P&G to Boost Ad Spending in U.S.

Cost-Cutting Plan Gives Way to Renewed Focus on Innovation, Developed Markets

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Procter & Gamble Co. boosted ad spending a modest 1% to more than $9.4 billion for the fiscal year ended June 30, but plans to step up spending this year at least in developed markets such as the U.S. as it walks back prior talk of moderating spending growth.

In an earnings conference call today, P&G executives highlighted the company's strategic shift back toward developed markets, where it's been losing share in the past year. The move comes in the face of growing investor, market-share and competitor pressure, including the entry of activist investor Bill Ackman, whose Pershing Square hedge fund disclosed a $2 billion investment last month.

That comes after keeping the ad-to-sales ratio essentially flat last year at around 11.3% and after P&G executives said in February they'd hold increases in marketing spending below sales growth to achieve around $1 billion of a five-year, $10 billion cost-cutting plan. Overall, P&G said it was ahead of schedule for cutting marketing and other overhead staff 10% by the end of this fiscal year and has identified new, unspecified cost savings.

Given that P&G projects foreign currency effects to help drive down global sales 4% to 6% this year, the new spending plans might still yield an absolute decline in global ad spending. Based on the projections P&G gave today, it will spend between $9.1 billion and $9.5 billion on advertising this year, though it plans to hike spending in the U.S. amid sagging shares and rising competitive threats.

"In terms of the increase in advertising," Chief Financial Officer Jon Moeller said, "obviously that 's somewhat fluid depending on how plans work or don't work."

Rather than get into details about a quarter P&G pre-announced in June would be disappointing, executives focused their investor call on fleshing out their strategy of targeting the 40 category-country combinations, 20 top innovations and 10 top developing markets that account for more than half of sales and 70% of profits.

And after saying it would use a cash windfall this quarter generated in part by lower-than-expected taxes to renew share buybacks, P&G faced a far less contentious conversation with analysts than after last quarter's results. P&G's stock was up 3.5% on the day, ahead of a market buoyed by a stronger-than-expected jobs report.

P&G's organic sales grew 3% last quarter, lagging most leading competitors, and overall sales fell 1% to $20.2 billion. Its market share fell 0.5 percentage points globally, Chairman-CEO Bob McDonald said on a call with journalists, and the company lost share across more than two-thirds of its business.

This quarter doesn't look better, with organic sales growth expected to be flat to up only 2% as the company stops getting benefit from last year's price hikes and rolls back around $400 million of $3.6 billion of those hikes. Overall, P&G expects 2% to 4% organic sales growth for the full year as results improve in the back half.

Mr. Moeller said developed-market sales were down slightly in the quarter with growth "below levels reported by our best competitors."

"Advertising spend in developed markets will increase," Mr. McDonald said. "Restarting growth in developed markets will have a positive overall impact on profit, as these are some of our most profitable businesses. At the same time, we'll begin to earn a return on the developing-market investments of the past couple of years."

Despite more emphasis on developed markets, Mr. McDonald said P&G won't walk away from developing ones. Mr. Moeller said P&G, with $14.7 billion in sales in Asia last year, appears to have passed Unilever there for the first time.

Mr. McDonald went into considerable depth about efforts to boost innovation.

Those efforts have included bringing in new advertising agencies to develop product plans and strategies on a project basis, which could lead to permanent roster spots later this year, according to people familiar with the matter. A P&G spokesman couldn't immediately reach an executive for comment.

Spearheading those efforts is a New Business Creation group headed by Group President Jorge Mesquita, who in his P&G career has overseen considerable new-product rollouts by such brands as Swiffer, Febreze and the recent launch of Tide Pods.

The first fruits of such efforts won't appear until sometime after the fiscal year that begins next July, Mr. McDonald said.

The focus is on "discontinuous" innovation that includes new brands, new categories and new products that can render old ones obsolete, he said, with noting that Harvard Business School innovation guru Clayton Christensen has been enlisted to help.

"The whole idea," Mr. McDonald said, "is to have people working on innovation in the seams, in the places that would fall between the organization boundaries," such as Swiffer, which involved cleaning chemistry, paper technology and small-appliance design.

To that end, P&G has identified nine technologies that span its business units, such as one that can be used to develop everything from stretchier diapers to stretchier trash bags -- the latter being used in P&G's Glad joint venture with Clorox Co.

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