Will Gap's Ad Budget Cut Spur Growth?

Struggling Gap Inc. took the right approach by cutting its ad budget, Jean-Claude Larreche argues in a recent issue of Advertising Age.

Conventional wisdom advises retailers to pour money into marketing to build market share. Larreche, professor of marketing at the international business school Insead, argues the converse: that Gap should use its resources to "step back from its compulsion to spend big when the offering is not good enough to generate its own momentum. In such situations, marketing indeed needs to shift some of its attention away from its traditional downstream activities -- communication and promotion -- and concentrate on applying its customer-focused skills upstream."

Research reported in Larreche's book, "The Momentum Effect: How To Ignite Exceptional Growth," showed that Fortune 1000 companies that trimmed their advertising-to-sales ratio delivered the highest growth in market capitalization.

"Marketers faced with challenging targets for less-than-perfect products always argue for bigger budgets. Unfortunately this tends to exacerbate the lack of consumer trust that forced the increased marketing spending in the first place. Furthermore, it forces firms into ... cutting costs elsewhere, in areas such as R&D and quality -- the very areas where spending is needed to improve the customer offering."

Gap CEO Glenn Murphy seems to agree, Larreche said. Murphy told analysts last month that "to justify marketing spending, its brands would need good product, well-run retail environments, imaginative, creative messages for their target consumers, and consumers who were ready to respond."

According to Ad Age's annual "100 Leading National Advertisers," Gap Inc.'s market share stayed flat between 2006 and 2007, at about 0.5 percent of the retail industry's $2.6 trillion total. During that time period, Gap spent an estimated $394.2 million on advertising, down 19.5 percent from the year before. (Only Hyundai and some pharmaceutical companies curtailed their spending as much or more.)

In other words, Gap cut $64.3 million from its ad budget -- which covers Banana Republic, Old Navy and the various Gap brands -- and didn't lose share. For this year, Murphy said during the May conference call, "all of our television investment is with Old Navy" and its value message, while the absence of TV for Gap stores saved $21 million in the first quarter alone.

Gap's ad dollars as a percentage of sales, meanwhile, is 3.1 percent, squarely in the middle of the universe of big retail advertisers, from Wal-Mart (0.4 percent) to eBay (13 percent).