rent reluctance to advertise is patently obvious:during periods of reduced earnings, advertisingspending is one of the few items a company canreduce in the short term to improve its cost situa-tion. Measures, such as restructuring, adjustmentof product portfolio, and staff reduction pro-grams, take time to show effect. Cuts in the adver-tising budget, on the other hand, improve prof-itability immediately. The crisis is often character-ized by a paradigm shift; controllers take the lead.According to a representative of a leading foodprocessing company, “short-term pressure to

improve profitability is considerable. Advertising isseen as a residual factor in influencing results.”

“The pressure to show positive results is enor-mous,” confesses the managing director of a deter-gent goods producer. In an interview with the mag-azine W&V, Hans-Dieter Liesering, president ofthe advertising association OWM, concludes: “It’svirtually impossible to consider personnel reduc-tions and simultaneously increase advertisingspending.” Gerhard Berssenbrügge, CEO of NestléNespresso, on the other hand, sees this as a lack ofsteadfastness on the part of management. “Weakmanagers might feel under pressure, while strongmanagers will use the crisis to strengthen thebrand.” The figures show how readily top advertis-ers in Germany have adopted this traditionalrecipe of cost reduction over the past year (dia-gram 9): Deutsche Telekom cut its communica-tions budget by 59 percent, while its T-Mobil sub-sidiary did so by 46 percent. Competitor ViagInterkom also cut its communications budget by 46percent. Other companies that went beyond theaverage reduction of 6.3 percent were Masterfoodsat 27 percent, Procter & Gamble and VW with 23percent each, and Henkel, where advertisingspending was down 11 percent.

12

(1) Telecoms: figures refer to period from 1995–2000(2) Insurance: one-time effect of marketing the so-called “Riester pension”; soft drinks: increase primarily driven by a countercyclical advertising investment by Coca-ColaSource: AC Nielsen; BCG analysis

(2)

Telecoms Detergentgoods

Travel Banking Con-fectionery

Cosmetics Brewing Retail Automotive Pharma-ceuticals

Insurance Soft drinks

52.0(1)

5.09.5 7.5 7.4 8.3 7.4 6.1

9.0 6.9 7.6

15.2

3.2 4.3

16.7

-38.3-23.5

-10.9 -10.6-7.8 -7.6 -7.0 -6.0

-0.3

Change in advertising investment in %(2000–2001)

Average change in advertising p.a. (1990–2000) in %

(2)

A L M O S T A L L I N D U S T R I E S R E D U C E A D V E R T I S I N G E X P E N D I T U R E S — R E D U C T I O N I N A D V E R T I S I N G F O R 2 0 0 1

D I A G R A M 8

Passively orienting advertising behavior towards theoverall market is typical of many companies' attitudeto advertising investment. As the marketing manag-er of a bank we interviewed puts it: “We primarilyobserve the advertising behavior of the competi-tion.” Procyclical behavior, however, will at bestcause market share to stagnate. And that will onlyhappen if none of the competitor companies launcha countercyclical advertising offensive. It is highlyinadvisable to rely on such an outcome, however. Asone representative of a credit card company puts it:“Even during crises, it's important to remember thatnot everyone suffers to the same extent.”

Those who have been tested by hard practical expe-rience say that in times of crisis, it is not so muchrisk avoidance but rather concrete action thatmakes the difference. In marketing, this means thatcompanies developing their brand during a down-turn in the economic cycle should strengthen mar-ket position through advertising, while market lead-ers have the opportunity to bolster existing advan-tages. Current examples, such as Dell or Müller,prove that this strategy is not only theoretical innature but works even in the adverse environmentsof extremely competitive markets.

CEO Gerhard Berssenbrügge sums up the hugeopportunity: “If a company has created the pre-requisites on the product side and done its home-work, then there is a real opportunity to gain mar-ket share through countercyclical advertising.”Peter Zühlsdorff, general manager for food retail-ing at Tengelmann, emphasizes the psychology ofcompetition. “Periods of crisis represent the idealtime for a company to shift market share in its ownfavor. With most industry players practically para-lyzed, opportunities remain for the more level-headed managers.”

The current situation not only affords opportuni-ties to improve market position: Due to the overallreduction in advertising pressure, this can also bea time of greater efficiency. Wolfgang Bück, adver-tising manager at the German Association ofSavings and Giro Banks, points out: “When can acompany advertise more efficiently than in timeslike these?” In a quieter market, each individualvoice can gain more strength.

13

Advertising investment2001 in M€

Note: excludes media companiesSource: AC Nielsen; BCG analysis

Change in advertisinginvestment2000/2001 in %

Market average:-6.3%

Telekom

-59

T-Mobil ViagInterkom

Master-foods

P&G VW Henkel Beiers-dorf

Renault L'Oréal Ferrero Ford Media-markt/Saturn

Opel Unilever

-46 -46

-27-24 -23

-11-6 -5 -5 -3

-1

4 3 5

105 82 74 206 137 129 135 129 168 234 135 199 137 190191

L A R G E A D V E R T I S I N G B U D G E T S A R E C U T — A D V E R T I S I N G B E H A V I O R O F T O P A D V E R T I S E R S I N G E R M A N Y

D I A G R A M 9

Even healthy companies will cut their com-munications budgets in an attempt to stabi-lize earnings. On the playing field of inter-national brands, however, this loss of adver-tising share can quickly result in the compa-ny being drawn into a double vicious circle,both in the market and in capital markets.

