First-Quarter Analysis: Package goods see return on ad investments

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Increased ad spending appears to be paying off for some package-goods marketers, though not everyone is following suit and spending could be hard to sustain if restructuring and recession-induced cost savings disappear.

Package-goods marketers Procter & Gamble Co., Clorox Co. and Kimberly-Clark Corp. hiked U.S. media spending last quarter while delivering positive earnings surprises on better-than-expected operating results, according to a new report from Alliance Capital Management's Sanford C. Bernstein.

Gillette Co., Avon Products and Colgate-Palmolive Co. were among companies cutting measured media last quarter. And while Gillette and Avon delivered better-than-expected earnings, theirs came more from non-operating factors, including foreign-currency hedges, said Bernstein analyst Jim Gingrich. Colgate reported earnings in line with analyst estimates.

But it's not the case that more spending instantly produced higher profits, Mr. Gingrich said. Rather, he said, companies with favorable prospects took the chance to spend more on ads while those facing more earnings pressure tightened their belts.

"Companies spend what they can afford," Mr. Gingrich said in an interview, and with five of the seven companies he covers reporting earnings surprises last quarter thanks largely to lower interest rates and raw-material costs, most should be able to afford more ad spending. "The fundamentals are about as good as they're going to get for these guys, so the question is, if they're not spending now, when are they going to spend?"

Bill Steele, analyst with Banc of America Securities, said in recent reports that increased marketing support appears to have paid off for several companies, including P&G, Clorox and Kimberly-Clark. "The companies that have taken restructuring savings and reinvested in their brands are benefiting," he said in an interview.

Overall, U.S. measured media spending for 10 key household and personal products companies Mr. Gingrich tracked was down an estimated 2% to $985 million in the first quarter. His media-spending estimates were based on Taylor Nelson Sofres' CMR reports that cover January, February and period data forMarch.

Ominously for Madison Avenue, an improving economy could hurt ad spending in package goods. Mr. Gingrich said pressure to cut ad spending will rise if a recovery pushes up raw-material costs and interest rates increase. He also feels many companies are disappointed with the results from their ads, further fueling pressure to cut spending going forward.

big spenders

That threat aside, last quarter's bigger spenders, including P&G, Clorox and Kimberly-Clark, have projected continued spending increases in coming quarters behind a variety of new-product launches.

Even last quarter's media-spending laggards project higher spending later this year. Unilever's North American marketing spending and new product initiatives are weighted toward the back half of the year, head of investor relations Howard Green told analysts last month. Among its second-half launches are Axe men's deodorant and body spray, with ads from Bcom3 Group-backed Bartle Bogle Hegarty, New York.

Gillette in the past month has launched ads for Venus Crystal Clear, Mach III Turbo razors and Gillette Series personal-care products from Omnicom Group's BBDO Worldwide and plans new ads for Duracell in the second half.

Colgate launches its Simply White answer to P&G's Crest Whitestrips in September, with ads from WPP's Y&R Advertising, New York, as part of a global effort to launch 23 products this year. Chairman-CEO Reuben Mark told analysts last month the company's new-product activity would be heavier in the back half of 2002.

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