P&G: We Won't Slash Spending to Make Our Margins

But Highlights Cases Where Marketing Cuts Helped Brands

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CINCINNATI (AdAge.com) -- Procter & Gamble Co. won't rely on cuts in marketing spending to reach its aggressive margin-expansion targets over the balance
There's no corporate mandate to cut ad spending as a percent of sales, Chairman-CEO A.G. Lafley has emphasized.
There's no corporate mandate to cut ad spending as a percent of sales, Chairman-CEO A.G. Lafley has emphasized.
of the decade, despite having cut reported ad spending as a share of sales the past two fiscal years, executives told a meeting of analysts today.

Fabric care cuts
At the same time, however, the company went to lengths to point out that restraining ad spending doesn't necessarily have to hurt brands. Case in point, according to Chief Financial Officer Clayton Daley: P&G's North American fabric-care business, which cut ad spending as a share of sales by 2% over the five fiscal years ended June 30 but increased sales $900 million, boosting market share 3.5 points and building scores for brand equity on flagship Tide to record levels.

Through cost cutting, sales growth and shifts to more profitable businesses (like beauty care and higher-value products), P&G hopes to increase its operating margin from 19.4% last year to around 24% in 2010. But Mr. Daley said, "Our sustained-growth model doesn't actually count on P&G reducing marketing as a percent of sales. As such, we will look to reinvest [marketing-efficiency savings] back in the business."

Nonetheless, P&G has cut global ad spending as a share of sales for the past two years -- to 9.9% from 10.7% in fiscal 2004 -- following three years of growth in the metric.

Boosted ROI
In a taped segment, Global Marketing Officer Jim Stengel noted that ad spending isn't determined centrally but by individual businesses and brands. He added that the increased use of the marketing-mix modeling he first discussed three years ago is now delivering increased marketing return on investment and that the company's brand equity measurement is up.

"There has been no corporate mandate to cut ad spending as a percent of sales," Mr. Stengel said, "only to spend all marketing money more efficiently." He reiterated prior statements by Chairman-CEO A.G. Lafley that ad spending as a share of sales is "just not the right measurement."

He said P&G has had significant launches where TV was not the leading element in the marketing mix, citing a recent Always upgrade that relied entirely on "targeted print media" and Prilosec, "which has done the same with interactive approaches."

That said, TNS Media Intelligence data show Always still spent the bulk of its overall measured media on TV last year, and 51% of its dollars on TV in the third quarter of 2006. Prilosec spent $3.6 million on internet ads compared to $21.6 million on TV and about $50 million overall through the third quarter, according to TNS.

Emphasis on interactive
Susan Arnold, vice chairman-global health and beauty, said several elements of the marketing mix, including interactive and influencer marketing -- which she defined broadly to include word-of-mouth marketing among friends and family -- have been shown to have higher ROI than TV. She defined interactive broadly to include any marketing that uses technology to foster two-way communication with consumers, including such unmeasured media as mobile and e-mail marketing. And she lauded the "Always Changing" in-school education program for the feminine-care brand that she said reached 90% of fifth-grade girls in the U.S.

Mr. Lafley conceded that the North American fabric-care case, which combined big share gains with smaller relative ad outlays, was special in that it came as P&G's chief rival, Unilever, pulled back on marketing in the U.S. following its failed launch of laundry tablets in 2000. "Most of the competition doesn't find the category that attractive," he said.

P&G's new trade-marketing program, which takes effect in January and is based heavily on Gillette's pay-for-performance model, could boost P&G sales substantially, said Bob McDonald, vice chairman-global operations.

Looking for drug-store increase
He said just the potential to get more P&G products, such as Tide to Go stain-remover pens or Prilosec antacids, at multiple display points in the front end of the store could boost sales by $100 million annually. The much bigger goal of using Gillette's better performance in drug stores to close P&G's market-share gap there (compared to what it has in mass outlets such as Wal-Mart Stores) could eventually boost P&G sales by $2 billion annually, he said.

Chip Bergh, the former P&G executive who took over as president-blades and razors, said sales of the closely launched Fusion men's system are accelerating. He said Fusion has logged $325 million in total sales to date, mainly in North America, and topping a 25% share in replacement blades in November, up more than five points since August, indicating strong repeat sales.

"There's no question that Fusion will be a billion-dollar brand," Mr. Bergh said.
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