“Reluctance to act means companies are effective-ly squandering a major opportunity,” is the con-clusion of “Horizont”, one of Germany’s leadingpapers in the advertising industry. “Werben &

Verkaufen” says “the cyclical and timid behavior ofmany managers” exacerbates the economic andadvertising crisis, as well as the general mood ofthe market. The pollsters from the AllensbachInstitute share this view. Managing DirectorRenate Köcher contends that there is a tendencyto anticipate the worst from the very beginning,particularly in Germany. “It is very likely that suchan attitude produces a self-fulfilling prophecy.”

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3 E X P E R T S C A U T I O N :

S H O R T-T E R M M A X I M I Z AT I O N O F P R O F I TA B I L I T Y P U T S

L O N G -T E R M G O A L S AT R I S K

ConsequenceCommon measures during crises

Long-termShort-term

Stop current innovation projectsReduction in product portfolio

Cutback in sales costsReduction in external service

Cutback in traditional advertisingCutback in below-the-line measures


Attractiveness of product range

Efficiency of sales

Intensity of communications

Product

Brand impact

Sales

Advertising

T H E R I S K O F S H O R T - T E R M O R I E N T E D P R O F I T M A X I M I Z A T I O N : L O N G - T E R M D E T E R I O R A T I O N

D I A G R A M 1 0

In fact, the German economy has enjoyed a pro-longed growth period since the early nineties, hit-ting a significant high in the summer of 2000. Thesharp downturn in the economy therefore hit par-ticularly hard, creating ideal conditions for over-reactions. All items not immediately necessary formaintaining business activity were cut drastically,not the least of which was advertising.

The strategy of undifferentiated cost cuttingappears risky (diagram 10); such a policy fails toaccount for long-term consequences affecting thebrand. In some circumstances, the value of abrand, developed and cultivated over an extendedperiod, can be permanently weakened by reduc-tions in advertising expenditure. As a result, thelong-term aim of strengthening the brand andincreasing corporate value is sacrificed to an“actionist” approach designed only to achieveshort-term profit maximization.

This process can lead to a double vicious circleboth in the market and in capital markets.

The vicious circle in the market always has thesame point of origin (diagram 11):

1. Industry turnover and profitabilities fall.

2. Companies reduce discretionary expendituresincluding advertising spending under pressurefrom controllers.

3. Total overall advertising investments in theindustry are reduced.

4. Managers tend to follow familiar patterns: cutadvertising spending in step with the industry,while maintaining a constant ratio of advertis-ing costs to turnover.

5. Brand equity suffers as a result: brand aware-ness erodes, brand individuality becomesblurred, and customer loyalty collapses.

6. Market positioning is adversely affected.

7. Both turnover and profitability deterioratefurther.

The risk of entering this vicious circle is particularlygreat for medium-sized companies and can havedangerous long-term consequences. Costs are simplyshifted into the future, when the brand, weakenedduring the crisis, needs to be revitalized by employ-ing high levels of capital. Since we have ascertainedthat it is the brand that creates value, a weaker brandhas a direct impact on corporate value.

16

Vicious circle in the market Vicious circle in capital markets

(1) BCG has coined the term “brand equity” which describes relative brand strength and can be broken down as awareness, desire, intention, purchase(2) Main elements of brand impact: product, sales, and advertisingSource: BCG analysis

Discretionaryexpenditures

Brand equity(1) Brand impact(2)

Countercyclicaladvertising

Advertising(companies)

Marketposition

Turnover/profitability

Advertising expenditurein the industry

Expectationpremium

Corporatevalue

Financingcosts

Procyclicaladvertising

T H E R I S K O F P R O C Y C L I C A L B U D G E T C U T B A C K S : D U A L V I C I O U S C I R C L E

D I A G R A M 1 1

The vicious circle in capital markets begins whenbrand impact, which is influenced by a stronglygrowth-oriented strategy, falls as a result of pro-cyclical action in the market. The crisis thendevelops as follows:

1. Turnover and profitability are reduced.

2. Brand impact falls.

3. As a result, the expectation premium as a pricepremium on the fundamental company valuefalls.

4. Corporate value falls.

5. Financing costs rise in capital markets.

6. Profitability deteriorates further.

The connection is clear: cost cutting may improvea company's profitability in the short term but mayprove shortsighted from the perspective of corpo-rate value. The apparent way out—presenting bet-ter figures to capital markets with the help of rapidprofit maximization—proves, in fact, to be a trap.The pressure exerted by the capital reporting sys-tem to distribute successful news on a quarterlybasis can drive a company directly into the double

vicious circle described above. This may happen ata time when it is least able to deal with such a situ-ation. Possible consequences include interrup-tions to continuous brand cultivation and adverseeffects to shareholder value in the medium term.

