Ads Don't Cure What Ails Your Investments

TheStreet.com

NEW YORK (TheStreet) -- We assume ads are meant to sell products or services.

When a publication like Advertising Age analyzes spending by the largest advertisers each year, most of the text involves strategies about media, about products, about who is spending more and who is spending less.

Little is written about why certain ads are running. Are they running to keep a company on offense, or for defensive purposes? And what should that choice tell investors?

Right now Wal-Mart Stores is running a series of TV ads in which "real Wal-Mart shoppers" look into the camera and defend their choice of store. These are defensive ads, running in part because the company is dealing with yet another scandal, this one involving the collapse of the Rana Plaza building in Bangladesh.


As The Guardian reports, Wal-Mart is trying to separate itself from this event, promising more factory inspections but refusing to go along with a legally binding agreement, fearful of what this might mean in an American court.

So are the new TV ads advertising meant for growth, or political face-saving? My concern here is strictly financial. If you're spending money defending yourself, you're not making money for shareholders.


Wal-Mart shares are up 15.46% so far this year, which sounds great until you realize that the S&P 500 is up 15.72%. Despite spending about $2.5 billion on advertising in 2012, Wal-Mart is barely running in place.

A recent report about the company and its advertising, which Colin Parajon of Interpublic posted on Slideshare, illustrates the problem.


Wal-Mart has 10% of the total U.S. retailing market, concentrated in southern states, and among low-income demographics. But a brand image word cloud from Brandtags shows words like "monster," "greedy" and "monopoly" alongside more positive terms. Focus groups use words like "cheap" and "dirty" to describe it. Target has a better image, according to the slide deck.

Wal-Mart is doing image ads, it's playing defense. Your money may be better invested in companies that are playing offense. Target shareholders are doing better than Wal-Mart shareholders this year, with a gain of 18.03%, ahead of the S&P average.

JPMorgan Chase is in similar straits. It's the sixth largest advertiser, according to AdAge, with 2011 spend of $2.35 billion. It has been dramatically increasing spending for its "Chase" branch banking and credit card brand, based in Chicago.

But with its New York management increasingly under fire over the "London Whale" trade, how effective is that ad spending? Again, the shares have done all right this year, up 14.24%, but remember the S&P is up 15.72%. JPMorgan Chase trails the averages.

As Phoenix Marketing noted in a press release last year, trust is the key value pushed by bank advertising, and Chase is by far the largest bank brand, in terms of total ad spend, as it has opened new branches aggressively.

But while ads have grown its deposits quickly, they haven't grown its lending as quickly. Business Week reports that, at the end of last year, JP Morgan Chase had only 61% of its deposits out in the form of loans, the lowest figure among the big banks.

Citigroup , by contrast, had 70% of its deposits out on loan, and that stock is up 27.14% in 2013. Remember that, for a bank, a deposit is really a liability. It's loans that are the assets.

The point is there's a myth on Wall Street that Madison Avenue can save it from the consequences of its mistakes, that with enough advertising all will be made better.

It's just not true.

At the time of publication, the author had no investments in companies mentioned here.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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