Counterintuitive Strategy: Fortune finds it pays to spend in bad times

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It's a common reaction in the business community: When the economy goes south, one of the first things to get cut is advertising spending.

Fortune Brands apparently didn't get the memo.

When the economy dropped and the ad community suffered its worst year in decades, the Lincolnshire, Ill., manufacturing holding company went the other way. Fortune Brands increased its advertising spending, maintaining position for its brands at a time when others retrenched.

"Part of what you've seen is, we're reaping the benefits to take costs out of our businesses in good economic times, which has allowed us to sustain and build our ad spends," said Fortune Brands Chairman-CEO Norman H. Wesley. "The core of that is really investing in our brands to drive internal growth. Our ad spends are up double digits over the past three years."

Fortune Brands, which grew out of the old American Tobacco Co., includes such diverse products as Moen faucets, Master Lock padlocks, Titleist golf equipment, Jim Beam bourbon and Day-Timer personal organizers, among many others. In 1999, Fortune Brands spent just over $59 million on measured U.S. advertising, according to Taylor Nelson Sofres' CMR. That increased to $70.1 million in both 2000 and 2001. If spending from the first three months of this year stay consistent, Fortune Brands is projected to spend $87.8 million in 2002. Cramer Krasselt, Chicago handles Moen; WPP Group's Y&R Advertising, Chicago handles Jim Beam; and Havas' Arnold Worldwide, Boston handles Titleist.

"The company has been very focused on generating profit growth of its brands," said Ann Gurkin, analyst for Davenport & Co., Richmond, Va. "They have certainly been focused on advertising and adding brands or products that are leaders in their categories, particularly on the cabinet side. They've been focused on new-product introductions to keep things in front of the consumer."

record results

While revenue of Fortune products was flat for 2001 ($5.68 billion, down slightly from $5.75 billion in 2000), the company reported record profits on flat sales for the first quarter of 2002. Diluted earnings per share grew to 55 cents, up 41% from 39 cents in the first quarter a year ago. And net income in 2001 was $386 million, a significant boost over its 2000 performance when it lost $137.7 million. Fortune's 2001 global ad spending was down slightly from 2000. The company said that was, in part, due to other expenses such as trade shows, product endorsements, and discontinued product lines, and not a reflection of increases in U.S. media outlays.

After hitting a nadir in July of 2000, when the stock closed below $20, Fortune Brands has soared. The price rose as high as $57.86 last month before closing at $56 on June 28.

The roller coaster on the stock market coincided with a restructuring program targeted to save $80 million over two years-half of which, Mr. Wesley said, was invested back into the company's brands, including advertising.

"When the economy gets sluggish, people look for ways to cut every discretionary-spend item," Mr. Wesley said. "We cut everything discretionary we could with the exception of ad spending, because for our long-term growth, that's critical."

The big winners in the Fortune family were Titleist, which leads the world in sales of golf balls; Jim Beam, the best-selling bourbon in the U.S.; Moen, which sells the most kitchen and bathroom faucets; and Fortune's cabinet-making companies (Aristokraft, Schrock and newly acquired Omega), which are No. 2 behind Masco Corp.

nesting helps

Selective price increases in the spirits industry, as well as the post 9/11 "nesting" syndrome that boosted home and hardware sales, also helped. Alcohol and home and hardware products account for a combined 61% of Fortune's total sales.

If first quarter spending of 2002 remains consistent, Titleist and Jim Beam will end up increasing this year's ad spending by 56% and 24%, respectively.

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