Companies with strong brand-driven growth aregenerally better performers in capital markets(diagram 12). This is demonstrated by the exam-ple of the automotive industry in the crisis year of1993. At this time, both VW and Peugeot were hitby considerable reductions in sales in the globalmarket. The result: market capitalization alsolagged behind the competition. Mercedes-Benz,on the other hand, significantly increased its mar-ket share and reported strong performance in cap-ital markets. Naturally, this principle is not auto-matic. Monocausal explanations generally do nottell the whole story in our highly complex moderneconomic systems. Completely ignoring the causalconnection seems negligent, however. The risk ofentering the double vicious circle through a com-munications strategy oriented exclusively towardscosts is significant. The solution: countercyclicaladvertising.

17

Change in market shareWorld market in percentage points(2)

(1) Corporate value trend: market capitalization 1994 ÷ market capitalization 1993(2) Change in market share: SoM 1993 compared to SoM 1992(3) Strong fall in sales due to management change (beginning of Piech era, President VW America, required to resign)Source: Datastream; BCG analysis

Corporate valuetrend(1)

-1.50.8

R = 0.72

-1.0 -0.5 0 0.5 1.0

1.0

1.2

1.4

1.6

Volkswagen(3)

Peugeot

Honda

Fiat

Toyota

GM

Mercedes-Benz

Ford

C A P I T A L M A R K E T S R E W A R D M A R K E T S H A R E G A I N S — I N D U S T R Y E X A M P L E O F T H E W O R L D W I D EA U T O M O T I V E M A R K E T I N C R I S I S , 1 9 9 3

D I A G R A M 1 2

Market leaders and aggressive opportunistsdemonstrate that efficient brand cultivationstrengthens a company's position in theindustry and in capital markets particularlyin times of economic downturn. They areamong the winners of the 2001 crisis.

In 2001 the vast majority of companies in Germanymade dramatic cuts in advertising spending, lead-ing to a 6.3-percent slump in total advertisinginvestment compared to the preceding year. Somecompanies, however, recognized the risk of thedouble vicious circle and viewed the crisis as anopportunity to make a lasting improvement to

their market position. In first place come top per-formers, such as Dell, Allianz, and Wella, all ofwhom drastically increased their advertisingexpenditure: Dell by 149 percent, Allianz by 122percent (far above the average industry increase of15 percent due to the one-time effect of the“Riester pension”), and Wella by 82 percent (dia-gram 13).

Once again, parallels can be drawn between con-tinuously high investments in the brand and thevalue of the company: the average total sharehold-er return (sum of increase in share price and divi-dend distribution) for the years 1996 to 2001

19

4 R E C O G N I Z I N G O P P O R T U N I T Y I N C R I S I S :

S O M E E X A M P L E S O F C O U N T E R C Y C L I C A L A D V E R T I S I N G

I N 2 0 0 1

Allianz Wella H&M BMW Bayer

∆ ndustry advertising2000–2001

i

investment2000–2001∆ dvertisinga

(1) Total shareholder return (TSR) defined as average increase in share price plus average dividend distribution per year(2) Figure for BMW adjusted to account for mini SoA (share of advertising) investment in industrySource: AC Nielsen; BCG analysis

Average TSR p.a. 1996–2001(1)

Insurance

+15.2%

Textiletrade

+0.6%

Automotive(2)

-0.3%

Pharma-ceuticals+3.2%

Computers andaccessories

-4.5%

Cosmetics

-7.6%

+149%

+122%

+82%

+24%+13%

+6%

71.1% 16.0% 68.6%32.6% 18.4% 24.7%

0 %

Dell

S O M E T O P P E R F O R M E R S T A K E C O U N T E R C Y C L I C A L A C T I O N — B U D G E T C H A N G E S I N C R I S I S Y E A R 2 0 0 1

D I A G R A M 1 3

shows a considerable increase in the corporatevalue of these top performers.

While this increase appears at the end of a longcausal chain, the influence of countercyclicaladvertising on a company's competitive positionwithin the industry is immediate—for both marketleaders and brand developers.

Countercyclical advertising offers the following:

■ Efficiency benefits: As a company's share ofadvertising(1) rises, its brand assumes a moreprominent position—with comparatively littlecapital employed. As a result, innovations canbe positioned more cheaply in the market.

■ Opportunities for growth: Market leaders canmake lasting improvements to their marketposition, while opportunists can conquer newground in the industry.

A number of different examples demonstrate thesuccess of countercyclical advertising (diagram14). For example, Müller, the market leader in thesegment of “white” dairy products, increased itsadvertising spending by 5.4 percent, raising itsshare of advertising across the industry as a wholefrom 25 to 28 percent. As a result, it was able to

launch its new “Crema di Yogurt” product cheaplyand efficiently and strengthen market share in spe-cific segments—fruit yoghurt, for example, whereits share rose from 10.9 to 11.7 percent.

