Conventional wisdom holds that advertising is among the marketing instruments most affected by general economic conditions. Every time the economy enters a downturn, advertising budgets seem to be among the first to be cut. Such widespread reduction in advertising by many companies during a recession translates into a considerable drop in a country’s aggregate advertising spending. In the past, major advertising adjustments during contractions have been responsible for a substantial number of media failures and mergers, while millions of employees lost their job through layoffs in the sector. Against this background, advertising executives have repeatedly claimed that countercyclical, or at least inelastic, advertising may be more effective than procyclical, elastic advertising. Thus, why is such highly cyclical advertising behavior (still) observed? Is this behavior limited to the United States, or is it generalizable across countries? Why might companies across countries respond differently to business cycles? Finally, are there managerial or social losses when ad spending is tied too tightly to business cycles?
In this study, the authors conduct a systematic investigation into the cyclical sensitivity of advertising expenditures in 37 countries across all continents, covering up to 25 years and four key media (magazines, newspapers, radio, and television) to address these pertinent questions. The results indicate that the anecdotal evidence on procyclical advertising spending generalizes across countries and that advertising is considerably more sensitive to business-cycle fluctuations than the economy as a whole, the average comovement elasticity being 1.4. Thus, a 1% cyclical drop (expansion) in real gross domestic product translates (on average) into a 1.4% cyclical reduction (increase) in real advertising spending. However, there are differences across media. Print advertising is more sensitive to the business cycle than radio and television advertising. Moreover, substantial differences are observed in advertising behavior across countries. Notably, advertising’s cyclical dependence is systematically related to the national cultural context in which companies operate. Firms adjust their advertising less cyclically in countries high on long-term orientation and power distance, while advertising is more cyclical in countries high on uncertainty avoidance. These findings are consistent with the two underlying metadimensions in the authors’ conceptualization—namely, firms’ view on the role of advertising as a strategic investment as opposed to an expense and the role of herding in advertising decision processes. Furthermore, advertising is more sensitive to the business cycle in countries characterized by significant stock market pressure and few foreign-owned multinationals.
Finally, the authors provide evidence of the long-term social and managerial losses incurred when companies tie ad spending too tightly to business cycles. These losses extend far beyond the recession period. Indeed, countries in which advertising behaves more cyclically exhibit slower growth of the advertising industry—an important industry in its own right and a major employer of marketing practitioners. Moreover, private-label growth is higher in countries characterized by more cyclical advertising spending, implying significant losses for brand manufacturers. Finally, an examination of 26 global companies shows that stock price performance is significantly lower for companies that exhibit stronger procyclical advertising spending patterns. Given the market capitalization of these global companies, this represents billions of dollars of shareholder value. The findings provide hard evidence for received wisdom among advertising executives that procyclical advertising reduces company performance.
Biography
Barbara Deleersnyder is currently Assistant Professor of Marketing at Tilburg University, the Netherlands. She obtained a PhD from the Catholic University Leuven (Belgium), after which she joined the Erasmus University in Rotterdam. Since 2008, she has been a faculty member at Tilburg University. Her research is mainly empirical and involves studies in the area of Internet distribution, the impact from general economic conditions on consumer and company behavior, market(ing) performance measurement and management of change, the demand for consumer durables, and grocery retailing. Her studies have appeared in major marketing journals, such as Journal of Marketing Research, Journal of Marketing, Quantitative Marketing & Economics, and International Journal of Research in Marketing. In 2002, one of her studies won the Best Paper Award of the International Journal of Research in Marketing.
Marnik G. Dekimpe (PhD, University of California, Los Angeles) is a research professor at Tilburg University, the Netherlands, and Professor of Marketing at the Catholic University Leuven (Belgium). His work has been published in Marketing Science, Management Science, Journal of Marketing Research, Journal of Marketing, International Journal of Research in Marketing, and Journal of Econometrics, among others. He has won best-paper awards at Marketing Science (1995, 2001), Journal of Marketing Research (1999), International Journal of Research in Marketing (1997, 2001, 2002), and Technological Forecasting and Social Change (2000). He is an associate editor at Journal of Marketing Research and International Journal of Research in Marketing and an academic trustee with the Marketing Science Institute. He also serves on the editorial board of Marketing Science, Journal of Marketing, Journal of the Academy of Marketing Science, Marketing Letters, Review of Marketing Science, and Journal of Interactive Marketing.
Jan-Benedict E.M. Steenkamp is C. Knox Massey Distinguished Professor of Marketing and Marketing Area Chair in the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill. His work has been published in journals such as Academy of Management Journal, International Journal of Research in Marketing, Journal of Consumer Research, Journal of Marketing, Journal of Marketing Research, and Marketing Science. He serves on the editorial boards of International Journal of Research in Marketing, Journal of Consumer Research, Journal of Marketing, Journal of Marketing Research, and Marketing Science and has been editor of International Journal of Research in Marketing. His most recent book is Private Label Strategy: How to Meet the Store Brand Challenge (with Nirmalya Kumar), published in 2007 by Harvard Business School Press. More than 13,000 copies have already been sold, and it has already been translated in Chinese and Portuguese as well. He has won the Hendrik Muller lifetime award for the social and behavioral sciences awarded by the Royal Netherlands Academy of Sciences for “exceptional achievements in the area of the behavioral and social sciences” (the first time the prize has been awarded to a researcher in any area of business administration). He has also received the O’Dell, Little, Bass, and International Journal of Research in Marketing best-article awards, and the American Marketing Association Global Marketing special interest group Excellence in Research Award (twice). His current research focuses on private labels and branding, global marketing, and international marketing research techniques.
Peter S.H. Leeflang is the Frank M. Bass Professor of Marketing at the University of Groningen, the Netherlands. He studied econometrics, obtaining both his MA (1970) and PhD (1974) at the Erasmus University. He has (co)authored 20 books, including Building Models for Marketing Decisions (2000) with Dick Wittink, Michel Wedel, and Philippe Naert. Other examples of his published work can be found, inter alia, in Applied Economics, Journal of Marketing, Journal of Marketing Research, International Journal of Research in Marketing, Management Science, Marketing Science, Quantitative Marketing and Economics, International Journal of Forecasting, and Journal of Econometrics. As of 2003, he has been a board member at the NJohann Wolfgang Goethe Universität at Frankfurt am Main and at the University of St. Gallen (Switzerland). From 1997 to 2001, he was dean of the Department of Economics and vice-vice chancellor of the University of Groningen. Since 1999, he has been a member of the Royal Netherlands Academy of Arts and Sciences.
Journal Marketing Research, Volume 46, Number 5, October 2009
View Table of Contents.