Consumer spending appears to have slowed, particularly in the U.S. beauty and personal-care categories. But a bigger question may be how much is due to the economy and the credit crunch vs. how much is due to marketers shifting focus to countries deemed more attractive, creating something of a self-fulfilling prophecy about a slowing U.S. market.
In the raft of earnings announcements last week, Procter & Gamble Co., Kraft Foods, Colgate-Palmolive and Kellogg all said they are holding firm to plans to raise marketing spending. That dovetails with package-goods companies almost universally talking about increasing outlays, said Sanford C. Bernstein analyst Ali Dibadj. The problem is, Bernstein's media analyst Michael Nathanson isn't seeing much sign of that.
"My question is: Where is it all going?" Mr. Dibadj said. Part of the answer may include unmeasured media such as shopper marketing or trade promotion, which can actually reduce reported sales growth, and rising levels of products sold on promotion would appear to bear that out.
But he believes marketers may also be shifting more attention and dollars overseas, chasing not only rapid-growth markets such as China and Russia but also the stronger currencies and bigger currency-fueled profit pop as the dollar weakens.
Ironically, Federal Reserve interest-rate cuts, which have helped hasten the downward spiral of the dollar, also may be helping send marketing dollars outside the U.S. For example, much of the focus of stepped-up marketing spending by Alberto-Culver this year is in Western Europe behind expansion of the Tresemmé brand there.
Until recently at least, the U.S. market was growing faster than Europe. But with the dollar falling to record lows against the euro, even flat sales can produce a profit boost for U.S.-based multinationals, while the falling dollar can eat up any profits earned from successes in the U.S.
As P&G Chairman-CEO A.G. Lafley vowed to boost marketing spending in a conference call with analysts Oct. 30, it was clear his focus was largely on Asia, where Unilever has stepped up spending. "You just need to look at where the competition has launched," Mr. Lafley said, noting that he'd just spent two weeks traveling Asia with P&G Vice Chairman Susan Arnold. "Asia's a very hot market right now."
If there are saving graces for marketing spending in the U.S. right now, it's that package-goods marketers are announcing substantial price increases that, should they stick, will let them maintain margins without slashing marketing costs. And they might: Third-quarter gross-domestic-product growth came in at a robust 3.9%, appearing to give lie to fears of a recession.
P&G announced a series of price hikes ranging from 3% to 12%, including on Olay personal-wash items, where it's catching up with Unilever price hikes that had been a drag on Dove.
And the food industry, long a laggard to personal care, is showing some surprising signs of life. Unilever, in an odd turnabout, reported that its long-lagging savory, spreads and dressings business grew organic sales 6.6% last quarter, compared to only 3.8% for its once company-leading personal-care business.
Food rivals Kellogg and Kraft last week noted that they would raise prices wherever possible (cheese for Kraft being one area where it has little pricing power) to maintain plans for aggressive increases in marketing spending.
Kraft Chairman-CEO Irene Rosenfeld said the company remains committed to stepped-up marketing spending weighted toward the fourth quarter of this year and continued into 2008, including new campaigns behind snacks, Maxwell House, Planters, Jell-O and Kraft dressings, as well as the European chocolate business.
In cases where Kraft can't raise prices to recoup overhead costs, she said the company will cut other areas of overhead to maintain its progress toward a goal of increasing marketing spending as a share of sales to the 8% to 9% range by 2009.