In the computer industry, Dell was able to increaseits SoA from 4 to 10 percent of total market spend-ing on the strength of a 149-percent rise in adspending. The company's success was resounding:a 20-percent turnover increase in Germany, upfrom fifth to fourth place in terms of industryturnover, and a strengthening of the brand imageas price leader.

Success stories, such as Dell or Müller, are by nomeans individual cases. As can be seen in diagrams15 and 16, companies in entirely different indus-tries have experienced similar degrees of successin strengthening their market positions. Thesehave included both market leaders and oppor-tunists. The conclusion: countercyclical advertis-ing works. In the context of falling advertisinginvestments, even constant levels of spending con-tribute to raising the share of advertising. At manycompanies, however, recognition that it is cheaperto advertise during crises is not the sole motivationfor increasing the advertising budget. There is fre-quently another driving force behind intensifying

20

SoA: share of advertising in industrySource: AC Nielsen; BCG interviews; BCG analysis

2000

Dairy products ("white")

Cheap, efficient introduction of innovations (Crema di Yogurt)Strengthening of market share base (e.g., increase in fruit yoghurtsegment from 10.9 to 11.7 percent)Cost-efficient brand cultivation

Market leader: strengthening of position

In Germany, 20-percent turnover increaseCapture of share in market, up from fifth to fourth place measured byturnoverStrengthening of brand image as price leader

Brand developer: market share capture

∆ advertisinginvestment industry

∆ advertisinginvestment company

2001

SoA25%

Müller

SoA28%

-6%

+5.4%

€180M€169M

2000

Computers and accessories

2001

SoA4%

Dell

SoA10%

-4.5%

+149%

€270M€258M



C O U N T E R C Y C L I C A L A D V E R T I S I N G O F F E R S O P P O R T U N I T I E S T O M A R K E T L E A D E R S A N D O P P O R T U N I S T S

D I A G R A M 1 4

(1) Share of Advertising (SoA): share of advertising investment of a company in total advertising investment of industry

communications—the introduction of a new prod-uct. The company Wella, which increased advertis-ing spending by 82 percent in 2001, explained itscommunications strategy with new product initia-tives requiring appropriate advertising support.Justus Schneider, vice president for marketingcommunications at DaimlerChrysler, also stressesthis requirement: “Once the car is ready, it has tobe advertised. There's simply no room for short-term thinking, even when there is profitability

pressure.” Countercyclical advertising investment isespecially suitable for those strategic communica-tion themes designed to cultivate brands. “Commu-nications aims are achieved more efficiently duringperiods of crisis.” There is opportunity for changein this area. Hans Sartor, advertising manager atPeugeot, confirms that his company's advertisingefforts have been extremely effective during peri-ods of general advertising restraint.

21

Note: SoA: Share of advertising; share of advertising investment in industrySource: AC Nielsen; M + M Eurotrade; BCG interviews; BCG analysis

2000

Food retailing

2001

SoA10%

Lidl

-6.0%

+27%

€1,165M

SoA14%

€1,095M

Turnover increase of 8%counter to industry trend

2000 2000 2000

Building and DIY markets Coffee Automobiles

2001 2001 2001

SoA20% SoA

11%

SoA6.1%

Hornbach Melitta Peugeot

-9.0% -1.5% -0.3%

+8%+13% +12%

€67M €190M €1,565M

SoA23%

SoA13%

SoA6.9%

€61M€187M €1,561M

Turnover increase of 9.9%(industry: 4.4%)

Turnover rise of 3.1% to 324million despite falling prices

€Move from third to second place

among imported brandsin Germany



O P P O R T U N I S T S G A I N N E W G R O U N D I N I N D U S T R Y — E X A M P L E S O F C O U N T E R C Y C L I C A L A D V E R T I S E R S I N 2 0 0 1

D I A G R A M 1 6

Note: SoA = share of advertising; share of advertising investment in industrySource: AC Nielsen; Horizont; FTD; FAZ; BCG interviews; BCG analysis

2000

Computers and accessories

2001

SoA10%

Compaq

-4.5%

+41%

€270M

SoA14%

€258M

Leader in Germany in terms ofturnover for PDAs and PCs

2000 2000 2000

Electrical household goods Photographic and optical Furniture and fittings

2001 2001 2001

SoA24% SoA

15%

SoA27%

Miele Kodak IKEA

-30% -1.3% +2.2%

+4.5%+16% +11%

€79M €102M €199M

SoA35%

SoA18%

SoA30%

€55M

€101M €203M

Strengthening of position inhigh-price segment (industry

about -4%)

Turnover rise from 2 to 3% fromcore business, stronger growth

expected from innovations

Turnover growth of 9.5%,opening of six new stores



M A R K E T L E A D E R S S T R E N G T H E N T H E I R M A R K E T P O S I T I O N S — E X A M P L E S O F C O U N T E R C Y C L I C A L A D V E R T I S E R S I N 2 0 0 1

D I A G R A M 1 5

Offensive advertising strategies are proving apowerful weapon in the fight for marketshare, particularly in times of crisis. Thiswas demonstrated in an industry-specificstudy of the German market.

