Cost Cuts Are in Store for P&G and Unilever

Nos. 1 and 2 Trim People, Production Costs, Look to Save Through Digital Media

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After years of big run-ups in marketing spending, packaged-goods giants Procter & Gamble Co.and Unilever are trying to modify their increases and talking more about how to save money, which isn't exactly great news for agencies, production companies or the media -- unless you're in digital. Both marketers are focusing on digital with its nearly bottomless well of media inventory and ample opportunities for "earned" media.

Both have raised prices the past year to recoup rising commodity costs. And both are reducing headcounts and otherwise squeezing overhead to relieve margin pressures as consumers, particularly in slow-growing U.S. and European markets, respond to higher prices by buying less or trading down.

P&G Chairman-CEO Bob McDonald
P&G Chairman-CEO Bob McDonald

In the past, both Unilever and P&G have cut overhead and headcounts in part to fuel more marketing spending. But now they are both tapping the brakes on ad spending, which has grown considerably. P&G boosted ad spending $1.8 billion to $9.3 billion during the past two years. Unilever has added more than $1 billion to annual spending compared to three years ago to reach $8.2 billion in reported spending last year.

Both also have said they plan to spend more this year, but want to at least moderate the increase. P&G doesn't plan to increase its ad-spending-to-sales ratio this year after watching it rise more than two points to 11.3% last year. Unilever carved 0.7 points off its ratio to 13.3% last year.

And while Unilever and P&G continue to spend more on TV than any other medium, both are looking to digital to help keep that spending in check (P&G also has ramped up print as a share of spending in recent years.)

P&G Chairman-CEO Bob McDonald said Jan. 27 that while heavy spending by candidates on the 2012 U.S. elections is pressuring P&G's TV costs, digital can offset that . "In the digital space, with things like Facebook and Google and others, we find that return on investment of the advertising when properly designed, when the big idea is there, can be much more efficient," Mr. McDonald said.

Unilever Chief Financial Officer Jean-Marc Huet also mentioned his company's 15% increase in digital spending last year vs. a 2% increase overall in the context of spending efficiency in a Feb. 2 investor meeting. That follows a December investor presentation by Chief Marketing Officer Keith Weed in which he noted several digital programs that produced north of $3 in revenue for each dollar spent.

Beyond that , even as Unilever hikes spending on media, it's squeezing agency fees and production costs. "We significantly reduced our nonproductive spend during the year," Mr. Huet said. "As you know, that 's the money we spend on production costs and agency fees, money that 's not directly driving the exposure of our brands to the community and consumers."

Unilever is likely to look for further savings in a global communications-planning and media review that launched last month, the second time in two years the company has reviewed media buying.

P&G last week announced plans to cut 1,600 non-manufacturing jobs by June 30, and it's not clear how many of those will come through layoffs. But the headcount reduction isn't caused by a shift toward digital spending or social media, which is actually more labor-intensive for marketers. P&G, for example, has added community managers in recent years to shepherd their brands in social media.

In earnings calls, executives for both P&G and Unilever got peppered by questions from analysts about marketing spending, not so much out of concern it was too high, but for fear their restraint in the face of rising prices and commodity costs could hurt market shares.

UBS analyst Nik Modi cut his rating on P&G to neutral from buy last week, for example, citing concerns P&G's culture wouldn't let it cut staffing or make other changes quickly enough -- but also saying P&G may need to further increase marketing spending amid market-share declines last quarter.

Of course, digital-media players are happy to talk with both companies about spending more with them, regardless of whether any of the motivation is to save money elsewhere. Unilever has had a series of "top-to-top" senior-management discussions with digital players in recent years, most recently at the Consumer Electronics Show in Las Vegas last month.

P&G is bringing digital executives to its Cincinnati headquarters for a March summit, including Twitter CEO Dick Costolo and executives from Facebook, Microsoft, Yahoo and Federated Media, in addition to executives from fellow marketer Coca-Cola.

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