Unilever Cuts Agency, Production Spending Even as Ad Costs Rise

'Non-Productive' Fees Targeted in Quest to Get Leaner Faster

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Unilever boosted marketing spending a modest 2% last year to $8.2 billion -- but it looks like the agencies or production companies didn't fare nearly as well as the packaged-goods giant cut spending on them.

Speaking at Unilever's year-end investor presentation in London on Tuesday, Chief Financial Officer Jean-Marc Huet said, "We significantly reduced our non-productive spend during the year. As you know, that 's the money we spend on production costs and agency fees, money that 's not directly driving the exposure of our brands to the community and consumers."

As another example of Unilever making ad spending stretch farther, Mr. Huet pointed to digital spending rising 15%, much faster than the overall rate. Both numbers were on a constant-currency basis stripping out effects of a weakening euro.

Despite the absolute increase, Unilever's advertising and promotion spending as a share of sales fell 0.7 points to 13.3% for the year, helping offset rising commodity costs. A bigger offset came from a 1-point decline in overhead as Unilever reduced staff in a global reorganization, though the company's profit margin still declined 0.1 points to 14.9% for the year.

Overall, Unilever has hiked annual marketing spending more than $1 billion compared to three years ago, when CEO Paul Polman took charge, and plans to increase it more in 2012, Mr. Huet said. But he said last year's increase came mostly due to acquisition of additional brands, such as Alberto-Culver's Tresemme. At least some of the 2012 increase will come from spending on those brands too, including rollout of Alberto-Culver's Simple, the leading U.K. facial skincare brand, into the U.S. and Canada.

Unilever is the second giant packaged-goods company in a week to discuss ways it's saving money on advertising, after Procter & Gamble Co.Chairman-CEO Bob McDonald on Jan. 27 noted that shifting funds to digital will help moderate advertising costs over time.

Both companies face rising pressure on margins due to higher commodity costs, though both expect those pressures to ease this year.

Unilever posted organic sales growth, excluding the effects of currency and acquisitions, of 6.5% for the fourth quarters, better than most peers, such as P&G's 4%, but behind average analyst expectations of 6.8%, according to Bloomberg. Net income for 2011 was nearly flat at $5.6 billion on sales of $61 billion, also up 6.5% organically. But net income was about $100 million short of analyst expectations, sending Unilever shares down 2.7% in midday trading in London.

Unilever achieved some of its savings in "non-productive" costs following a production roster review and consolidation.

"Currently we work with hundreds and hundreds of production companies," said Jorgen Bartsch, VP-marketing services for Unilever, told Advertising Age when the review was launched in March. "That's far too much. We need to bring them down to a manageable number."

But he said the goal "is first and foremost about quality and consistency globally. From that , no doubt we would hope to get efficiencies, but that 's not the primary result."

In another sign of pressure on agency fees at Unilever, the company last month launched its second global media review in two years, this time encompassing communications planning in addition to media buying, the focus of the prior review.

While Unilever is looking to cut costs, it's also speeding product launches globally. Case in point is rollout of Simple facial skincare in the U.S. and Canada less than nine months after acquiring the brand in the Alberto-Culver deal. In the earnings presentation, Mr. Polman called the rollout "a great example of speed that is becoming the new currency in Unilever."

Incumbent Alberto agencies are keeping or expanding their roles in the process. Havas' Arnold , New York, which also handles former Alberto brand St. Ives, will do digital and print work on Simple, while Audacity, London, the incumbent on Simple under Alberto, is handling TV for the North American launch, a Unilever spokeswoman said.

Simple, aimed at women with more sensitive skin, has no fragrance and focuses more on cleansing than anti-aging, with mid- to high-end prices for mass products at $8 to $11. It joins a crowded skincare lineup in the U.S. that includes Unilever's own Dove, Vaseline, Ponds and St. Ives. Retailers that have picked up Simple so far include Target , Kroger, Amazon and Walmart Stores.com.

Lack of fragrance makes Simple a niche product and tough sell to most consumers, said U.K.-based personal-care consultant Colin Hession.

Unilever has struggled the past decade to find its footing in facial skincare in the U.S. as P&G kept rolling new ranges of Olay and L'Oreal expanded Garnier there. But lately Olay has lost share in the U.S., which P&G's Mr. McDonald last week blamed on more competition at the value end of the category.

Prestige skincare, however, has done even better, leading all other categories in an 11% surge in prestige beauty sales last year, according to NPD Group.

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