The examples provided in the previous chapterhave shown that countercyclical advertising is apreferred method for market leaders and oppor-tunists to make lasting improvements to their mar-ket positions. The Boston Consulting Group exam-

ined the effect of high levels of advertising intensi-ty in eleven different industries in order to back upthese findings with a broad analytical base. Theindustry examples presented include the segmentsof consumer goods, consumer durables, and serv-ices. A period covering the past eleven years wasexamined for crises and cyclical downturns. Crisisyears are defined as those in which significantreductions in turnover and/or total advertisinginvestment by industry occur: 1993 in the automo-tive industry, 1999 in the brewing market, and2001 in mobile communications (cf. diagram 17).

23

5 I M P R O V I N G M A R K E T P O S I T I O N D U R I N GP E R I O D S O F C R I S I S :

I N D U S T R Y A N A LY S E S 1 9 9 1 – 2 0 0 1

Note: t = year preceding crisis; t = crisis year; SoA = share of advertising (share of advertising investment in industry); SoM = share of market; both relate to the defined industrysample; SoM is defined by value, with exception of automobile industry (by cars sold) and mobile communications (by connections)Source: BCG analysis

0 1

Soft drinksAutomotiveBrewingCosmetics (hair care)Food retailingMobile communicationsPharmaceuticals (OTC)Tour operatorsCandyTextile tradeInsurance

Industries

20011993199920011999200119981994200119991999

Crisis

Long-term analysis of advertisinginvestment and turnover

(1991–2001)

SoM (t )1

SoM (t )0

Change inmarket share

SoA (t )0

SoM (t )0

Advertising base

SoA (t )1

SoA (t )0

Advertising developmentAdvertising intensity

< 1 > 11

> 1

1

< 1

Winners of the crisis

Losers of the crisis

Correlation?

G R O W T H B Y A D V E R T I S I N G A S A N O P P O R T U N I T Y I N T I M E S O F C R I S I S ? A N A L Y T I C A L F R A M E W O R K

D I A G R A M 1 7

One expression of offensive or defensive use ofadvertising is the “advertising intensity” formuladeveloped by BCG. This combines two differentfactors:

1. Advertising base: the ratio of the share ofadvertising to the company's share of market,which is an expression of the strategic stancetowards advertising. A value of below 1 shows acompany advertising defensively, whose shareof advertising is smaller than its market share.Where the value is above 1, the company is anoffensive advertiser.

2. Advertising development: this indicates theincrease in share of advertising in the crisisyear compared to the preceding year.

Multiplying the advertising base by the advertisingdevelopment provides us with a value referred toas the advertising intensity. This is greatestamongst companies coming from a high advertis-ing base and increasing investment in a counter-cyclical manner during the period of crisis. As the

analyses show, there is a clear positive correlationbetween advertising intensity and change in mar-ket share during crisis periods. A value of below 1indicates a loss in market share. The more thevalue exceeds 1, on the other hand, the more thecompany has been able to increase its marketshare.

Example from the automotive industry (diagram 18):We have identified 1993 as the crisis year in whichindustry turnover collapsed following the reunifi-cation boom in Germany. Opel was a defensiveadvertiser in this crisis year, with an advertisingintensity value of 0.7. This was the result of below-average use of advertising compared to marketshare and a share of advertising reduced by 3.3percent. There was also a downward trend on themarket side, with Opel's market share falling from21.4 to 20.9 percent. The picture is quite differentfor Citroën: although the French car manufactur-er was an offensive advertiser, with an advertisingbase value of 2.3, it increased its advertising deve-lopment value by 12 percent, achieving a finaladvertising intensity of 2.3. Market share increaseproves the strategy correct: the factor is 1.2.

24

Advertising investment in automotive industryin crisis year 1993: 1,062M€

Advertising intensity(2)

(1) Change in market share: SoM 1993 ÷ SoM 1992(2) Advertising intensity (SoA 1992 ÷ SoM 1993) × (SoA 1993 ÷ SoA 1992)Note: SoM = share of market; SoA = share of advertisingSource: AC Nielsen; BCG analysis

Change inmarket share(1)

00.8

R = 0.79

0.5 1.0 1.5 2.0 3.0

0.9

1.0

1.1

1.3

Volkswagen

Peugeot

FiatOpel

Mercedes-Benz

Ford

1.2

2.5

1993

Renault

Citroën

AudiDefensive advertiser

SoA÷SoM (92): 0.8SoA (93 to 92): -3.3%

Offensive advertiser

SoA÷SoM (92): 2.3SoA (93 to 92): +12%

BMW

A D V E R T I S I N G I N T E N S I T Y J U S T I F I E D I N T H E F I G H T F O R M A R K E T S H A R E ( I ) — P O S I T I V E C O R R E L A T I O NC O N F I R M E D — A U T O M O B I L E S

D I A G R A M 1 8

Example from the tour operator industry (diagram 19, upper table)In the crisis year of 1994, Meier's Weltreisen, withits advertising base of just 0.3, was a strongly defen-sive advertiser whose share of advertising wasreduced by an additional 6 percent. The compa-ny's low advertising intensity was forced furtherdown by a market share change factor of 0.9. Bycontrast, L'TUR, with its advertising intensity of1.9 based primarily on a significant increase of 86percent in its share of advertising, achieved a fac-tor of change in market share of 1.2.

