Consumer brands to protect advertising budgets even as other costs rise

Advertising is a tempting place to start for CFOs in search of cost savings. But even as makers of some of the world’s most popular household products are squeezed by the most severe inflationary pressures in a decade, they’re thinking twice before taking the ax into marketing budgets.

Consumer goods purveyors spent huge amounts of money on advertising during the pandemic, when their prices skyrocketed Hygiene concerns Increased demand for cleaning products and lockdown restrictions have stimulated sales of food and drink for home consumption.

Procter & Gamble has been particularly bold in seizing the moment, spending $8.2 billion on advertising in the 12 months to June — $900 million more than the year before. In the beverage sector, Diageo’s marketing spending rose 17 per cent to £2.16 billion over the same period.

For the advertising business, these companies have been a much-needed source of work as commissions from other corporate clients have dried up. Agencies developed campaigns for the sector that sought to capture the mood of the moment, such as Beautiful Dove Courage Video showing the faces of health care workers on the front lines.

However, how many advertising dollars will be rolled out – and where – in the coming months presents a dilemma. While the lockdown rules have boosted sales for home packaged goods groups like P&G, the outlook is less bright: the cost of transportation and raw materials like palm oil is surging at the same time that shopper demand for some products falters. Meanwhile, reopening from lockdown encourages companies in other sectors to increase ad spending, driving up prices.

Along with technology and pharmaceuticals, consumer packaged goods (CPG) have been among the most resilient industries during the pandemic, said Mark Reed, CEO of WPP, the world’s largest advertising group. Now that the other customers Increase ad spend againThere was “some pressure on margins and marketing costs” in the sector.

“We are seeing a mixed picture across our CPG clients, but mainly I think they are recognizing the need to invest in marketing – those companies that have gained a stake are looking to retain,” he said.

Some CPG companies can more easily ignore cost pressures than others because easing lockdown restrictions should boost their sales. Beverage companies, for example, are putting up brands to reopen bars, clubs and restaurants.

Dolph van den Brink, CEO of Heineken, which announced plans earlier this year to reduce 8000 jobs to curb costsHe said, “We feel very strongly about the need to increase our marketing and selling expenses.

“Although it is a bit painful [financially] In the short term, it’s right to do in the long run.”

But for other companies, the return of consumer behavior to pre-pandemic standards slows sales — complicating the calculation of marketing expenses. British group Reckitt Benckiser, which makes Finish tablets for dishwashers and Lysol disinfectant, is among several reports of a recent high consumer demand for soaps and sanitizers. I started in moderation.

CEO Laxman Narasimhan said the group “does not have specific targets to disclose” for advertising but that “marketing spending remains high”.

A customer selects an item from a nearly empty section of toilet rolls in an Asda supermarket in England

Many consumer brands have benefited from increased sales of household products during the Covid lockdowns © Chris Ratcliffe / Bloomberg

In the US, Barclays analysts expect marketing spending to decline in the coming months at bleach maker Clorox, which spent $790 million on marketing in its fiscal year through the end of June and is expected to spend $700 million next year. and Kimberly-Clark, the company behind Andrex toilet paper and Kleenex tissues, estimated to drop from $956 million in 2020 to $879 million this year.

Showing results that showed a second straight quarterly decline in organic sales, Kim Hsu CEO Mike Hsu told analysts the company “has chosen to pull back a bit” on ad spending in some areas. He highlighted toilet paper in North America, which has fallen in demand as consumers spend more time outside the home.

“There is as much a sporting component to our advertising program as there is a creative component,” Hsu added. “We are very disciplined.”

Line chart of Malaysian palm oil futures (ringgit per ton) showing that palm oil is among the commodities that have risen in price

However, projected advertising expenditures in both Kimberly-Clark and Clorox are expected to remain above pre-pandemic levels. Hsu said the group is maintaining investment in brands in several 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, in line with previous periods. The company added that it has an “ongoing commitment to investing aggressively behind our brands.”

