Zero-based budgeting is scary but the alternative makes marketing worthless

“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.

Marketers love to tell Kraft Heinz’s story – increasingly, it would seem. You all know how it goes.

Kraft Heinz: We have invested too much in marketing costs that consumers can’t see

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.

How budgeting works

ZBB is not just applied to marketing; it originated in the broader business operations of the White House in the 1970s and has been used to radically rethink almost every aspect of corporate expenditure. But it is a particular anathema for marketing people. That’s partly because most marketers rightly believe in longer-term investment and also because many, quite shamefully, don’t really understand the financial implications of the work they do.

ZBB has certainly been the straw man for the current plight of Kraft Heinz. It’s rare to read an account of the company and not encounter the budgeting approach being blamed for most of its problems. According to the retail strategy author and speaker Jan Benedict Steenkamp, Kraft Heinz’s “terrible shape” is a direct result of the “chronic under-investment in its iconic brands” driven by “slash-and-burn zero-base budgeting”.

Kraft-Heinz CEO, Miguel Patricio, disagrees. He has gone on record to praise the discipline of ZBB and believes that without the approach his company would be in an even worse state. But in a call to discuss his company’s parlous performance last week, Patricio also made it clear that “setting short-term targets publicly won’t be productive as we set and work to deliver against our strategic directions and priorities”.

Never forget the madness behind almost every marketing budget.

I feel Patricio’s pain here. On the one hand, as a marketer, he knows he needs long-term, incremental brand-building investment to rescue Kraft-Heinz. But on the other hand, he likes the discipline and focus that ZBB provides.

And let’s add another factor into the mix – the usual alternative to ZBB is a total load of cock. I appreciate that more than 90% of companies set their marketing budgets using advertising-to-sales ratios, but the approach is so ridiculously amateur and non-strategic we are almost better off using ouija boards and numerology to derive our marketing budgets for the year ahead.

Never forget the madness behind almost every marketing budget. First, a finance executive looks at the last few years of revenue performance and calculates a compound annual growth rate. Next, that growth rate is applied to this year’s revenues to arrive at an expected sales figure for the year ahead. Finally, an entirely arbitrary percentage of sales is allocated back to marketing.

Arbitrary ratios

All the critics of ZBB might want to take a long, hard look at the dominant alternative of advertising-to-sales ratios before they reach for their pitchforks because it makes little, if any, strategic sense.

Why should a finance executive who knows nothing of marketing, markets or brands be put in charge of the process? If we already know how much money we will make next year what is the point of marketing and, indeed, the marketing department? We have already booked the number before they even start work.

Kraft Heinz’s new CEO needs to deliver a much-needed dose of tough love

And what’s with the arbitrary percentages that we apply to sales to derive the marketing budget? Why is it 5% and not 4% or 8% or 2.5%? Nobody knows.

And the biggest problem with this derisory approach to budget setting is that all marketing strategy dies before it even begins. We are working backwards from an assumed, bullshit forecast from the very beginning and marketing is simply a cost that companies pay without any proper expectation of impact.

Smart marketers realise, early on, that their efforts are fundamentally superfluous because the numbers have already been put in place before they even picked up a marker pen to think through the strategy for the year ahead.

Marketing departments are trapped between the short-term rapacity of ZBB and the abstract passivity of the percentage-of-sales approach.