Example from the brewing industry (diagram 19, lower table)In the crisis year of 1999, Holsten had below-aver-age advertising intensity. The change in marketshare is negative. Radeberger invested above aver-age in advertising and succeeded in gaining addi-tional market share.

25

Advertising investment in brewing industryin crisis year 1999: 3€ 80M

(1) Change in market share: SoM 1993 ÷ SoM 1992(2) Advertising intensity (SoA 1992 ÷ SoM 1993) × (SoA 1993 ÷ SoA 1992)Note: SoM = share of market; SoA = share of advertisingSource: AC Nielsen; FVM; Büro van Dijk; Deutscher Brauerbund; BCG analysis

00.8

R = 0.74

0.5 1.0 1.5 2.0

0.9

1.0

1.1

1.21999

Defensive advertiser

SoA SoM (98): 1.1SoA (99 to 98): -47%

÷


SoA SoM (98): 1.4SoA (99 to 98): +7%

÷

Becks

Holsten

WarsteinerDiebels

BitburgerKrombacher

Radeberger

König

Advertising investment in tour operator industryin crisis year 1994: 1€ 15M

00.8

R = 0.82

0.5 1.0 1.5 2.0 3.0

0.9

1.0

1.1

1.3

1.2

2.5

1994

L'TUR

Defensive advertiser

SoA SoM (93): 0.3SoA (94 to 93): -6%

÷


SoA SoM (93): 1.1SoA (94 to 93): +86%

÷

ITS

Alltours

LTU

Meier'sWeltreisen

TUI

NurTouristic

Studiosus





A D V E R T I S I N G I N T E N S I T Y J U S T I F I E D I N T H E F I G H T F O R M A R K E T S H A R E ( I I ) — P O S I T I V E C O R R E L A T I O NC O N F I R M E D — T O U R O P E R A T O R S A N D B R E W I N G

D I A G R A M 1 9

26

Pharmaceuticals (OTC)—1998

(1) Change in market share: SoM 1993 ÷ SoM(2) Advertising intensity (SoA 1992 ÷ SoM 1993) × (SoA 1993 ÷ SoA 1992)Source: Institut für Handelsforschung; Datamonitor; Hoppenstedt; Mobile Communications; Textilwirtschaft; annual reports; BCG project experience; BCG analysis

00.9

R = 0.78

0.5 1.0 1.5 5.0

1.0

1.1

Merk

Candy—2001

00.8

0.5 1.0 1.5 3.0

1.0

1.4

Milka Tafel

Mobile communications—2001

Insurance—1999

Food retailing—1999

0

0.4

0

0.4

0.6

0.90

R = 0.73

R = 0.65

R = 0.63

1.0

0.6

2.5

2.0

1.0

1.0

3.0

1.4

1.5

4.0

1.8

3.5

0.8

1.0

1.00

1.6

1.1

1.05

2.0

1.8

1.10

Viag Interkom

HUK

Spar

Cosmetics (hair care)—2001

Soft drinks—2001

Textile trade—1999

0

0.5

0

0.6

0.9

0.8

R = 0.69

R = 0.64

R = 0.23

0.5

1.0

1.0

1.5

1.5

2.5

2.5

1.0

1.0

1.0

1.2

1.1

1.4

1.4

1.

Karstadt

Apollinaris

Roche

Ratiopharm GlaxoSmith Kline

Novartis

BoehringerIngelheim

Bayer

2.0 2.5 2.0 2.5

1.2

R = 0.77

M&M’s Kinder Überraschung

MarsMilky Way

Mon ChériDuplo K. Pingui

Milch-Schnitte

Hanuta

Toffifee

Kinder Country

Balisto

Tic Tac

1.2E-Plus

VodafoneT-Mobil

Mobil Com

Debitel

0.8

0.5 1.0 1.5 5.02.0 2.5

Beiersdorf

Alcina

L’OréalWellaGuhl

Schwarzkopf

Colgate-Palmolive

Goldwelle

Bristol-Myers

1.6

1.2

0.8

0.8 1.2 1.6

Aachener Allianz

Provinzial

R&V

DKVVictoria

Hamburg MannheimerWürttembergische

1.3

1.2

2.0

Gerolsteiner

Eckes GraniniHassia+Luisen

Coca-Cola Überkinger

Vittel

Red Bull

Adelholzner

2.0 3.0

0.95Tengelmann

EdekaNorma

Netto

Aldi

Lidl

0.5

Rewe

2.0

1.2

Kaufhof

BreuningerJean Pascale

P&C

Esprit

H&M

C&A

















A D V E R T I S I N G I N T E N S I T Y J U S T I F I E D I N T H E F I G H T F O R M A R K E T S H A R E ( I I I ) — P O S I T I V EC O R R E L A T I O N C O N F I R M E D I N P H A R M A C E U T I C A L S , C A N D Y , M O B I L E C O M M U N I C A T I O N S , C O S M E T I C S ( H A I R C A R E ) , I N S U R A N C E , S O F T D R I N K S , A N D F O O D R E T A I L I N G

