Wall Street advice: Ad, don't subtract

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Consumer-products companies that in better times fattened profits by trimming marketing budgets have taken a surprising turn of late: They're spending more-or at least recasting books to play up marketing-while most of the world cuts back.

More surprising is the reason. Wall Street is paying increasing attention to how companies support brands, particularly in the package-goods industry. Whether the attention will last and whether it will stop long-term ad spending declines is debatable.

Package goods' share of U.S. measured media spending fell to less than 20% last year from 45% in the mid-1980s, according to figures from Taylor Nelson Sofres' CMR.

Long criticized for creating the earnings pressure that encourages budget cuts, Wall Street is now asking companies pointed questions about marketing spending as a "quality of earnings" issue.

"The attention given on conference calls today and the number of questions from analysts vs. a year ago [about marketing support] clearly has increased," said Jim Gingrich, household and personal-care products analyst at Alliance Capital Corp.'s Sanford C. Bernstein unit. "It's clearly going to be an issue for a while."

Mr. Gingrich believes attention to marketing spending is stronger in package goods than in other categories both because of the long-term slide in ad support and the pricing weakness this year for many brands.

But Janice Meyer, restaurant analyst at Credit Suisse First Boston, also has seen increased attention to ad spending as analysts try to determine whether restaurateurs will take lower media rates to the bottom line or use them to gain market share by putting more ads on the air. She recently praised a shift by Wendy's International from spot to network TV aimed at boosting the chain's exposure.

Still, Ms. Meyer noted ad spending is less of an earnings issue for restaurants since ad budgets tend to be in the range of 3% to 4% of sales. That compares to 5% to 10% among many package-goods players, which is higher than in most industries.

An April report by Mr. Gingrich helped raise the issue's profile: He argued that package-goods brand strength and pricing power were eroding as advertising fell and price promotion increased.

Since then, Procter & Gamble Co. President-CEO A.G. Lafley and Colgate-Palmolive Co. Chairman-CEO Reuben Mark each have devoted substantial portions of analysts' conference calls to defending the strength of their marketing support, which they said isn't reflected by media spending alone. And both companies have begun adding more non-traditional-media dollars to the ad spending they discuss with the Street.

For example, P&G last month boosted its reported fiscal 2001 global ad spending by a whopping $419 million to $3.6 billion as it restated some non-media marketing expenditures as "advertising." That followed restatements Sept. 12 that increased ad spending by $97 million to $126 million a year for 1997-2000. The shifts involved "misclassified brand-equity-building spending," a spokeswoman said, but didn't affect overall company spending or earnings.

The 2001 recast erased an unprecedented decline in P&G's ad spending as a percent of sales to 8%, below P&G's traditional 9% to 10% range. P&G fell to third place for 2000 among Advertising Age's 100 Leading National Advertisers, its lowest ranking in the report's 46-year history.

Mr. Mark in recent conference calls has described Colgate's "360 degree" marketing, which encompasses ads, consumer events, publicity and retail promotions. He also discussed "rifle shot" promotions where Colgate combines retail promotions with targeted ads in a retailer's market. He stresses that Colgate supports brands in ways beyond measured media.

Some consumer-products companies are spending more on measured media-and making a point of telling analysts. Marketers on this list include Gillette Co., Clorox Co., Hershey Foods, Campbell Soup Co., Newell-Rubbermaid and Kimberly-Clark Corp. All last quarter reported increased ad spending both in absolute terms and as a percent of sales, analysts said.

"It follows that as investors become more attuned to [marketing-support issues] that companies are responding," Mr. Gingrich said, though he cautions: "Long term, this is still a show-me story."

Banc of America Securities analyst Bill Steele said many companies have given themselves breathing room by moderating or scrapping short-term earnings forecasts, allowing them to fund stronger marketing and sales growth long term.

But Deutsche Banc Alex. Brown analyst Andrew Shore cautions earnings per share growth still is the key measure for investors. Cutting marketing remains one of the easiest ways to hit the numbers in a pinch, even if it's self-destructive long term.

"The vicious cycle is that lower advertising ... lowers brand loyalty," Mr. Shore said. "It's like when the doctor tells you to quit smoking after he found a spot on your lung and you keep doing it anyway. This is the ultimate form of cognitive dissonance."

Contributing: Mercedes M. Cardona

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