Consumer brands to protect advertising budgets even as other costs soar
Advertising is a tempting place to start for CFOs looking to save money. But even as the makers of some of the world’s most popular household products have faced the most intense inflationary pressures in a decade, they think twice before axing marketing budgets.
Consumer goods vendors spent heavily on advertising during the pandemic, when elevated hygiene concerns boosted demand for cleaning supplies and lockdown restrictions boosted sales of food and drink for consumption domesticated.
Procter & Gamble was particularly aggressive in seizing the opportunity, spending $ 8.2 billion on advertising in the 12 months leading up to June, up $ 900 million from the previous year. In the drinks sector, Diageo’s marketing spend rose 17% to £ 2.16 billion in the same period.
For the advertising industry, these companies were an indispensable source of work, as commissions dried up from other client companies. Agencies developed industry campaigns that sought to capture the mood of the moment, such as Dove’s Courage is Beautiful video, which featured the faces of frontline healthcare workers.
However, how much advertising money to deploy – and where – in the coming months is more of a dilemma. While foreclosure rules have boosted sales of packaged household goods groups like P&G, the outlook is less bright: the cost of transportation and raw materials like palm oil are soaring along with demand. of buyers for certain products is weakening. Meanwhile, the reopening of the lockdown encourages companies in other industries to increase their ad spending, pushing prices up.
Mark Read, chief executive of WPP, the world’s largest advertising group, said that alongside technology and pharmaceuticals, consumer packaged goods (CPGs) had been among the most resilient industries during the pandemic. Now that other customers were once again increasing their ad spend, there was “some pressure on margins and marketing costs” in the industry.
“We see a mixed picture among our CPG clients, but overall I think they realize the need to invest in marketing – companies that have gained stakes are looking to keep them,” he said. declared.
Some CPG companies may more easily ignore cost pressures than others, as loosening foreclosure restrictions should increase sales. Beverage companies, for example, are positioning brands for reopening pubs, clubs and restaurants.
Dolf van den Brink, Managing Director of Heineken, who earlier this year announced plans to cut 8,000 jobs to contain costs, said: “We really believe in the need to increase our marketing and sales spending. .
“Even though it’s a little painful [financially] in the short term, it is the right thing to do in the long term.
But for other businesses, returning consumer behavior to pre-pandemic norms means slowing sales, making it harder to calculate marketing spend. British group Reckitt Benckiser, maker of Finish dishwasher tablets and Lysol disinfectant, is among several to report that high consumer demand for soaps and disinfectants has recently started to moderate.
Managing Director Laxman Narasimhan said the group did not “really have specific goals that we disclose” for advertising but “marketing spend remains high.”
In the United States, Barclays analysts expect marketing spend to decline in the coming months at bleach maker Clorox, which spent $ 790 million on marketing in its fiscal year to date. at the end of June and is expected to spend $ 700 million in the coming year, and Kimberly -Clark, the company behind Andrex toilet paper and Kleenex toilet paper, where it is expected to grow from $ 956 million in 2020 to $ 879 million. dollars this year.
Reporting results showing a second consecutive quarterly decline in organic sales, Mike Hsu, chief executive of Kimberly-Clark, told analysts that the company had “chosen to cut” its advertising spending a bit in certain areas. He highlighted toilet paper in North America, for which demand has slowed as consumers spend more time away from the home.
“There is as much a mathematical component in our advertising program as there is a creative component,” added Hsu. “We’re pretty disciplined.
Despite this, forecasted ad spending for both Kimberly-Clark and Clorox is expected to remain above pre-pandemic levels. Hsu said the group is maintaining its investments in brands across multiple regions and product lines.
Clorox, which spent more than usual on advertising last year, said it plans to invest about 10 percent of its sales this fiscal year, consistent with previous periods. The company added that it had “an ongoing commitment to invest heavily behind our brands.”
Companies that plan to increase their ad spending despite cost pressures include Coca-Cola, PepsiCo, and Colgate-Palmolive. Barclays expects P & G’s advertising budget to grow another $ 250 million in the coming year.
Colgate-Palmolive, which released a more conservative full-year profit forecast last month, citing a “tough cost environment,” said that while it was speeding up cost cuts in other areas, the ad was to “always grow against both the dollar and one percent of the sales base.”
Television continues to attract the industry, which has long been drawn to the broad reach of the medium, but Google, Facebook and other digital platforms have become increasingly important.
Big brands typically spend at least 40% of their marketing budget on digital channels, said Brian Wieser, global president of business intelligence at Media Buyer GroupM.
In the UK, adults spent a third of their waking hours on average last year watching TV and videos online, according to a recent Ofcom study.
Executives are reluctant to aggressively restrict spending in part because the dangers of tight budgets have been exposed by the struggles at Kraft Heinz, analysts said.
The rest of the industry, in the United States at least, had come under pressure from Wall Street to adopt its strict cost approach – before the food group, backed by the Brazilian-American investment firm 3G, took any action. depreciation of $ 15 billion three years ago on bleak prospects for some of its best-known products.
“The investment community has woken up,” said Bruno Monteyne, analyst at Bernstein. There was now “enormous attention” to whether companies “were gaining market share, if they continued to grow.”
“Just look at Kraft Heinz and what happened in terms of stock price performance. No one sees this as a paragon of virtue anymore. “
Kraft Heinz, which is now headed by former marketing manager Miguel Patricio, said it has “transformed significantly in a short period of time, becoming more consumer obsessed than ever, reinvesting in our brands and our talent”.
The company – whose products include Heinz Ketchup, Mac and Cheese Kraft, HP Sauce, and Philadelphia Cream Cheese – said it plans to spend $ 100 million more on marketing this year than in 2019 and that it anticipated further increases in the years to come.
Competition from both disruptive start-ups, which have gained traction through digital marketing, and supermarket’s own cheaper labels gives managers yet another reason to avoid taking too harsh an approach to ad spend. .
The importance of branding for packaged products is such that advertising is to a large extent the lifeblood of the industry.
CPG companies “think of advertising as a central expense rather than a discretionary one, which some retailers might think,” said Phil Smith, former marketing director at Kraft in the 1990s and now general manager of UK advertisers’ commerce. association, Isba.
Monteyne said executives were more prepared to limit investments in innovation than they were in marketing, or to push for efficiency gains through other means, such as downsizing. versions of similar products.
Smith said the outlook for spending in the industry will ultimately depend on how well companies can pass cost increases on to buyers. “There is clearly a lot of inflationary pressure and at some point the advertising will sag down if they are not able to push through their price increases,” he said.
Advertising was even more important in an inflationary environment, especially given the competitive threat of cheaper alternatives, GroupM’s Wieser said. “If you’re going to pass the costs on, are you really going to persuade consumers to pay more if your brand has less presence? You have to make sure that the consumer does not turn to store brands.
While CFOs are ready to protect overall marketing budgets, advertising executives have said customers are more demanding of returns than ever before. P&G said it was reducing agency costs, eliminating waste and reducing “excessive ad frequency.”
Ivan Menezes, Managing Director of Diageo, said: “You need two things to really work effectively. One is a great creative flair in understanding consumers, product development and digital engagement. The other is to understand the return you get on every dollar you spend.
Agencies are called upon to produce more concrete evidence that their campaigns are producing results, especially since advances in technology have made their effectiveness easier to measure.
“The level of review keeps increasing, and rightly so,” said one creative industry executive. “It’s not art. It’s advertising.