D I A G R A M 2 0

High correlations between advertising intensityand increase in market share during crisis years iscommon to all the industries surveyed here (dia-grams 20 and 21). Only the textile trade (yearexamined: 1999) does not feature this positivecausal connection.

Overall, all industries show the same pattern in thecrisis years studied: As a general rule, companiesthat gain market share in the tighter competitiveenvironment do so by means of above-average useof advertising. There is a tendency for their shareof advertising to be higher than the share of mar-

ket, while advertising behavior is more likely to becountercyclical.

The risk of the crisis is also clearly shown: com-petitors with low advertising intensity who alsoreduce their share of advertising during the crisisregularly fall behind and lose market share.

There is substantial opportunity to emerge as thewinner in a crisis by coming from a high advertis-ing base and using countercyclical advertising.

27


Tour operators

Automotive

Pharmaceuticals (OTC)

Candy

Brewing

Mobile communications

Cosmetics (hair care)

Insurance

Food retailing

Soft drinks

Textile trade

Industries examined

1994

1993

1998

2001

1999

2001

2001

1999

1999

2001

1999

Crisis/downturn

0.82

0.79

0.78

0.77

0.74

0.73

0.69

0.65

0.64

0.64

0.23

Correlation (R) Causal connection

A D V E R T I S I N G I N T E N S I T Y J U S T I F I E D I N T H E F I G H T F O R M A R K E T S H A R E ( I V ) — S U M M A R Y O FR E S U L T S O F I N D U S T R Y A N A L Y S E S

D I A G R A M 2 1

Companies taking countercyclical action toincrease advertising budgets during periodsof crisis will profit in the longer term. It iseasier to conquer market share and therebyincrease corporate value more rapidly.

In times of crisis, companies should take action.Many competitors look to established industry pat-terns during downturns and reduce advertisingbudgets in step with the industry as a whole.However, there are excellent opportunities forprescient managers to strengthen market positionthrough countercyclical investment in the compa-ny brand. This leads to an improvement in thecompany's growth platform, which in the longterm is rewarded by capital markets with increasedcorporate value. Every crisis produces winners inthe market and in capital markets. The winnersregularly include those companies that retain con-fidence in the power of advertising, even duringcrises.

This analysis by The Boston Consulting Group hasproven this connection. For the first time, a com-prehensive study has shown that in times of crisis apositive causal connection exists between advertis-ing investment, increase of market share, and cre-ation of corporate value. The study has shown thatstrong fundamental corporate data alone areinsufficient to project the development of corpo-rate value. Companies that work consistently ontheir growth, however, are also in a better positionin the eyes of capital markets. We refer to this

share of fundamental value relative to the growthof the company as the “brand impact”. Those com-panies with superior product innovation, moreefficient sales channels, and continuously highinvestment in advertising will enjoy the highestbrand impact in comparison to their particularindustry. According to the study, the higher a com-pany's brand impact, the stronger its opportunitiesto achieve above-average performance in the capi-tal markets. Current examples include L'Oréal,H&M, and BMW. The market values those compa-nies that continuously cultivate their brands.

The crisis year of 2001 shows, however, that manycompanies reduced their communication budgetsin an effort to achieve short-term improvements inearnings. The collapse in advertising investmentwas dramatic: in Germany, advertising spendingfell, for the first time since 1981, by 6.3 percentcompared to 2000. Nearly all industries and themajority of advertisers cut advertising spendingdramatically. Frequently they adhered unquestion-ingly to established models, oriented themselvestowards constant advertising cost-turnover ratiosand the advertising behavior of their competitors,or simply capitulated in the face of pressure fromanalysts to achieve positive quarterly results.

Such procyclical behavior appears dangerous,however. There is a strong risk of companies beingdrawn into double vicious circles in the marketand in capital markets.

29

6 C O N C L U S I O N :

S E I Z E T H E O P P O R T U N I T Y — A C T C O U N T E R C YC L I C A L LY

As the present study by The Boston ConsultingGroup shows, it is dangerous to reduce advertisingbudgets as this course of action can damage brandindividuality and weaken market position. Thiscan in turn lead to further deterioration inturnover and declining profitability. The down-ward spiral of the industry, and especially of thecompany acting procyclically, continues to gainstrength. Such a vicious circle occurs on two levels.The reduced use of brand power leads directly toa fall in brand impact, putting unwelcome pres-sure on corporate value. Subsequent increasedcosts of financing put additional pressure on prof-itability and limit the maneuverability of the com-pany.

