FMCG makers are spending much more on advertising and promotion than they did in recent times, irrespective of sales growth..
If there is one item of cost that fast moving consumer goods (FMCG) makers aren’t skimping on lately, it is advertising. For the latest half-year ended September 2009, the 10 leading listed FMCG companies hiked their outlays on advertising andpromotion (A&P) by over 30 per cent, the spends far outpacing their sales growth of 13 per cent. The numbers also show that companies stepped up their ad budgets no matter how they fared with sales. Those who saw their products literally zip off the shelves – Godrej Consumer, Dabur India, Emami – splurged on A&P, expanding such spends by between 30 and 60 per cent in the six months ended September 2009 compared to the corresponding period last year. But surprisingly, so did the ones that had to contend with sluggish sales. Hindustan Unilever, which saw its sales inch up by about 7 per cent for the six-month period, did not hesitate to peg its A&P higher, by as much as 31 per cent for these six months!
Sweet spot on inputs
No doubt, some of the recent bingeing on advertising is explained by the fact that FMCG makers have been in a particularly sweet spot in recent months. Raw material prices for many large categories – soaps, detergents, personal products and edible oils – have seen sharp corrections after going through the roof last year. Having increased prices through 2008, this has left FMCG makers with extra-big profit margins this year. Players are choosing to deploy these savings in two ways – roll out promotions such as “20 per cent extra” or plough it back into A&P. With crude oil prices already charting a rebound from their lows and other commodities following suit, margins may turn moderate from here on. This suggests FMCG makers may temper super-normal outlays on advertising in the months ahead.
While increases in ad budgets may become more moderate, significant cutbacks in advertising spends appear quite unlikely. Long-term trends in the A&P spends of FMCG makers show that they have been willing to put aside increasingly larger slices of their sales towards outlays on advertising and promotion in recent years. A few years ago, FMCG giant Hindustan Unilever (HUL) made waves when its annual advertising spend crossed the Rs 1,000-crore mark. But its A&P spend for the half year ended September 2009 totalled Rs 1,132 crore! The point to note is that HUL’s adspends have grown twofold, when its sales grew by 60 per cent. The consequence: From ploughing back about 9 per cent of its annual sales into A&P, HUL spent 13 per cent in the latest half-year period.
With the biggest spender of them all upping the ante, other players operating in larger categories have followed in its wake. Most listed FMCG makers, whether it is the Rs 3,000-crore Dabur India or the Rs 2,000-crore Godrej Consumer, have seen adspends account for a larger portion of their sales revenues over the past three years. Adspend-sales ratios hovering at 10-14 per cent now are up from 8-10 per cent three years ago.
Big players, big spenders
Going through the adspend-to-sales ratios of these players also reveals another interesting trend. Contrary to what you would expect, smaller FMCG players tend to spend a lower portion of their sales on ads than the larger ones. Even in the latest half year, while HUL spent about 13 per cent of its massive sales (nearly Rs 16,000 crore a year) on A&P, its tiny Rs 500-crore rival, Jyothy Labs, deployed just 6 per cent. Godrej Consumer spends just 9 per cent of sales on ads. On the face of it, this may contradict the notion that companies with larger ad budgets can obtain much better ‘bang’ for the advertising buck than those with smaller budgets. However, the trends in adspend-sales ratios of players suggests two things.
One, A&P spends are often a function of the brand portfolio a company has to support. HUL, with its vast array of brands and presence across categories, obviously needs to invest more in sustaining them than a player operating in one or two categories. Two, higher A&P spends are often a sign of a company battling to hold on to its turf; investing for future sales is a secondary objective. HUL’s recent aggression with adspend is partly a function of the company trying to regain market share from smaller rivals who have been able to play the price card more effectively since last year.
Milind Sarwate, Chief of HR, Finance and Strategy, Marico, says, “The relationship between sales growth, A&P to sales ratio and market share is complex. It is governed not only by the configuration of players but also industry profitability.
“Generally, companies with high market share enjoy a favourable terrain. The equity of their brands allows them to retain their market share without expending too much on A&P.”
Aspiring to spend?
Spending on A&P also seems to be an “aspirational” quality in the FMCG space, with smaller players invariably looking to increase their spends the moment they scale up in size. As Dabur India successfully ramped up its sales from about Rs 1,900 crore in 2005-06 to nearly Rs 3,000 crore this year, it also set aside a larger chunk of its revenues towards A&P (14.7 per cent of sales now against 12 per cent earlier). That the company’s growth has come largely from its forays into several new categories – oral care, personal products, shampoos – probably explains its higher advertising outlays. Much smaller players such as Agro-Tech Foods and Emami too have sharply hiked their ad budgets as they expanded in size.
Emami’s A&P spend, which stood at a modest Rs 9 crore in 2005-06, has since shot up to Rs 75 crore for the latest half-year.
While FMCG players are clearly laying their bets on more advertising, trends over the past five years do not offer much evidence that companies with bigger ad budgets managed better sales growth. Godrej Consumer with 18 per cent annual growth over the past three years managed much stronger growth (on a much lower base, of course) than HUL (13.3 per cent).
So, even as FMCG makers in general appear to be in a race to outspend each other, are there any players at all who have kept their ad budgets modest and yet managed growth? Among the larger players, Nestle India appears to be one example that stands out. In 2008, its latest financial year, this food and dairy major cranked up sales of well over Rs 4,300 crore with an A&P spend of less than Rs 200 crore. Though Nestle’s adspend-sales ratio has never risen above 5 per cent in the last three years, it has managed healthy sales growth of 20 per cent. That the company is not allowed to advertise one of its large categories – baby foods – may be one explanation for this. The other could be that the company operates in categories such as noodles, baby food, dairy products and beverages that aren’t hotly contested.
Marico Industries is another player which has managed to retain a stable adspend-sales ratio (about 12 per cent) and yet deliver robust sales growth of 27 per cent over the past three years. Sarwate explains that the company’s policy of allocating the lion’s share of its ad budget to above-the-line activity has helped. He says: “We have always believed in investing more money in the interface with the consumer for brand creation, as compared to the interface with the trade or consumer offers. Most of our brands have national presence and above-the-line spends play a key role in brand building. Currently, above-the-line spends are around 80 per cent of the total A&P expense. Marico has always been an outlier in this area. Our advertisement-promotions ratio has typically trended around 75:25 as against the broad industry average of 50:50.”
However, for players attempting to scale up in the more mature categories such as soaps, laundry or personal products, jostling with each other for market share may be the only way forward. That means budgets for these players can only head one way – up!Related Stories:
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