P&G Says It Won't Cut Ad Budget, Despite Rising Costs

Fiscal-Year Tally Puts Global Spending at $8.7 Billion

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WEAVERVILLE, N.C. (AdAge.com) -- Procter & Gamble Co. will have to keep tightening its belt to deal with rising commodity costs, but the media budget won't be cut, company executives said today.
Clayton Daley
Clayton Daley Credit: P&G

P&G maintained ad spending as a percent of sales for its fiscal year ended June 30 and plans to do so again this year, despite an accelerating restructuring focused on its marketing organizations and organic sales growth weaker than that of global competitors.

Fourth-quarter mystery
P&G spent 10.4% of sales on advertising last year, as it had the year before, said Chief Financial Officer Clayton Daley on the company's quarterly earnings conference call today, though he declined to discuss happened with spending in the fourth quarter. TNS Media Intelligence data showed P&G sharply cut U.S. media spending last quarter.

Helped by a weakening dollar and strong growth in developing markets, P&G should come in with $8.7 billion in global ad spending for the just-concluded fiscal year, up 9% from $7.9 billion last year.

Lower overhead costs last quarter, combined with a sharply lower tax rate, helped P&G beat Wall Street earnings-per-share estimates by 2 cents, up 37% to 92 cents. Organic sales, excluding the impact of currency exchange rates, acquisitions and divestitures, rose 5% for the quarter to $21.3 billion. The results sent P&G shares up 2.4% to $67.38 in midday trading.

P&G's organic sales growth was below the pace of most major global competitors that have reported so far, including L'Oreal, Unilever, Kimberly-Clark Corp., Reckitt Benckiser and Colgate-Palmolive Co. But P&G's results also beat investor expectations, unlike those of L'Oreal, Unilever and K-C.

Lean years
Amid a cost environment tougher than most P&G managers have seen in their careers, Chairman-CEO A.G. Lafley said P&G will accelerate an already stepped-up restructuring program beyond what he set out in February at the Consumer Analyst Group of New York investor conference. The plan already called for reducing the number of P&G executives at the general-manager rank or above, to around 300 from around 360.

P&G will have to further cut costs in addition to raising prices to offset an expected $3 billion increase in commodity costs in fiscal 2009, double the $1.5 billion increase last year, Mr. Daley said. Even if it fully recovered those cost increases with price hikes, that would still lower P&G's gross and operating margins this year.

In the past three months, P&G already has announced a new round of price increases in almost every portion of its business, Mr. Daley said, but "pricing beyond commodity and energy cost increases to maintain operating margin would be very risky given the pressure that our consumers are under." As a result, Mr. Daley said, P&G is "challenging every part of our cost structure."

Mr. Lafley spoke proudly of his efforts to cut capital expenditures from around 7.8% of sales to 3.6% of sales and research-and-development expenses from 4.8% to about 3.3% of sales on his eight-year watch. But the more than 10% of sales P&G spends on advertising appears to be off limits for a similar squeeze.

Mr. Daley said P&G "will continue to improve our return on marketing spending while we increase our marketing investments at roughly the same rate as sales growth."

Spending carefully
Mr. Lafley said P&G's mix will continue to change, with "less TV, though in developing markets TV is still very powerful." And he said P&G would continue to use marketing-mix modeling to attempt to deliver the "bang" equivalent to spending 11% to 12% of sales on advertising while only spending around 10%.

The shift from Jim Stengel to Marc Pritchard as global marketing officer wouldn't change P&G's approach, Mr. Lafley said, adding that "some of the productivity things that Jim started in marketing, Marc will continue."

"The productivity things relate to people, not to advertising spending," Mr. Daley said. "We still have a lot of productivity opportunity where our organization structures connect," Mr. Lafley said. "There is duplication and opportunities to be more efficient," he said, particularly where the global business units, which handle most brand marketing efforts, connect with the regional market development organizations that handle media planning and buying, multibrand marketing programs and sales.

The company now projects volume to increase only 2%-3% globally this year, down from 4% last year, with price hikes adding 4% to 5% to top-line growth while a shift to lower-priced goods, caused primarily from P&G's business shifting to developing markets, should trim two percentage points off the company's top line this year. The company is counting on tighter overhead spending to keep earnings-per-share growth continuing at 10%.

Consumers trade down
Among signs of consumer "trade down" P&G is seeing in the U.S. has been slowing growth of Tide laundry detergent and faster growth of more moderately priced Gain. One sign of that: As Tide cut media spending last quarter, according to TNS data, Gain increased it.

Despite tougher times in the U.S., private-label shares grew only about half a percentage point last quarter across P&G's categories, Mr. Daley said, not counting Prilosec OTC, which the company said saw sales fall by double digits as it lost patent protection and private-label competition began.
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