Budget cuts hurt brands

By Published on .

Package-goods brands may be dying by a thousand ad-budget cuts, according to a report by Alliance Capital Management's Sanford C. Bernstein & Co. unit.

The industry's loss of pricing power-evidenced by Procter & Gamble Co.'s move to trim more than 17,000 jobs to finance price rollbacks-results from years of eroding ad support and increased reliance on price promotion, concludes the report by analyst Jim Gingrich.

The report singles out P&G and Colgate-Palmolive Co. as having "developed the habit of raiding the ad-spend cookie jar" to meet earnings forecasts in the final quarters of their fiscal years. Mr. Gingrich's analysis of Taylor Nelson Sofres' CMR data show P&G's media spending roughly 40% lower in the fourth quarter of fiscal 2000, ended June 2000, than in the first quarter. Colgate, which operates on a calendar fiscal year, cut spending by more than half from the first quarter of 2000 to the fourth.

Similar patterns appeared in 1999 for P&G and 1998 and 1999 for Colgate. P&G in January again exercised options to trim network-TV spending in the current quarter, the fourth of its fiscal 2001, though not as sharply as last year, a spokesman said.

Package-goods companies are "in effect, mortgaging the future to make the numbers today," Mr. Gingrich said. Ultimately, however, the trend could erode stock prices by turning package-goods categories into commodity businesses.

Short-term fixes have had long-term impact, Mr. Gingrich said. Colgate's total ad spending has fallen from 8.1% to 5.9% of sales since 1987, while Gillette Co.'s spending has dropped from 9% of sales to 6.5% in the same period. Food companies' ad outlays relative to sales have declined even more, the Sanford Bernstein report added.

Media cuts, combined with increased price promotion, make consumers more price-sensitive, meaning marketers sometimes can't raise prices even to recoup recent energy and raw-material cost increases, Mr. Gingrich said.

Even without year-end belt-tightening, package-goods companies would suffer declining share of "media voice," because their products compose declining shares of consumer spending, the report said. Media fragmentation also hurt companies that, despite segmentation efforts, still make mass-market products, it added.

Such economics are one reason that simply increasing ad spending isn't practical, Mr. Gingrich contended. Another is the negative feedback companies get from Wall Street when they do hike spending, he said, citing Coca-Cola Co. and Gillette, whose stock prices have fallen 10%-25% in recent months after announcing such plans.

"If you're a CEO and you're looking at this, how many data points do you need?" he asked. "What we have now is a problem that has accumulated over 10, 20, 30 years. The idea that you could fix it with incremental spending over the next year-it's not going to happen."

Instead, package-goods companies must develop more cost-effective ways to "reaggregate" consumers, much as P&G did with TV soap operas or General Mills did with the Betty Crocker Cookbook 50 years ago, he said.

Among moves in that direction, he cited Gillette and Kimberly-Clark Corp.'s use of publicity to support launches of Venus women's razors and Cottonelle Rollwipes bath tissue; P&G's use of a custom-published magazine for Hispanic consumers and word-of-mouth marketing to back its Physique and Crest Whitestrips brands.

P&G Global Marketing Officer Bob Wehling said aggregate spending figures don't tell the story of brands whose managers make decisions based on individual situations and increasingly use unmeasured media. Even as P&G trimmed network-TV commitments this quarter, some brands, such as Pantene and Olay, have increased spending compared to last year, he said.

"It's dangerous to look at a brand and see that maybe its television went from $6 million to $5 million and conclude that there's a reduced reliance on or capacity to support advertising spending," Mr. Wehling said. "It's just going after the fragmented market out there or the multiplicity of communications options in a different way."

In this article:
Most Popular