Package-Goods Cos. Take Hit on Wall St. for Raising Outlays

With Sales Down, Marketers Test the Limits

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NEW YORK ( -- Package-goods marketers have been promising for more than a year to boost marketing to reinvigorate growth, and they've largely been delivering on the marketing spending, as second-quarter earnings reports show.

The problem is, sales results from their spending spree are underwhelming investors, and marketers are being punished for following through on spending that cuts into (or threatens to cut into) margins. In fact, one company that spent less than expected on advertising last quarter -- Energizer Holdings -- got among the warmest receptions from Wall Street, even though its organic sales results were down 1%, better than investors expected.

The fundamental problem is that marketer spending isn't broadly rekindling consumer spending, said Consumer Edge Research analyst Bill Pecoriello, whose monthly tracking survey of 2,500 U.S. consumers shows growing unwillingness to trade up for top performance. With unemployment staying high, economic growth slowing and commodity costs rising, the risk is that the whole industry will have to spend more to carve up a stagnant, less profitable market, he said.

All this doesn't provide much incentive to stick with ad-spending plans. But big marketers like Procter & Gamble Co. and Unilever are vowing to at least hold the line on spending through the balance of this year. Others, such as Colgate-Palmolive Co. and Church & Dwight, have shifted funds into trade promotion to counter what they say is heightened spending there, too.

P&G boosted ad spending $1 billion for the year ended June 30 and $750 million for the final quarter, delivering 4% organic sales growth and 8% volume growth. But the market lopped more than 4% off its stock price -- or more than $7 billion in market capitalization -- through the balance of the week. Unilever last week said it had boosted ad spending $500 million during the first half of the year and $200 million last quarter to produce a similar 4% increase in organic sales and 6% volume increase -- and the market took its shares down and even sharper 7%.

It's a similar story among pure food players such as Kellogg Co., which increased ad spending but still saw sales fall 5%, largely because of tougher promotional competition from the likes of Ralston, which has aggressively promoted the Post cereal business.

For P&G, the trouble was that it missed consensus earnings estimates and shaved two points off its operating margin last quarter, despite -- or in part because of -- the more aggressive spending. For Unilever, which doesn't provide guidance, the trouble was a hint that it will sacrifice margins to maintain competitiveness through the rest of the year.

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