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Like many other package-goods players, Kellogg's strategy has been to increase spending to boost, or even hold, demand as commodity costs force price hikes on their brands. Kraft, General Mills, Campbell's Soup Co. and Sara Lee have all boosted marketing and advertising spending in the last year. (When pressed by analysts about whether additional outlays might goose sales of its condensed soups, Campbell executives said they need to do better marketing, not more.)
Getting investors to swallow increased marketing investment isn't easy. In Kellogg's case, it's justifying the move in part by assuring analysts it is scrutinizing every dime to make sure it brings return on those big bucks.
"If we think about having over $1 billion in our P&L spent on advertising, not only from Kellogg's perspective but from shareholders,' the key question is are we driving sufficient efficiency and effectiveness to warrant that level of support," Mr. Mackay said.
He went on to say that Kellogg is looking for ways to cuts costs; has set up best-practice case studies for international units; and is looking at its media practices around the world to increase efficiencies. The company's media-buying account is held by Publicis Groupe's Starcom USA; its creative agency is sibling Leo Burnett.
"We're looking at our production and agency efficiencies and programs, how can we drive costs of commercial production, how can we work more effectively with our agencies," Mr. Mackay said.
Kellogg plans to identify the advertising dollars with the lowest rate of return and redirect them. Mr. Mackay was quick to add that the redirection may be into other forms of advertising, and not simply applied to the company's bottom line. The CEO said a number of opportunities he wouldn't name already have been identified for additional ad support.
But given the pressures on food companies with unprecedented commodity costs and competition from surging house brands that are getting increased support from stores, analysts have begun to wonder when the returns on investment will begin to diminish.
Kellogg "mentioning that they're looking more closely at effectiveness of ROI in advertising makes investors wonder if they are reaching frontiers of ROI," said David Palmer, an analyst with UBS. "In other words, at some point, increases in advertising on the existing portfolio may not yield the best return." He noted that fast-food companies have met with success in breaking out regional and ethnic marketing campaigns that are more targeted and saving national blitzes for the real innovations. "ROI is going to depend on not only the type of media and whether the media is appropriate for the product and what type of new news you're trying to tell people about," he said.
In response to a question about advertising ROI, Kellogg's Mr. Mackay said, "If you look at the performance of the company in the last five years, and we've consistently driven top-line growth, our innovation has worked and our level of advertising has been fundamental to ensuring that we drive that top line and that our innovation succeeds, and to the extent that we believe we can continue to do that, we look to the future to increase our advertising broadly at the rate of sales."