Digital Likely to Gain as P&G Focuses on ROI, Tempers Marketing Spend
Procter & Gamble Co. will hike ad spending next year, but not as fast as the 1% to 2% sales growth it expects globally. This part of its plan to step up focus on effectiveness in part by holding all brands to minimum standards for marketing return on investment. All of which is likely to be good news for the digital space.
The company beat expectations for top-line growth and earnings last quarter. But in the first quarterly earnings report since A.G. Lafley returned as Chairman-CEO, P&G is also tempering forecasts for market-share growth.
While P&G is ahead of targets for cost savings and headcount reduction under its restructuring plan, it's planning to take more savings to the bottom line this year and less to marketing spending as it steps up efforts to restrain costs there.
"We are holding all of the businesses to a minimum ROI," Mr. Lafley said on the company's earnings conference call. "We're pounding away on best media," he said, in part by focusing more on digital spending. He said the share of P&G marketing spending on digital in the U.S. is "up to 35%," ranging down to 25% on some brands.
"We have some businesses and brands where digital is incredibly effective and we're doing more," he said. "We have other brands that are on the learning curve. We've got to get up the learning curve faster."
Chief Financial Officer Jon Moeller said he expects advertising spending to lag sales growth by about 0.2 percentage points this year. The company declined to disclose reported advertising spending for the just-concluded fiscal year prior to release of its 10-K later this month, but spent $9.3 billion globally the prior year, and that's expected to have grown at least 1% in line with sales, which rose to $84.2 billion.
Restraining ad spending below sales growth "does not mean less reach, less frequency," Mr. Moeller said. "It means more effective advertising, the right mix of media, and, importantly, reducing non-advertising costs that the consumers never see."
Overall, P&G organic sales growth of 4% in the fiscal fourth quarter beat analyst expectations of closer to 3%, and core earnings per share (excluding restructuring costs) of 79 cents, while down from 82 cents a year ago, beat the company's forecast by 2 cents.
But P&G is tempering expectations, calling for organic sales growth, excluding effects of acquisitions, divestitures and currency, of 3%-4%, about in line with the 3.5% growth it projects in its markets, and below prior targets of a point or two ahead of market growth under Chairman-CEO Bob McDonald, who stepped down in May. P&G had moved away from growth-above-markets target last year as Mr. McDonald worked on a turnaround plan, but P&G's forecast today indicated it doesn't see a return to aggressive share growth in the near future.
"We continue to believe that the right organic sales growth target is one that is modestly above the rate of market growth," Mr. Moeller said.
P&G's global market share of around 20% in March through May was "about in line" with a year ago, Mr. Moeller said, while it held or grew share in 70% of its U.S. business, the best performance in several quarters.
While P&G beat expectations for the quarters, Mr. Lafley tempered Mr. McDonald's prior projections of a major step-up in innovation this year.
"It takes time to work out of a tough patch," he said, adding later: "I think it's going to take a couple of years before we get everything in place where we're performing to our best potential." He called this "a transition year," following a "stepping-stone year" last year.
After participating along with the management team in two-month a "deep dive" into P&G's issues, Mr. Lafley said the company will step up focus on such things as innovation, productivity and execution. P&G will focus on its core businesses, including the U.S., but isn't retreating from any countries entered under Mr. McDonald.