In a testament to how important advertising has become to their businesses, Procter & Gamble Co., Colgate-Palmolive Co., Kraft Foods and Kellogg Co. all have boosted or at least maintained their marketing budgets, even as they've had to implement cost controls elsewhere. And that trend looks set to continue as these giants are forced to hike prices in response to rising commodities costs -- a move that will require them to continue pitching consumers on the merits of their brands.
So far, however, the marketers are seeing differing returns on their budgetary fortitude, with household and personal-care companies' results outstripping that of their counterparts in the food business.
Beating private labels
P&G and Colgate last week reported stronger-than-expected organic sales growth, at least in the U.S., along with strong earnings growth. Both said private-label market shares were flat to down in their categories despite what P&G Chief Financial Officer Clayton Daley said was an overall slowing of sales growth in its categories by about one percentage point last quarter in North America vs. the third quarter.
On the other hand, Kraft Foods and Kellogg Co. -- also trying to hold down costs as they boost marketing spending -- both reported declining net earnings growth last quarter despite strong revenue growth driven largely by price increases.
Still, they, too, were bullish about advertising. Kellogg CEO David MacKay said the company increased ad spending to $1.1 billion, or about 9% of sales for the year.
Kraft Chairman-CEO Irene Rosenfeld vowed to increase marketing spending to between 8% and 9% of total sales by 2009. She noted that while some products -- cheese singles and Maxwell House coffee -- have benefited from increased advertising, marketing spending probably still wasn't high enough across the board. She added that insufficient brand equity for its cheese products has prevented the company from increasing its prices in line with increases in commodity costs.
Future of cheese
"Our pricing realization was not as strong as we would like it to be, because we don't yet have suitable brand equity," Ms. Rosenfeld told analysts last week. "But the key to our future in cheese as it is in so many of our businesses is continuing to ensure that we have invested appropriately in quality, in marketing support and in innovation."
Kimberly-Clark Corp. and Energizer Holdings also stuck to plans to boost ad spending. In both cases they achieved stronger-than-expected organic sales. Even so, their operating earnings disappointed analysts -- they could have hit the relevant financial targets by trimming marketing spending, but stuck with plans to raise it instead.
Energizer's quarterly earnings per share, for example, came in 11¢ below Wall Street consensus expectations, but would have been 18¢ higher had the company's ad spending simply grown in line with sales rather than faster, noted Deutsche Bank analyst William Schmitz.
Mr. Schmitz also noted that P&G's overhead costs grew at only half the rate of sales last quarter, this despite indications that the company has actually boosted U.S. media spending of late. P&G's measured-media spending was up 15.7% in the first two months of last quarter from a year ago to $708.8 million, according to TNS Media Intelligence, and up 7% for its full fiscal year started July 1 to $1.6 billion. That comes after two years of essentially flat spending, with a 3.9% increase in calendar 2006 following a 3.5% decline in 2005.
The spending hike appears to have helped P&G pull out a surprising 6% sales increase in the U.S. last quarter, more than double the 2%-3% growth in retail sales it tracked in its categories and ahead of its 5% organic sales growth globally.
While a spokeswoman said P&G's long-term goal is to increase ad spending at the same rate as sales growth, it's clearly growing ahead of sales in the U.S. of late. And one reason may be that P&G wants to give consumers cause to accept a spate of price increases covering about half of its brands.
Mr. Lafley wants to coordinate its price increases with innovation and marketing initiatives, he said, because "the value stays right for the consumer when we do that. ... It's very difficult to take what we call a naked price increase [without a simultaneous new-product initiative]."