Consumer brands to protect ad budgets even as other costs spiral

0
227

Advertising is a tempting place to start for finance directors on the hunt for cost savings. But even as makers of some of the world’s most popular household products are squeezed by the most intense inflationary pressures in a decade, they are thinking twice about taking the axe to marketing budgets.

Purveyors of consumer goods spent big on ads during the pandemic, when elevated concerns about hygiene boosted demand for cleaning products and lockdown restrictions spurred sales of food and drink for home consumption.

Procter & Gamble was particularly aggressive in seizing the moment, spending $8.2bn on advertising in the 12 months to June — $900m more than the previous year. In the drinks sector, Diageo’s marketing expenditure rose 17 per cent to £2.16bn over the same period.

For the ad business, such companies were a much-needed source of work as commissions dried up from other corporate clients. Agencies developed campaigns for the sector 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.

How many advertising dollars to deploy — and where — in the months ahead is more of a dilemma, however. While lockdown rules gave sales a boost for household packaged goods groups such as P&G, the outlook is less bright: the cost of transportation and raw materials such as palm oil is spiralling at the same time as shopper demand for some products is faltering. Meanwhile, the reopening from lockdown is encouraging companies in other sectors to increase ad expenditure, pushing up prices.

Mark Read, chief executive of WPP, the world’s largest advertising group, said that alongside technology and pharmaceuticals, consumer packaged goods (CPG) had been among the most resilient industries during the pandemic. Now that other clients were increasing advertising expenditure again, there was “some pressure on margins and marketing costs” in the sector.

“We’re seeing a mixed picture across our CPG clients, but in the main I think they realise the need to invest in marketing — those companies that have gained share are looking to retain it,” he said.

Some CPG companies can more easily shrug off the cost pressures than others because the easing of lockdown restrictions should boost their sales. Drinks companies, for instance, are positioning brands for the reopening of pubs, clubs and restaurants.

Dolf van den Brink, chief executive of Heineken, which announced plans earlier this year to cut 8,000 jobs to rein in costs, said: “We really feel strongly about the need to increase our marketing and selling expenses.

“Even though it’s a bit painful [financially] in the short term, it’s the right thing to do long term.”

But for other companies, the reversion of consumer behaviour to pre-pandemic norms is causing sales to slow — complicating the calculation on marketing expenditure. UK group Reckitt Benckiser, maker of Finish dishwasher tablets and Lysol disinfectant, is among several to report that elevated consumer demand for soaps and disinfectants has recently begun to moderate.

Chief executive Laxman Narasimhan said the group does not “really have specific targets which we divulge” for advertising but that “marketing spend remains high”.

A customer selects an item from an almost empty section of toilet rolls at an Asda supermarket in England
Many consumer brands benefited from increased sales of household products during Covid lockdowns © Chris Ratcliffe/Bloomberg

In the US, analysts at Barclays expect marketing spend to dip in the months ahead at bleach maker Clorox, which spent $790m on marketing in its financial year to the end of June and is forecast to spend $700m in the year ahead, and Kimberly-Clark, the company behind Andrex toilet roll and Kleenex tissue, where it is estimated to fall from $956m in 2020 to $879m this year.

Presenting results that showed a second successive quarterly decline in organic sales, Mike Hsu, Kimberly-Clark’s chief executive, told analysts the company had “chosen to pull back a little bit” on advertising spending in some areas. He highlighted toilet paper in North America, for which demand had eased as consumers spend more time out of the house.

“There’s as much a math component to our advertising programme as there is a creative component,” Hsu added. “We’re pretty disciplined.”

Line chart of Malaysian palm oil futures (Ringgit per tonne) showing palm oil is among commodities whose price has soared

Even so, the forecast ad expenditure at both Kimberly-Clark and Clorox is expected to remain above pre-pandemic levels. Hsu said the group was maintaining investment in brands in several regions and product lines.

