One way Visa Inc. and MasterCard Inc. have weathered a global slowdown in transaction volume is by trimming their legendary advertising and marketing budgets, which hovered around $1 billion each last year.
For both companies, cutting such expenditures boosts the bottom line, but there are risks to the strategy, even in a severe recession. Advertising encourages consumers to switch more of their spending from cash and checks to plastic. This increases business for the networks' card-issuing bank customers.
MasterCard, in particular, relied on ad cutbacks to juice earnings last quarter — leaving it less room to maneuver. Hence, it spent much of a conference call Friday warning investors not to get used to such low advertising costs.
"I would expect all three remaining quarters to be significantly higher … for advertising and marketing expenses," said Martina Hund-Mejean, the Purchase, N.Y., company's chief financial officer. MasterCard will "invest wisely to protect future growth opportunities. We remain committed to our longer-term performance objectives and do not intend to jeopardize them in order to deliver short-term results."
In an interview after the call, Hund-Mejean said she does not expect MasterCard's total advertising expenses for this year to reach the same $1 billion that it spent last year. But without increasing spending the rest of the year, "we would be basically halving our advertising and marketing expense. There is no way that we, as a brand company, in terms of what we stand for at MasterCard, would ever do that."
It cut ad spending 35% from a year earlier, to $116 million in the first quarter. At Visa the cutbacks were less severe: 9%, to $196 million, in the company's fiscal second quarter, which ended March 31.
But the San Francisco company left the door open to further cuts.
"In the current economy, there are things that we probably are doing somewhat less aggressively because they simply aren't things that would gain traction right now," Joseph Saunders, Visa's chief executive, said on a conference call Wednesday.
"It certainly doesn't make sense to overadvertise in this environment where there is going to be less credit usage for instance," he said. "And so I think we have to carefully consider that."
Eric Grover, a former Visa executive and the principal of the consulting firm Intrepid Ventures, said that Visa and MasterCard "can certainly get away with" cutting ad spending "in the near term … but there's a danger there. Cutting the spending in an environment to hold up earnings, the real cost of that is going to be borne in future years."
MasterCard's profits fell 17.8% from a year earlier, to $367 million, or $2.80 a share. Revenue fell 2.2%, to $1.16 billion, and MasterCard said it no longer expects to hit its longer-term net revenue growth targets of 12% to 15% this year. MasterCard shares fell 5.75% Friday on the earnings report.
Visa reported a profit gain of nearly 71% for the quarter that ended March 31. Both companies' results beat analyst expectations.
The declining prices of ads could make it possible for the networks to maintain a strong advertising presence while spending less.
But observers speculated that concerns over a consumer — or even issuer — backlash against their brands also played a role in their thinking.
"Even with Visa's extraordinary results, one can understand why they would want to sound a more cautious note than they might have when they went public with such fanfare," said Campbell Edlund, the president of the consulting firm EMI Strategic Marketing Inc. "Now might not be the time to be out in the consumer eye aggressively chasing growth."
And in the interest of maintaining good relationships with their issuer customers, "sounding a quieter, more subdued note is consistent with how the banks are feeling," Edlund said. "Visa's just delivered results that any of their bank issuers would find extraordinary. One doesn't want to gloat."
Sanjay Sakhrani, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc., agreed that both networks have "toned down in terms of talking up their position in the food chain. When your customers are feeling the pressure that they are, it's kind of best to tone down that attitude."
Though MasterCard said it does not expect an economic recovery this year, its executives pointed to the potential effects of stimulus packages and to signs that consumer confidence could soon rebound.
"We certainly would expect with the stimulus … particularly in the U.S., but in other markets around the world, that that's going to start to work its way in the second half," CEO Robert W. Selander said on the call in response to analyst questions. "As that happens, we have, I think, got adequate advertising and marketing capacity in our thinking to be able to respond to that. If we don't see that recovery happening, that would clearly temper and cause us to rethink whether or not we want to make those investments or not. … But right now, there's a level of expectation on our part that as things get better, we will be increasing our marketing spend."
In the interview, Hund-Mejean said advertising is not MasterCard's only tool for gaining market share; signing partners is key.
Last week MasterCard said that it had extended the term of its brand contract with Fifth Third Bancorp. And on Friday it announced an expansion of its deal with Travelex, a provider of prepaid travel cards.
When making decisions about ad spending, "we are not really talking about share. What's important for us is profitable deals," Hund-Mejean said. "I don't think the marketing spend in the end is going to make a difference from a deal perspective and a market share perspective. It's typically the whole package."