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Saturday, September 3, 2011

Why Aren't Companies Spending?

In recent weeks, if you follow the business news at all, you have been pummeled with the statistic that for the first time in history U.S. corporations are sitting on over $1 trillion dollars in cash. Several of my friends at both advertising agencies and in media sales have asked me why companies are not investing some of that record cash hoard into conventional advertising.

Well, instead of looking at it from the perspective of an ad agency or media executive who would benefit directly from a spike in media spending let us take a look at it from the view of a CEO of a fairly large corporation.

The recession that began in 2008 was deeper and scarier than any since World War II. Generally, in our lifetimes, recessions have been V-shaped, meaning there was a sharp downturn with a quick and equally sharp recovery. This time it truly is different. We continue to bump along with a recovery so tepid that some observers say that we really never pulled out of the recession of a few years ago. This past week, revised figures for 2nd quarter say that GDP grew by a paltry one percent. So, there is a very real risk that we could slip into a double dip recession.

All this makes even the most successful CEO nervous and cautious. Historically, management often is guilty of fighting the last war when it comes to recessions. But, as this malaise drags on month after month, it is easy for me to see why many remain in the “bunker mentality” of 2009. Then, many were worried about survival. Now, some question if there will ever be a return to normalcy.

Where did this cash hoard come from? When things got tough in 2008 and tougher in 2009, companies engaged in layoffs, downsizing, and when possible, leaving marginal businesses. Productivity rose as frightened workers put in longer hours with no raises and often no complaints. So, companies began to operate more efficiently than ever. On top of that even loosely managed companies got into fanatical expense reduction and suddenly the balance sheets started sporting fabulous cash hoards.

This may be controversial but I feel that Ben Bernanke’s monetary policy is at fault as well. With interest rates at or only a tad over a corporation’s cost of capital borrowing makes more sense than drawing down your cash. So you often move to expand via these cheap external funds that were never available before.

As this goes on month after month, management faces several choices:

1) Keep building up cash in the event a 2008 calamity hits again. This is not prevalent but off the record some seem to admit it.
2) Increase dividends. This keeps shareholders happy and rewards them for sticking with you. This year, according to my rough and unofficial tabulations, over 240 companies have raised dividends while only three have cut them.
3) Buy back shares. This automatically lifts earnings per share as the number of shares shrinks. If you think that your shares are seriously undervalued and cannot find any other good opportunities, this can be a fine allocation of cash.
4) Wait for a market pullback and then pounce on opportunistic acquisitions or craft a merger. We are seeing much of this recently and likely will have more over the next year if things do not pick up.
5) Hire more people. Many say not yet. Workers are more productive than ever by some measures so few new hires and no raises only helps your financial position. At some point, many firms will reach a breaking point and have to add staff. But, no one thought that it would be this long.
6) Invest in advertising to build your brand(s). Historically, this was how Kellogg became the leading cereal manufacturer and Crest, for decades, the #1 toothpaste. There does not seem to be that type of boldness prevalent among marketers especially with consumer confidence levels weak.

Another reason that the conventional media are not seeing it is that many firms are shifting some funds to social media and other alternatives. Some are hard to track so it is not always clear what is going on. Also, promotion has eclipsed advertising expenditures for many firms and while it has a weak record on brand building it does provide fast sales which Wall Street wants to see at the end of each quarter.

Pulling it all together, we will likely not see advertising come roaring back until after we are in a strong recovery and we have no idea when that will be (the sooner, the better). You can bet that share buybacks will continue especially when share prices dip, dividends will rise nicely, and acquisitions may break records in terms of number and size. But the “bunker mentality” is hard to shake off and will remain in place for many for the immediate future. Remember, debt-encumbered nations with traditionally high incomes like the US and Western Europe all have economies that are very fragile. And, investors and advertisers appear to have next to no confidence in the ability of policymakers and politicians to resolve the challenges that these nations face. With that backdrop, why invest heavily in your brand?

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

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