We need a new ‘third way’ to set marketing budgets
Zero-based budgeting hurts long-term brand-building, while advertising-to-sales ratios are entirely arbitrary. There’s a much better, ‘two-speed’ way to set marketing budgets.
By Mark Ritson
“Some may say that it’s not a disaster and thus better than feared – we’re not yet in that camp.” That was the gloomy verdict from Goldman Sachs analyst Ken Goldman as he surveyed the latest results from struggling food giant Kraft Heinz last Thursday.
It was another dire week for Kraft Heinz, in a year of dire weeks that has seen the company’s share price fall by a third. Last week, there was more disappointment as Kraft Heinz reported weakened sales, a further write-down of its businesses and an even more gloomy forecast for the rest of the year.
With increasing frequency and vehemence, marketers have a particularly negative narrative they like to tell about Kraft-Heinz and its current predicament. You know how it goes.
The company was partly acquired by 3G, a famed private equity firm. The stereotypical private equity firm is all about ensuring a quick and lucrative exit before it will even consider an offer for a business, and that leads to overriding short-termism. That short-termism runs counter to long-term brand building.
When a private equity firm, like 3G, buys a branded business, like Kraft Heinz, there is an initial flush of profit as costs are cut and the company coasts along on the fumes of former marketing investments. But eventually, reduced marketing budgets cause the business to splutter and then dive. The declines in salience and brand equity caused by under-investment manifest in lower revenues, greater price-sensitivity and increased vulnerability to private labels.
Much of the criticism of the private equity approach to brands focuses on one of the sector’s most beloved instruments – zero-based budgeting (ZBB). It has been part of the private equity tool kit from the very beginning.
A firm takes control of a floundering acquisition and immediately subjects it to full ZBB. In what is usually the organisational equivalent of an airport customs search, a company’s expenditures are stripped bare, cavities are examined and everything is pared back.
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