Marketing sea change: Unilever, C-P spend even as they warn

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It was black monday for package-goods stocks last week as Unilever and Colgate-Palmolive Co. issued earnings warnings. But their bad news could be a good omen for the marketing business; both companies cited the need to maintain spending as a factor in missing their targets.

That aggressive turnabout could trigger a sea change in how mature companies view their marketing budgets, potentially ending what Sanford C. Bernstein analyst Michael Nathanson termed "a three-year global advertising depression."

Unilever and Colgate were notorious in recent years for trimming year-end ad spending to hit earnings numbers. But on Sept. 20, both signaled it won't be that way in 2004, or quite possibly for years to come. Though they cited such factors as bad weather and rising material costs for their woes, executives at both powerhouses said mounting competition in the U.S. and globally made it impractical to cut marketing spending, which they plan to increase through 2004 and 2005.

Package-goods industry analysts said the twin warnings mark a new reality in which nearly all players will need to spend more to drive sales growth. They will also have to live with slimmer operating margins amid heightened competition in what's largely a "zero-sum game," as Banc of America Securities analyst William Steele put it.

The moves by two bellwether marketers could also signal a broader turn, said Bernstein's Mr. Nathanson. "I think it's going to spread to other industries," he said, citing alcoholic and non-alcoholic beverages among sectors ripe for a widespread increase in marketing spending, possibly including more TV to supplement or replace heavy event and direct marketing, which he believes has had questionable impact.

A review Bernstein conducted earlier this year of the 49 biggest advertisers in mature industries within the Standard & Poor's 500 found their ad spending as a percent of revenue slid from a peak of 4.4% in 1997 to 3.5% in 2002. That's near a 20-year low for the ratio set in 1984. Mr. Nathanson believes the trend may have reached an inflection point toward a long-term rebound.

reversing a bust

While the entrance of such new players as computer, software, telecom and drug marketers drove the advertising boom of 1995-2000, Mr. Nathanson believes a bounce in ad spending by mature marketers could reverse a bust this time.

"Both Unilever and Colgate tried to make their numbers through cost cutting [in a variety of areas]," Mr. Nathanson said. "That works until it doesn't work. By trashing the earnings outlooks as much as they did, it gives them a freer hand to invest in advertising and marketing."

Not coincidentally, Unilever and Colgate share a common rival in Procter & Gamble Co. P&G, too, was once notorious for slashing ad spending to make its numbers in the back quarters of its fiscal years, which end in June. But that hasn't happened since 2001.

Over the past three years, P&G's annual ad spending growth rate has outstripped that of its major global competitors, up 11% compared to a 3% average rise for rivals, according to Bernstein. Over that period, P&G has hiked its measured U.S. media spending $1 billion to $2.7 billion.

By contrast, Unilever and Colgate have been the biggest spending laggards in the home and personal care industry, averaging annual U.S. media spending declines of 6.9% and 14.1%, respectively, over the past three years, according to Bernstein research, excising a collective $267 million from their spending.

winning the war

The announcements by Unilever and Colgate were remarkable both for the size of the misses and the frank acknowledgement by their executives that analysts may need to revise 2005 outlooks to account for continued heavy marketing spending.

Confounding analysts, Colgate said sales and revenue are ahead of projections despite the earnings miss, which it attributed to stepped-up marketing combined with unexpected hikes in material costs. Colgate said sales will be up 7% in the third quarter, and, Chairman-CEO Reuben Mark said in a conference call, its U.S. oral-care volumes were up 14% in the U.S. in August.

Unilever said it will close a five-year restructuring by widely missing both earnings and sales goals set at the outset, as sales of its 400 leading brands decline for 2004. But incoming Co-Chairman Patrick Cescau said the decision to cut spending to step up marketing spending globally is "in the long-term interest of the business, however painful the immediate consequences." n

contributing: normandy madden and alexandra jardine

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