Boxed into a corner by rising input costs, fast-moving consumer goods (FMCG) companies have begun to trim the one item of expense over which they have some control – their spends on advertising and promotion.

Listed FMCG companies set aside just 12 per cent of their sales towards advertising and promotional expenses in the January-March 2011 quarter, which is a good two percentage points lower than the ad budget from the 14 per cent in the nine months to December 2010.

Lower splurge

Six leading listed FMCG companies spent Rs 1,043 crore on advertising in the latest March quarter, a sum that barely changed from a year ago. That is a marked shift from the splurging on advertisements seen in the nine months to December 2010, where such spends shot up by 21 per cent.

Take the consumer goods behemoth Hindustan Unilever (HUL), which not only dwarfs other advertisers but also has been one of the most aggressive spenders on advertising in the past two years. The company spent Rs 623 crore towards advertising and promotions in the recent March quarter, actually economising on last year's figure of Rs 627 crore for the same quarter.

Selective pruning

The proportion of sales that the company set aside towards ad spend plummeted from nearly 15 per cent of sales in the first nine months of 2010-11 to 12.7 per cent in this quarter.

This move allowed its operating profits to grow by 8 per cent, even as raw material costs zoomed 20 per cent year on year.

With the biggest spender of them all taking a breather, HUL's smaller rivals in the FMCG space too have opted to moderate their advertising expenses in the March quarter. The advertising expenses for Dabur India dropped from 13.7 per cent of sales in the first nine months of the year to 11.5 per cent in the March quarter.

Personal products maker Marico, malted drinks maker GlaxoSmithKline Consumer and Emami too saw a drop in the proportion of their sales that they set aside towards ad spends.

Companies generally cut back on advertising in categories that saw higher cost pressures. Some players deferred new product launches in the light of the inflationary scenario.

Explaining where exactly HUL effected those cuts, Mr Nitin Paranjpe, HUL's CEO, said in the company's earnings conference call: “We have seen a reduction in the intensity of spends both in soaps and detergents and in beverages wherein the commodity cost pressures have been the highest. And we have calibrated our spends appropriately to ensure that we remain competitive in the new scenario that we find ourselves in.” The company is also taking a more thorough look at the effectiveness of its advertising spends.

Economising on ad spends has helped companies report some profit growth this quarter, even as costs of raw materials from palm oil, to detergent chemicals, to plastic packaging, soared.

Though FMCG players did make price increases on their products, they were not enough to cover the higher costs.

Aberration?

However, players such as Dabur and Marico feel that competition being what it is, they will have to get back to higher spending once inflation normalises. Mr Sunil Duggal, CEO of Dabur, said, “We are pretty committed to keeping advertising and promotion spends in the 13 to 15 per cent (of sales) band. So, what you saw on the fourth quarter was a little bit of an aberration.

“We believe (13-15 per cent) is the baseline level which we need to protect our brand and to launch a reasonably high number of new products.”

Trends in advertising spends of FMCG companies have direct revenue implications for media companies. FMCG companies have the highest ad spends to sales ratio among consumer companies.

According to the FICCI-KPMG Media and Entertainment Report 2011, FMCG companies account for over 40 per cent of the ad volumes on television and less than 5 per cent of the volumes in print media.

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