P&G Will Keep Hiking Ad Spend Amid Soft Sales

More Cuts Coming Too, Some Targeting Massive $18 Billion Promotion Budget

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Procter & Gamble Co. is sticking with plans to hike ad spending this year, though an increase last quarter produced sales growth that missed analyst expectations slightly.

Jon Moeller
Jon Moeller

Despite planned spending increases in media and overall marketing, P&G continues to cut agency and production costs. And in a conference call with analysts, Chief Financial Officer Jon Moeller said one focus of P&G's new five-year, $10 billion round of cost cuts would come in trade promotion spending largely with retailers, which he pegged at a whopping $18 billion annually.

P&G's sales rose $15.8 billion last quarter, down 7% absolutely but up 1% discounting currency and divestiture effects. Those numbers don't include brands already sold in deals that haven't yet closed -- including Clairol, CoverGirl and Wella.

Earnings per share excluding restructuring items were 86 cents, four cents ahead of analyst forecasts. Overall, net earnings for continuing operations fell 3% to $2.3 billion.

In a media briefing, Mr. Moeller said P&G's advertising spending last quarter was up 1.3 percentage points as a share of sales. Given the currency-driven sales decline, that left it up slightly in absolute terms globally.

In the first half of the fiscal year, P&G ad spending as a share of sales was roughly in line with the prior year, a spokesman said. But P&G will hike ad spending by 1.4% as a share of sales for the back half of the year, Mr. Moeller said. That breaks a company habit in some past years of cutting marketing to make earnings numbers.

"We certainly do expect that will have an impact on the top line over time," Mr. Moeller said. "Just because of purchase cycles in our categories, that's not an overnight phenomenon."

In the U.S., P&G's sales momentum is already improving, with sales up around 2% in line with its categories, he said. Globally, P&G's categories grew 3% in the quarter, well ahead of P&G's 1% organic sales growth. And the company's long-term goal is to grow at or slightly above its markets, he said on the analyst call. As P&G deals with a strong dollar that hurts it, relative to most competitors, and shifts its declining business in China toward faster-growth premium sectors, he said that may not happen until fiscal 2018.

In the meantime, P&G will continue efforts to improve profits by cutting costs. He said $370 million in cuts to agency and production fees last year and $200 million this year should reduce spending in the area from $2 billion to $1.5 billion annually. But he said that still leaves "more room to improve."

Likely a bigger focus of future cost cutting efforts is in promotion spending, primarily with retailers. It's reflected under U.S. accounting rules as a reduction in net sales but not required to be reported.

So by pegging P&G's number at $18 billion, Mr. Moeller provided a rare glimpse into this dark budget, which amounts to 22% of gross sales and includes both promotional fees to retailers and coupon redemptions or other consumer discounts.

The number is bigger than it used to be, and bigger than many analysts thought. But Mr. Moeller attributed that to the spread of big Western retailers in developing markets bringing "their business model with them."

P&G's promotion budget is considerably higher than the $11.5 billion it spent in other total marketing outlays last year, based on P&G reports and Ad Age Datacenter estimates. And it's nearly double the $9.7 billion P&G reported in ad spending.

P&G isn't just looking to reduce that $18 billion in promotion spending, Mr. Moeller said, but also to improve efficiency so it generates more sales growth.