Companies such as Coca-Cola, PepsiCo and Colgate-Palmolive are expected to increase ad spend despite cost pressures. Barclays expects Procter & Gamble’s advertising budget to rise by another $250 million next year.

Colgate-Palmolive, which last month released a more conservative full-year earnings forecast, citing a “challenging cost environment,” said that while it was accelerating cost-cutting in other regions, the announcement was “still expected to rise on both the dollar and dollar” ratio. percentage of sales basis.

Television continues to have the appeal of the sector, which has long been drawn to the broad reach of the medium, but Google, Facebook and other digital platforms are becoming increasingly important.

Brian Wieser, global head of business intelligence at Media Buyer GroupM, said large brands typically spend at least 40 percent of their marketing budgets on digital channels.

In the UK, adults spent an average of a third of their waking hours last year watching TV and video online, according to a recent study by Ofcom.

Analysts said executives were reluctant to rein in spending aggressively, in part due to the risks of tight budgets due to difficulties at Kraft Heinz.

The rest of the industry, in the US at least, came under pressure from Wall Street to adopt its tough approach to dealing with costs – before the food group, backed by Brazilian-American investment firm 3G, got its Write off $15 billion Three years ago, expectations were even bleaker for some of its most iconic products.

“The investment community has woken up to this,” said Bruno Montaigne, an analyst at Bernstein. There was now “a great deal of focus” on whether companies were “gaining a stake, and whether they were still growing”.

“Just take a look at Kraft Heinz and what happened in terms of stock price performance. Nobody considers that a model of virtue anymore.”

Screenshots from the campaign

Guinness, owned by Diageo, has launched a ‘Welcome Back’ campaign launched in anticipation of the reopening of pubs and bars across the UK © Diageo

Kraft Heinz, now run by a former marketing manager, Miguel PatricioIt has “transformed dramatically in a short period of time, becoming more consumer-obsessed than ever, by reinvesting in our brands and talent,” he said.

The company — whose products include Heinz ketchup, Kraft Mac and Cheese, HP Sauce and Philadelphia Cream cheese — said it plans to spend $100 million more on marketing this year than it did in 2019, and is set to spend additional increases in the coming years.

Competition from pesky startups, which have gained traction through digital marketing, and labels for cheaper supermarkets, is giving managers another reason to avoid taking an overly harsh approach to advertising spending.

The importance of branding for packaged goods is that advertising is very much the lifeblood of the industry.

CPG companies “think of advertising as centralized rather than discretionary spending, which some retailers might think of,” according to Phil Smith, a former Kraft chief marketing officer in the 1990s who is now general manager of the UK’s Advertisers Merchandising Association.

Montaigne said CEOs were more willing to rein in investment in innovation than they were in marketing, or to push for efficiencies in other ways, such as reducing the number of releases of similar products.

Smith said spending expectations in this sector will ultimately depend on the extent to which companies can pass on cost increases to shoppers. “Obviously there is a lot of inflationary pressure and at some point the ads will flex downwards if they can’t achieve their price increases,” he said.

Advertising was more important in inflationary environmentGroupM’s Wieser said, especially given the competitive threat from cheaper alternatives. “If you’re going to pass on costs, are you really going to convince consumers to pay more if your brand has less presence? You need to make sure the consumer doesn’t switch to stocking the brands.”

Even if CFOs were willing to protect overall marketing budgets, advertising executives said customers were more demanding than ever pressing for revenue. Procter & Gamble said it was saving agency costs, eliminating waste and reducing “redundant advertising.”

“You need two things to really work effectively,” said Evan Menezes, CEO of Diageo. “One is a great creative approach to understanding consumers, product development, and digital engagement. The other is understanding the return you get from every dollar you spend.”

Agencies are being asked to provide more tangible evidence that their campaigns are producing results, not least since technological advances have made it easier to measure their effectiveness.

“The level of scrutiny is forever increasing, and he is absolutely right,” said one of the industry’s creative executives. “This is not art. It is advertising.”

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