But next year, it looks like the storyline will flip. A combination of moderating commodity prices, a stronger dollar and a U.S. market that suddenly looks pretty good in comparison with the rest of the world will help household and personal-care companies in 2009, and quite possibly result in restored spending. But for food companies such as Kraft Foods and Kellogg, buoyed much more than household and personal care by price hikes in the past year, 2009 could bring strong deflationary pressures that could also pressure ad spending.
The same factors that drove prices and revenue up for food companies in the past year could drive them down in a hurry, as not only are they benefiting from oil prices that have been cut by nearly half in the past two months, but also by grain prices that have fallen just as fast. And expect at least some retailers, such as Wal-Mart and Costco, to push back on prices hard, the latter having already booted brands out of its stores in some cases rather than accept price hikes in the past year.
"We will aggressively look for opportunities to give back to the customer" if costs come down, Wal-Mart Stores U.S. CEO Eduardo Castro Wright said at an analyst conference last week.
For household, personal- and beauty-care players, however, the past quarter was much more of a mixed bag, though the two biggest players -- Procter & Gamble Co. and Unilever -- appear to have slashed ad spending substantially in the U.S.
P&G cut spending in July and August (excluding outdoor, which is rarely a major outlay) by 11.9% to $498 million in the period, according to TNS Media Intelligence (September data aren't yet available). Unilever cut even more deeply in the period -- 37% to $93.8 million in the period vs. year ago.
Both companies delivered top-line growth at or above their long-term targets, though, and sidestepped much discussion of their ad spending on quarterly conference calls last week. Unilever said its global advertising was up around $13 million in absolute terms, though down as a percent of sales last quarter. Because it reports under European standards, some price promotion that would be deducted from the top line of U.S. companies appears as marketing spending for Unilever.
P&G Chairman-CEO A.G. Lafley described nearly $400 million in cost savings last quarter mainly in terms of efficiency improvements, though he said some came from reductions in less productive "initiatives." A P&G spokesman declined to say how much of P&G's savings in the quarter came from lower ad spending. Both companies, like the rest of their industry, are in a bind, as they face rising private-label sales in their categories due to commodity fueled price increases amid a worsening global economy. And unlike the food companies, costs for the household-product players aren't coming down nearly as fast. P&G said it has seen a reduction by only $300 million of an originally projected $3 billion in increased costs projected for the fiscal year.
P&G and other U.S. players also face profit pressure starting this quarter from a strengthening dollar, which reduces the value of the roughly 60% of sales that come from overseas.
Relief next year
As long as U.S.-based consumer-package-goods companies face the double whammy of a strengthening dollar and stubbornly high commodity costs, "advertising spending is probably going to be down," said one analyst -- particularly in the fourth quarter. He doesn't expect significant relief for the household-product companies on commodity costs until the first quarter of 2009.
Indeed, some companies made no bones about having to restrain ad spending last quarter. Of the 0.9 percentage points of operating-margin savings Colgate-Palmolive Co. got last quarter, about 0.7 was from advertising, which was still up in absolute terms, CEO Ian Cook said on a conference call last week.
"We're seeing traditional advertising spending weaken in Europe and the U.S. [across all advertisers], particularly if you take out the presidential spending," Mr. Cook said. "We're seeing traditional advertising spending continue to increase in the emerging markets of Asia and Latin America, although at a decelerating rate."
Some of those global forces, however, could reverse as 2009 progresses, and particularly in 2010. Thanks to a stronger dollar that makes dollar-denominated profits worth more, a relatively resilient market compared with Western Europe; and slowing growth in developing markets, some of those product initiatives and marketing dollars that have been shifting overseas from multinationals in recent years could start coming back to the U.S.
For its part, Colgate still expects to hike ad spending globally in 2009, both absolutely and as a share of sales, Mr. Cook said.
In terms of value growth last quarter, P&G Chief Financial Officer Clayton Daley said North America grew 3% to 4%, Western Europe was flat, and developing markets were up 6% to 7% -- a much lower differential between the U.S. and developing markets than in years past.
Indeed, while having a relatively large U.S. component was something of a competitive disadvantage for P&G in recent years, it's looking a lot better now. "Having a large, very profitable U.S. business is a huge asset in this environment," Mr. Lafley said.
~ ~ ~
Contributing: Emily Bryson York
2. Organic marketing spending growth (excluding currency and acquisitions) Overall reported marketing spending was up 27%. Sources: Company financial reports, TNS Media Intelligence