P&G Will Cut $2 Billion in Marketing but Spend Some Back to Become 'Irresistible'

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Credit: Courtesy Procter & Gamble/Business Wire

Procter & Gamble Co. wants to cut a whopping $2 billion in marketing spending over five years, and for the first time is providing details on a broader $10 billion cost-cutting plan launched a year ago.

That marketing spending cut comes amid a fiscal third-quarter earnings report where the company missed on sales-growth expectations and lost market-share in developing markets despite hiking ad spending.

While the cost cuts were the biggest takeaway, P&G also outlined how it plans to become "irresistibly superior" in the eyes of consumers.

First, those massive cuts: They include $1 billion or more in media and around $500 million in agency fees, which comes on top of $600 million of cuts in prior years that reduced P&G's spending there to around $1.4 billion annually. A spokeswoman said this doesn't necessarily mean P&G's spending on creative costs will fall under $1 billion a year, given growth that may otherwise occur.

Jon Moeller
Jon Moeller Credit: Procter & Gamble Co.

P&G also outlined $12 billion to $13 billion in overall savings that are "risk adjusted" down to $10 billion in case some aren't realized. And some savings in other areas – including $7 billion in material, packaging, production and transportations costs -- will likely be reinvested in marketing. So there are many moving parts.

"We see over $2 billion in savings opportunities in marketing spending, with half or more coming from media rates or eliminating supply-chain waste," said P&G Chief Financial Officer Jon Moeller on the company's earnings call Wednesday. "We're targeting up to half a billion more from reducing agency fees and ad-production costs. And we see about half a billion in sales from in-store materials, direct-to-consumer programs, and improved efficiencies in trial and sampling programs."

As with agency fees, the company isn't projecting exactly what media spending will be five years out – just that it can squeeze $1 billion or more out of the system. That will come at least partly through the tougher stand Chief Brand Officer Marc Pritchard outlined in January on reforming the digital media supply chain.

The cuts come with P&G in the midst of a comprehensive review of agency contracts and compensation, including reducing duplication of staffing and services on the client and agency sides.

Despite those longer-term cuts, P&G hiked reported advertising spending last quarter – which includes media and outside agency fees -- to $1.8 billion from $1.7 billion a year ago, Moeller said on a call with media this morning. All-in marketing spending, which includes some costs of in-store activities and consumer promotion, held steady at $2.6 billion, he said. So that $2 billion in savings comes out of a pot likely of around $10 billion for the fiscal year ended June 30.

Second, activist investor Nelson Peltz, as expected wasn't mentioned, yet still loomed large. Adding missing details from P&G's cost-cutting strategy may helped blunt whatever Peltz will describe in an anticipated white paper.

But P&G didn't help its case by missing on the revenue line, with organic sales growth up 1% vs. the 1.8% expected by analysts. Moeller outlined a litany of issues holding down market growth – including late tax refunds in the U.S., retailers paring inventories and competitive promotion in advance of the 12% cut in razor and blade prices that took effect this month.

P&G's grooming business, including razors, was largely responsible for the miss, with sales down 6% organically. But there may be less to this miss than meets the eye. The price cut was announced in February but didn't take effect until April, likely leading some retailers to cut razor orders last quarter to take delivery instead this quarter. That could actually spring-load P&G's sales numbers for this all-important business in the fiscal fourth quarter during the key Father's Day period for razors.

Third, P&G has what sounds like a new brand name for P&G branding: Irresistible Superiority. It begs for P&G-style acroynym IS. And Moeller gave considerable detail on what the meaning of IS is.

"This is what will be required in a slow-growth environment in order to grow markets and market share," he said. "When a consumer has an Irresistibly Superior experience with our products and packages, it raises their expectations for performance in the category. It makes it hard for them to go back to what they were using before."

Marc Pritchard
Marc Pritchard

Here's how it's measured: Instead of tracking "weighted purchase intent" scores in surveys, P&G is now weighing a "a body of evidence" that "integrates technical tests, blind tests, [tracking call and online contacts], household panel tests, and in-market product reviews," Moeller said. "It adds behavioral data, which is more reliable than attitudinal data, which is what we've historically used."

IS similarly changes how P&G evaluates ads. Irresistibly Superior advertising "makes you think, talk, laugh, cry and smile, act and of course buy," Moeller said, "and is a voice for good by expressing views on points that matter, and where the brand matters." He described it as "advertising that clears the bar for creative brilliance, sparking conversations, affecting attitudes, changing behavior and sometimes even defining popular culture."

Measuring this will go way beyond conventional copy testing to a similar "body of evidence." Ads deemed "effective" must raise awareness, increase household penetration and share growth for at least one year and be judged so by a "panel of experts," which Pritchard last month said include P&G executives not affiliated with the brands being evaluated. Always, Tide, Dawn and SK-II are brands currently with ads deemed effective, Moeller said. Only 30% of P&G efforts currently are deemed Irresistibly Superior, so there's work to do.

Fourth, planned cost cuts or no, that requires increased investments in product formulations, packaging, advertising, sales support, sampling, R&D and pricing, Moeller said. Those investments will come from in part from cost savings.

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