Never a Bad Time to Spend Wisely
Splurging in the middle of a recession is a no-no by Wall Street’s lights. They’re very good at punishing companies that can’t rein in spending when the economy goes into a tailspin (like now). The thinking is, a company can’t increase sales in a recession and shouldn’t try. They can only hope to cut costs to sustain profits. But this particular piece of conventional wisdom doesn’t always hold true. In the recession of 1989 to 1991, many companies that dared to spend aggressively on advertising were amply rewarded…
- Jif peanut butter raised ad support and sales went up 57 percent.
- Kraft salad dressings saw a rise of 70 percent.
- Bud Light and Coors Light spent more than the average on marketing, and ramped up sales by 15 percent. (Overall, beer sales were down 1 percent.)
- With aggressive advertising, Pizza Hut sales rose 61 percent, and Taco Bell’s rose 40 percent.
At the same time, companies that didn’t spend on advertising suffered the consequences. Mickie D’s sales went down about 28 percent. Jell-O, Crisco, Hellmann’s, Green Giant, and Doritos suffered sales losses of 26-64 percent.
And there are studies that point to business-to-business companies getting good results from spending that supports sales during a recession. During the recession of 1981-82, companies that spent aggressively on advertising averaged significantly higher sales volume not only during the recession but for the following three years.
Investors looking for companies like these can search for them on Yahoo and other financial sites by “sales” or “revenue” (look for increasing sales in the last three or 12 months). Further research will most likely reveal that the money they spent on advertising also went up.
Search engines have no category that tracks spending in support of sales. But I like doing it “backward.” In the end, you don’t care why sales go up as long as they do. When you hear so-called experts on TV complaining about a company failing to cut back on costs and/or spending, take it with a grain of salt. Smart strong spending in support of sales can help a company grow – even in the worst of times.
This is a good lesson not only for investors but also for small businesses. It comes down to this: Smart spending is always smart, regardless of what the economy is doing. And stupid spending is always stupid. Companies seemingly get away with it when the economy is good. But when it stalls, stupid spending (think auto companies) catches up to them in a hurry.
[Ed. Note: Some of the smartest spending you can do is on yourself and your financial future. Start an Internet business, and you could end up making $100,000 to $25 million a year. Learn how to do it here.
Andrew Gordon, ETR's Investment Director, can show you how to spot the "red flag" signals that could predict (with as much as 92 percent certainty) when a company's stock is going to tank. Learn more here.]
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