P&G Hikes Ad Spending to Record Levels

CEO McDonald Sees No Signs Yet That Consumers Are Resisting Price Hikes

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As Wall Street panics, Madison Avenue -- at least that part funded by Procter & Gamble Co. -- need not begin just yet.

P&G hiked its world-leading global ad spending 8%, or more than $700 million to $9.3 billion, for the fiscal year ended June 30, setting all-time records both in absolute terms and as a share of sales for the company despite a weak economy and rising commodity costs.

In a telephone press conference prior to P&G's earnings release, Chairman-CEO Bob McDonald noted that ad spending as a share of sales reached 11.3%, a level not reached even in some of the company's strongest growth years in the middle of last decade.

This year wasn't up to those growth standards for P&G, but the company did beat Wall Street expectations for top-line sales and earnings per share last quarter, with organic sales growth up 5% for the quarter and 4% for the year, and market-share gained or maintained across about 60% of its business. About one point of P&G's organic sales growth last quarter, however, came from retailers increasing shipments of product ahead of price hikes coming this quarter, which will depress sales by an equal amount this quarter.

Chief Financial Officer Jon Moeller said P&G plans to increase ad spending in line with sales this year. Last year's 8% increase came on a 5% increase in global sales to $82.6 billion. P&G is expecting sales next year to increase 5% to 9% -- boosted substantially by commodity-fueled price increases and growth in developing markets as weak economies in the U.S. and Western Europe continue to keep market growth there in low single digits at best.

Mr. McDonald said he sees no signs yet that consumers are strongly rejecting price increases, though many of the increases don't take effect until this quarter and next.

"Consumers are continuing to buy our products, particularly when we have innovation in market, and we have a very strong innovation program right now," Mr. McDonald said. "I think ... the concern for us is whether our competitors follow our price increases, because if we maintain the current pricing relationship we have with competition we know from our research that we have a winning value equation. ... So far we're seeing competition follow."

Mr. McDonald did blame relatively sluggish sales in male grooming in part on heavy discounting, particularly razor handles, led by competition and said P&G may ultimately react in kind.

"We believe innovation wins decades and promotion affects quarters, and so we allow a little monkey business to go on," he said. "But if it goes on too long, then we react."

"We're not economists," Mr. McDonald said. "We're going to do what we do. We're going to continue to innovate. We're going to continue to cut costs. We're going to continue to be more productive."

P&G's results are in line with what have generally been strong performance by competitors in reports last quarter, with such rivals as Clorox Co. and Unilever beating expectations on the top line, the latter with organic sales up 7%, fueled heavily by price increases. But Unilever's earnings and advertising and promotion spending also came in below expectations last quarter, though Unilever noted that first-half ad spending of $4.3 billion was still up on absolute terms over last year.

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