Clorox, which spent more than usual on advertising last year, said it planned to invest about 10 per cent of its sales this fiscal year, in line with previous periods. The company added it had “an ongoing commitment to invest strongly behind our brands”.

Companies forecast to increase ad spend despite the pressures on costs include Coca-Cola, PepsiCo and Colgate-Palmolive. Barclays expects P&G’s ad budget will rise another $250m in the year ahead.

Colgate-Palmolive, which last month issued more conservative full-year profit forecasts, citing a “difficult cost environment”, said that while it was accelerating cost-cutting in other areas, advertising was “still expected to be up on both the dollar and a per cent of sales basis”.

Television still holds appeal for the sector, which has long been attracted to the medium’s broad reach, but Google, Facebook and other digital platforms have become increasingly important.

Large brands typically spent at least 40 per cent of their marketing budgets 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 online video, according to a recent study by Ofcom.

Executives are reluctant to aggressively rein in expenditure in part because the dangers of tightened budgets were exposed by difficulties at Kraft Heinz, analysts said.

The rest of the industry, in the US at least, had come under pressure from Wall Street to adopt its stringent approach to costs — before the food group, backed by Brazilian-American investment firm 3G, took a $15bn writedown three years ago on gloomier prospects for some of its best-known products.

“The investment community has woken up to it,” said Bruno Monteyne, analyst at Bernstein. There was now “a huge amount of focus” on whether the companies were “gaining share, whether they’re still growing”.

“You only have to look at Kraft Heinz and what happened in terms of share price performance. No one is holding that up any more as a paragon of virtue.”

Stills from Guinness’s recent ‘Welcome Back’ campaign
Guinness, which is owned by Diageo, launched a ‘Welcome Back’ campaign launched in anticipation of pubs and bars reopening across the UK © Diageo

Kraft Heinz, which is now run by a former marketing executive, Miguel Patricio, said it had “transformed significantly in a short amount of time, becoming more consumer-obsessed than ever, by reinvesting in our brands and our talent”.

The company — whose products include Heinz ketchup, Kraft Mac and Cheese, HP Sauce and Philadelphia cream cheese — said it planned to spend $100m more on marketing this year than it did in 2019, and was set for additional increases in the years ahead.

Competition both from disruptive start-ups, which have gained traction through digital marketing, and supermarkets’ cheaper own labels gives managers another reason to avoid taking too harsh an approach to ad spend.

The importance of branding to packaged goods is such that advertising is to a large degree the lifeblood of the industry.

CPG companies “think of advertising as a central rather than discretionary spend, which is how some retailers might think of it”, according to Phil Smith, a former marketing director at Kraft in the 1990s and now director-general of the UK advertisers’ trade association, Isba.

Monteyne said executives were more prepared to curb investment in innovation than they were in marketing, or push for efficiencies in other ways, such as reducing the number of versions of similar products.

Smith said the outlook for spending in the sector would ultimately depend on the extent to which the companies could pass cost increases on to shoppers. “There is clearly big inflationary pressure and at some point advertising will flex downwards if they’re not able to get their price increases through,” he said.

Advertising was even more important in an inflationary environment, especially given the competitive threat from cheaper alternatives, said GroupM’s Wieser. “If you’re going to pass on costs, are you really going to persuade consumers to pay more if your brand is less present? You need to make sure that the consumer’s not shifting down to store brands.”

Even if finance directors are willing to safeguard overall marketing budgets, ad executives said clients were being as demanding as ever in pushing for returns. P&G said it was saving on agency costs, eliminating waste and reducing “excess ad frequency”.

Ivan Menezes, chief executive of Diageo, said: “You need two things to work really effectively. One is great creative flair in understanding consumers, developing products and digital engagement. The other is understanding the return you get on every dollar you spend.”

Agencies are being called on to produce more concrete evidence that their campaigns produce results, not least since advances in technology have made their effectiveness easier to measure.

“The level of scrutiny is forever increasing, and quite rightly,” one creative executive in the sector said. “This isn’t art. It’s advertising.”

Source