How Marketing Budgets Could Get Caught In The Crosshairs Of Trump’s Trade War

No dotted line

It’s nearly impossible to prove a direct connection between hard-line trade policies and the eventual tightening of purse strings in the marketing department. The international ad market is simply too small – less than 1% of GDP – to track the effect of macroeconomic change per industry.

“When it comes to advertising,” said Adam Smith, futures director at GroupM, “the only thing you can confidently correlate is the broad curve of recovery and recession.”

But it doesn’t matter what’s provable or trackable. If the executives responsible for safeguarding the bottom line get spooked by the possibility of another recession triggered by US trade policy, they’ll react by cutting costs and rejiggering budgets.

A cost to be killed

Advertisers are “incentivized” to constrain their ad spend during periods of economic anxiety, Smith said. Tariffs reduce the amount of trade, a reduction in trade depresses growth and less growth causes brands to lose their confidence and question their expenses.

“And there’s also often a tendency to regard marketing as a cost to be killed as opposed to an investment,” Smith said.

In some ways, that’s the marketer’s fault – and their responsibility. CFOs don’t wield their budget-cutting machetes just for fun. If the marketing department can show ROI, its budget is probably safe. But if there’s no system in place to prove return, the CFO is likely to come knocking with unpleasant news.

“CFOs have a choice to either pass an increased price on to the consumer or not, but the money has to come from somewhere,” said John Militello, who spent nearly three years as director of marketing at Volvo before leaving in January to found a consultancy called Longblink. “And on the marketing front, there’s not a lot you can really do. You’re at the behest of the CFO.”

But creating, or cutting, a marketing budget is a nuanced enterprise. Price hikes may lead to fewer sales, but that doesn’t necessarily mean marketing is going to feel the burn.

Say the price of acquiring a car goes up, as is likely if proposed 25% tariffs on foreign-made automobile imports become a reality, or if the cost of production on the home front starts to rise with less access to raw materials. Media budgets in the auto industry are locked in on an annual basis, but related budgets – like incentive budgets for salespeople at the dealerships – are reconciled quarterly and tied to predictive car sales.

If higher prices translate into fewer car sales, dealers may actually need larger incentive budgets to motivate the salespeople – stimulus cash that might shift over from the marketing budget.

And the same time, the car buying journey is an extended process that starts long before a consumer makes it onto the lot. And if belts are tightening across the board, consumers may need a little more wooing than usual to even consider a new vehicle.

“Tariffs or no tariffs, a brand still needs share of voice,” Militello said.

Don’t cut too deep

Although downsizing ad budgets to counter rising economic tensions may sound like a logical move, brands should be cautious not to be too reactionary, especially in regional overseas markets, said GroupM’s Smith.

“It’s easier to throw market share away than it is to recover it,” said Smith, who noted that it’s already possible to see US carmakers losing market share in China by as much as 20% to local manufacturers and European car companies.

Yanking or reducing ad spend in a foreign market can be akin to pulling out of that market altogether.

“If you’re contemplating reducing advertising overseas, think carefully before making a blanket cut,” Smith said. “It’s particularly hard to regain share against your local competition.”

Trade war, who is it good for?

But here’s a contrarian view: Budgetary cuts tied to tariffs concerns could actually help certain advertisers gain market share.

Scrappy direct-to-consumer brands may import materials – Warby Parker, for example, sources acetate from Italy and assembles the components in China before they get shipped to Warby’s prescription lab in the US – but they still usually have a tighter supply chain and manufacturing process than legacy brands, particularly the big CPG incumbents.

D2C brands are also already well versed in digital marketing and they know how to be as efficient as possible with smaller ad budgets. It also helps to be subscription-based.

“Companies with domestic inputs that currently have to compete against traditional brands would benefit from not having to worry as much about being competitive on price,” said Jonathan Barnard, head of forecasting and director of global intelligence at Zenith. “They won’t be faced with as much competition from abroad.”

By the same token, tariffs would presumably hit most companies in the same sector in roughly the same way, which could equalize the impact of fewer ad dollars on market share or share of voice, said Volvo vet Militello.

“In the end, everyone might just have a little less money to spend on marketing,” Militello said. “And, if that’s the case … tariffs may not actually end up changing the playing field all that much.”

This post was syndicated from Ad Exchanger.