P&G Hikes Media Spending Despite Currency-Driven Sales Plunge

Marketer Cuts Agency Fees, Exits Unprofitable Developing-Market Businesses

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Procter & Gamble Co. missed analyst expectations on the top line last quarter but still increased media spending, thanks in part to lower agency and production fees. P&G's cost cutting and other margin-boosting efforts still produced better-than-anticipated earnings, which, combined with a rosier outlook for the rest of the fiscal year, sent the stock up 3% in early-morning trading.

Jon Moeller
Jon Moeller

P&G's organic sales fell 1% in the quarter, even excluding currency effects and the roughly 100 slower-growing brands the company has shed or is in the process of divesting. Including effects of a stronger dollar on overseas revenue, P&G sales plunged 12% to $16.5 billion.

Despite that, P&G increased "working media" spending both as a share of sales and in absolute terms last quarter, and plans to continue to do so for the full fiscal year ending June 30, said Chief Financial Officer Jon Moeller in a call with media and later with analysts. He didn't quantify how much P&G will increase paid media spending.

"We will not cut smart investments to offset foreign-exchange impacts," Mr. Moeller said on the analyst call. To get margin room for that approach, P&G is leaning in part on the $300 million in cuts to agency fees and production costs made last fiscal year and another $200 million of such cuts planned for this year.

Within that media budget, P&G continues to shift to digital media, which is now around 35% of its "working media" spending, Mr. Moeller said in an interview with CNBC this morning, adding that digital is a higher proportion of the U.S. budget.

P&G has also made the media-spending hike possible through continuing reductions in its own ranks, including marketing, other administrative and manufacturing staff. Lower commodity costs have helped too, as has the decision to exit unprofitable product lines in Mexico and India that were a drag on profits.

Organic sales are already looking better this quarter, up 3% so far in October vs. the same period a year ago, Mr. Moeller said.

But last quarter was rough, as P&G took price hikes to offset currency impact, and volumes declined as a result. Mr. Moeller said P&G is monitoring how competitors and consumers respond before deciding whether to roll any of those overseas price hikes back.

P&G's top line is far worse than results from such rivals as Unilever, RB (Reckitt-Benckiser), Johnson & Johnson and Kimberly-Clark Corp., which all reported organic sales growth in the 3% to 7% range last quarter in comparable businesses.

In the analyst call, Mr. Moeller went through a long list of factors, including that competitors reporting results in euros are facing only about half the developing-market currency impact P&G does, and that P&G has by far the biggest businesses among its competitive set in such markets as China, Russia and the Middle East, which have been beset by slowing growth and declining currency. In China, P&G's second biggest market after the U.S., P&G's organic sales were down 8% last quarter, he said.

"Each of these items are realities, not excuses," he said.

In the U.S., P&G lost about 0.2 percentage points of market share across its whole business, Mr. Moeller said. And later on the analyst call, he said: "We don't like the top-line situation. We don't accept the top-line situation. We will fix the top-line situation. But we need to do that in ways that are certain and sustainable." That won't include a step up in price promotion, he said.

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