Lessons from Warren Buffett: Are you doing enough advertising?

In many CE businesses, advertising is an afterthought. Most companies do some, but many times, the job is sloughed off to a tech support guy who knows how to work Photoshop. He may know Photoshop, but he doesn't neccessarily know about art.

Time after time, we flip through electronics magazines with ads that use fonts and graphics that haven't been updated since the Reagan Administration.

That's right - looks and graphics come in and out of style, and bad art can make a company look as dumb as a guy who shows up to the iPhone launch party wearing a disco leisure suit and huge, square John Denver sunglasses.

What's worse -- we're talking about technology companies. Companies that consider themselves on the cutting edge. Companies that want to position themselves as leaders in the industry. So why do their ads look like leftovers from the discount bin at Goodwill?

So what does Warren Buffett have to do with all this? Advertising? Buffett's known far and wide as a cheapskate, right? He wouldn't be dumping a ton of money on advertising. He'd rather use that money to make more acquisitions, right? After all, Berkshire Hathaway never advertises, right?

Wrong.

Berkshire Hathaway advertises like mad, and they advertise all the time.

Here's a passage from Buffett's 2006 letter to shareholders:

In addition, the great majority of our 73 businesses did outstandingly well in 2006. Let me focus for a moment on one of our largest operations, GEICO. What management accomplished there was simply extraordinary. As I’ve told you before, Tony Nicely, GEICO’s CEO, went to work at the company 45 years ago, two months after turning 18. He became CEO in 1992, and from then on the company’s growth exploded. In addition, Tony has delivered staggering productivity gains in recent years. Between yearend 2003 and yearend 2006, the number of GEICO policies increased from 5.7 million to 8.1 million, a jump of 42%. Yet during that same period, the company’s employees (measured on a fulltime-equivalent basis) fell 3.5%. So productivity grew 47%. And GEICO didn’t start fat.

That remarkable gain has allowed GEICO to maintain its all-important position as a low-cost producer, even though it has dramatically increased advertising expenditures. Last year GEICO spent $631 million on ads, up from $238 million in 2003 (and up from $31 million in 1995, when Berkshire took control). Today, GEICO spends far more on ads than any of its competitors, even those much larger. We
will continue to raise the bar.

So since being acquired by legendary cheapskate and cost control fanatic Warren Buffett and his holding company, GEICO has increased its advertising some 2000 percent!

So Buffett believes in advertising. Why? Because Buffett believes in brands! Specifically, Buffett looks for companies with strong brand loyalty and a wide "moat." He looks for companies that cannot be successfully competed with by anyone else throwing a bunch of capital at the problem. Anyone can make and bottle and distribute soda pop. And anyone can make a cola. But there's only one Coca-Cola. It's a dominant brand - and has been one of Berkshire's all-time great investment decisions.

Think Coca-Cola got where it is today by not investing in its advertising?

Note: Harvard Business Review subscribers will find this excellent article of great interest.

Synopsis:

Safeguarding your brand equity has become harder than ever. Consumers are buying more non-branded products. Globalizing companies are having difficulty determining which offerings, in which countries, will yield the biggest profits. And many brand managers don't provide the care and feeding that leading brands require--such as making sure all marketing communications deliver a consistent message about a brand. How to protect your brands? Avoid using repeated discounting to boost sales if price-sensitive consumers are straying from your brand. Instead, beef up your advertising, new product development, and distribution strategies. Analytically determine which products, marketed in which countries, will deliver the best ROI. Then dedicate most of your marketing budget to high-ROI scenarios. Understand the 10 traits shared by the world's strongest brands--then ensure your brands get high grades on each trait. Boost your brand value, and you win customers' enduring devotion and the profits that come with it.

Well worth the cost of the issue.

--Jason Van Steenwyk

Disclaimer: Jason owns stock in Berkshire Hathaway. Yes, it's only a "B" share, alas.