One solution to this double vicious circle is the useof countercyclical advertising.

The analysis of a number of prominent individualexamples from 2001 and the extensive study of var-ious German crisis years in 11 different industriesall arrive at the same conclusion: crisis also pro-vides opportunity. Companies which use counter-cyclical advertising and maintain a significantshare of total advertising spending in their indus-try will emerge from crises as winners. Market lead-ers will strengthen their positions, while oppor-tunists will gain new ground in their industry. Thepassivity of their competitors offers significantadvantage in terms of efficiency; just by holdinglevels of capital at a constant level, they alreadyincrease their “share of voice”, the perceivedprominence of their brand presence. Where suchcompanies increase their advertising on a coun-tercyclical basis, such companies become evenmore prominent.

As our analyses have illustrated, the opportunity togain market share during crises by means of coun-tercyclical advertising is especially high when thisincrease in market share is working from analready high starting point. Despite the clear ben-efits offered by countercyclical brand cultivation,many companies have great difficulty throwing offthe restraints of the crisis and using the particularconditions to their own advantage. Pressure onprofitability often forces change within organiza-tions, with financial controllers and analystsassuming decision-making roles.

Undifferentiated cost cutting, however, is fatal fora company's brand. Our study shows that brandcultivation during times of crisis is one part of acorrectly understood, long-term shareholder valueapproach. Companies that pass up such value cre-ation potential in favor of short-term improve-ments will rarely be working on the basis of soundadvice: since companies are naturally affected todiffering degrees by crises, there is an acute risk ofshort-term actors being overtaken by market lead-ers and smaller opportunists thinking and actingon a countercyclical basis.

Growth and market value drive corporate value.According to the analyses of The BostonConsulting Group, countercyclical brand develop-ment is easier and more efficient to accomplish intimes of crisis. There is no doubt that an offensiveadvertising strategy in the face of a fall in prof-itability requires real courage. The need for suchinner strength is nothing new, however. It was overa century ago that Carl von Clausewitz, the leg-endary strategist, noted: “There are times whentaking the greatest risk can be considered the wis-est course of action.” His insight remains valid tothis day.

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By examining the commercial behavior of compa-nies in 11 industries, the present study analyzes theconnection between advertising investment,change in market share, and the creation ofincreased value.

The following industries were selected: soft drink,automobile, brewing, cosmetics (hair care), foodretailing, mobile communications, pharmaceuti-cals (OTC), candy, tour operator, insurance, andtextile trade. These industries cover the sectors ofconsumer durables, consumer goods, and services.

Advertising investments are based on informationfrom AC Nielsen Werbeforschung; changes inmarket share are based on trade panel data, as wellas national and international market, industry,association, broker, and company reports.

Corporate values and the changes therein werecalculated using data from Thomson FinancialDatastream. Details of fundamental value andexpectation premium were provided by the BCGDatabase Value Manager. More information onthis topic is available in the BCG study “ValueCreators 2001: Dealing with investor's expecta-tions”. The level of brand impact of the individualcompanies was calculated using balance sheetaccounts and profit and loss data and was incor-porated into the largest database of this type.

By establishing the period under examination,years of crisis or downturn were derived from thecourse of industry-specific advertising investmentand turnover.

A causal connection between advertising andchange in market share was determined in allindustries reviewed. A sample of companies wasselected to include the most important suppliersand brands in a given industry sector. The highestcorrelations were found to exist between the fac-tors of advertising intensity and change in marketshare. Advertising intensity is the result of theproduct of the advertising base [share of advertis-ing (t0) divided by share of market (t0)] and theadvertising development [share of advertising (t1)divided by share of advertising (t0)].

Numerous expert interviews were carried out inorder to supplement the analyses and verify themodels and findings. The basis was a preset ques-tionnaire covering the topic areas of advertising,market position, and corporate value. Our highlyrespected interviewees included executives, man-aging directors, and marketing managers at lead-ing brand companies (Beiersdorf, Coty,DaimlerChrysler, Dresdner Bank, HannenBrauerei, Henkel, Nestlé Nespresso, Tchibo,Tengelmann, Visa, and Wella).

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M E T H O D O L O G YM E T H O D O L O G Y

Publisher: The Boston Consulting Group GmbHGruner + Jahr AG & Co, HamburgIP Deutschland GmbH, Cologne

Conception and content: The Boston Consulting Group GmbH

BCG project team: Dr. Berndt HauptkornDr. Antonella Mei-PochtlerOliver MerkelSabine RuffDr. Claudia TourneauDr. Jens Willenbockel

Text: Dr. Berndt HauptkornKirsten Ueber

For further information on this study, please contact:Dr. Antonella Mei-Pochtler: [email protected]. Berndt Hauptkorn: [email protected]

All publications of data from this study, with the exception of publications for scientific purposes,require the advance consent of the editor.

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