Makers of Fast Moving Consumer Goods (FMCGs) are setting aside a much larger slice of their sales towards advertising and promotions (A&P) this year.
Take the case of Hindustan Unilever. Its advertising and promotion spends in the six months ended September 2009 zoomed 31 per cent to a whopping Rs 1,132 crore even as its sales grew 6 per cent. Ad spends now account for 13 per cent of the company’s sales, sharply up from about 10 per cent last year.
However, the FMCG giant was not alone in its spending spree. The eight listed FMCG companies collectively hiked their ad spends by 33 per cent for the first half of this fiscal, even as their sales grew at 12 per cent. As a result, companies spent anywhere between 9 and 18 per cent of their sales on advertising and promotions in the latest fiscal, up sharply from last year.
Margin effect
What explains the sudden surge in ad spends? Part of the reason for it is that raw material prices for many large FMCG categories – soaps, detergents, personal products – have corrected sharply after going through the roof last year. Having endured price increases through 2008, FMCG makers are left with larger profit margins to either launch promotions, or deploy in brand-building. Players such as Hindustan Unilever have upped advertising spends to protect market shares from the now-active smaller rivals.
Numbers also show that there was little correlation between increases in ad spend and sales for individual companies. Some companies stepped up their ad spends irrespective of the trends in their sales.
Agro Tech Foods, which saw its sales decline was actually one of the companies to sharply hike its advertising spends. Hindustan Unilever too opted for a bigger ad budget, despite a single-digit growth in its topline.
In fact, apart from trends in raw material prices, it is the breadth of a company’s product portfolio that seems to have decided the ad spends in this period. Both Hindustan Unilever and Dabur India, which straddle several categories – hair care, oral care and foods – increased their spending quite sharply.
Colgate Palmolive, with its brands focussed mainly on the oral care market, was the only company to have actually cut-back on its advertising spends this fiscal. However, it still managed a 16 per cent sales growth.
Asked why companies with the strongest sales are not the ones with high ad spends, Mr Milind Sarwate, the Chief of Strategy, Finance and Human Resource, Marico Industries, said, “The relationship between sales growth, ad spend-sales ratio and market share is complex. It is governed not only by the configuration of players, but also by industry profitability. Generally, companies with high market share enjoy a favourable terrain. The equity of their brands allows them to retain market share without expending too much on advertising and sales promotion.”
Source: The Hindu Business Line
