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Unilever Cuts Agency Fees and Production Costs, but a Media Surge Looms

By Published on .

Unilever CEO Paul Polman.
Unilever CEO Paul Polman. Credit: Unilever

Unilever's 3% organic sales growth was slightly below analyst projections for the second quarter, but the company handily beat expectations on earnings and margin thanks to lower agency and production costs. Still, the world's second biggest ad spender plans to step up new-product launches and media in the second half.

Here are five key takeaways from today's earnings announcement by the marketer of Dove, Axe, Hellmann's and Seventh Generation.

Marketing cuts are coming faster than others. Unilever in April said a third of its three-year $7 billion cost-cutting plan would come from marketing and overhead. In the first half, however, nearly a third of the cutbacks came just from marketing, and half from marketing and overhead combined. Overhead cuts included a 13% reduction in middle and senior managers, which meant fewer people to greenlight new ads.

Agencies and production spending are taking a big hit. Absolute spending on agency fees fell 17% in the first half, thanks partly to making fewer ads and keeping them running longer until they stop working, said Chief Financial Officer Graeme Pitkethly on an investor conference call.

Production costs are falling thanks to several tactics. TV production spending fell 14% in the first half. That's not just from fewer ads. Pitkethly said Unilever is also saving money by offshoring production to places like South Africa, bucking prior company and industry trends by using more, rather than fewer, production companies, and doing more digital production in-house.

Lower marketing spending boosted profit. Unilever's first-half operating margin fell 1.8 percentage points, better than analyst expectations, thanks to a 1.3-point reduction in marketing. That comes after a 0.5-point margin improvement last year was fueled by 0.4 points from marketing. CEO Paul Polman said on an investor call Thursday that marketing cuts aren't to blame for sluggish volume growth, which he blamed primarily on hiking prices in emerging markets to compensate for currency devaluations.

Media spending will bounce back. Despite all those agency and production cuts, marketing spending – at least on media – will rebound in the second half, which will get around 60% of Unilever's new-product launches for the year. Pitkethly said overall marketing spending will be "about flat" as a share of sales for the full year, suggesting a second-half increase on par with the $350 million first-half decrease. Since pressure on agency and production fees remains, that means a big hike in media.

Even there, Unilever is cutting back selectively, such as digital spending in Southeast Asia, where it "oversaturated" consumers, Pitkethly said. And in a media call, Polman said, "We don't see anything we're worried about in terms of competitive media spend" on a country-by-country basis.

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