Big Hike in Ad Spending Helps P&G Beat Expectations, but Agency Cuts Continue

World's Biggest Advertiser Expects Ad Spending to Rise Ahead of Sales Next Year

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A big increase in ad spending last quarter helped Procter & Gamble Co. beat analyst expectations for sales growth, though it left absolute spending roughly flat for the year and was fueled in part by cuts in agency and production fees.

P&G Chairman-CEO David Taylor
P&G Chairman-CEO David Taylor Credit: Duke University, YouTube

The world's biggest ad spender expects to grow ad spending ahead of sales again for the just-begun fiscal year, and keep cutting agency-related costs, executives said Tuesday.

Overall, P&G hiked reported ad spending, which covers mainly media and sampling costs, by 2.8 percentage points as a share of sales, or around $450 million in the fourth quarter. That accounted for most of what Chief Financial Officer Jon Moeller said on a conference call with media was an increase of one percentage point in ad spending as a share of net sales for the full year ended June 30. But that was only enough to keep P&G spending in absolute terms roughly flat amid a currency-driven 8% decline in absolute sales to $65.3 billion.

P&G reported $8.2 billion in ad spending for its prior fiscal year (2015), but that was based on a business around $5 billion bigger, including beauty brands the company is preparing to spin off to Coty this fall, and which the company doesn't include in current financial reporting. Absolute ad spending numbers for P&G's continuing operations won't be available until the company issues its annual report later this month, but will likely be in the $7 billion to $7.5 billion range.

But the spending isn't reason for agencies and production companies to chear. Increases in media and sampling spending are being funded partially by cuts to "agency-related" costs. Mr. Moeller said on a call with analysts that the company cut such costs by $250 million last fiscal year, including $60 million last quarter, on top of $370 million the prior year. That's brought overall agency-related costs down from $2 billion to around $1.4 billion, he said. But he added there's "still room to improve."

P&G expects to hike ad spending "by mid single digits" in percentage terms for the fiscal year begun July 1, Mr. Moeller said, ahead of expected absolute sales growth of 1%.

The focus of that spending will be what Chairman-CEO David Taylor said on the investor call would be "point of market-entry" or sampling programs, increased media reach and frequency and mobile advertising that he termed a "mobile back" approach (in which the company starts planning with mobile and works back from there).

Deprivation tests
Mr. Taylor, who's beginning his first full fiscal year as CEO and recently took over as chairman from A.G. Lafley, said P&G is also focused on stepping up quality and impact of product launches. That has included going back over plans in the pipeline to make improvements and trying to create products that can grow categories, not just take share. He said part of that effort includes "deprivation tests" in which consumers get products to use at home, then have them taken away to see how much it really matters to them.

He projected the quarterly spending hike in a February speech to the Consumer Analyst Group of New York conference in Florida, and contrasted it to many prior years when P&G cut fiscal fourth quarter ad spending to make profit numbers. P&G's fourth-quarter core earnings per share fell 15% to 79 cents, but that still beat analyst expectations, and its stock rose 0.7% in morning trading amid a broader market selloff.

Net earnings for the quarter more than tripled to nearly $2 billion, but the gains were all driven by comparison to charges related to deconsolidating the troubled Venezeuelan market from company results a year ago.

Fueled by last quarter's ad spending increase, P&G organic sales growth (excluding currency and divestiture effects) of 2% beat analyst expectations of 1% to 1.5%, and was actually rounded down from 2.25%. But Mr. Taylor said he wasn't satisfied with that, which was still below 3% growth globally in P&G's categories.

P&G's overall organic sales growth accelerated in the back half of the fiscal year from flat in the first half. But even next year's projection of 2% organic sales growth still implies growing slower than the competition, and Mr. Taylor said P&G remains committed to "growing slightly ahead of the underlying growth of the markets where we compete."

In North America, while P&G's 3% unit volume growth was ahead of the market, its 2% sales growth was behind the market, due in part to price cuts on Luvs diapers to match an unnamed competitor, the company's executives said. But Mr. Moeller said that doesn't signal a broader promotional or price push, saying P&G prefers to invest in advertising and product improvements.

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