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FMCG firms cut ads to protect dipping margins

FMCG firms cut ads to protect dipping margins
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First Published: Mon, Aug 06 2007. 09 47 AM IST
Mumbai: The fast moving consumer goods (FMCG) sector, one of the biggest advertisers in the country, has gone quiet if its numbers for the first quarter of 2007-08 are any indication. The sector that saw spends on advertising and brand communication grow almost 20-30% in 2006-07 (over 2005-06), thanks to a revival in demand, cut down its advertising budget considerably in the quarter ended June as against the corresponding quarter of the previous year.
The financial results of seven leading FMCG companies, including Hindustan Unilever Ltd (HUL), Colgate-Palmolive (India) Ltd, Godrej Consumer Products Ltd (GCPL), Britannia Industries Ltd and Marico Ltd, show that aggregate spends on advertising and promotions (A&P) as a proportion of aggregate net sales came down from 11.5% to 10% in the quarter ended June. “Usually, ad budgets are sacrificed when sales dampen or companies are going through choppy waters,” said Harish Bijoor, the head of Bijoor Consults, a Bangalore-based marketing consultancy. But this doesn’t seem to be the case here. A Mint analysis shows that the net sales of the companies in question grew almost 16% in the quarter ended June 2007.
Companies, on their part, said rising input costs and their inability to increase prices forced them to clamp down on their advertising spends. After a fierce price war fought in the past few years, most FMCG companies increased the prices of most of their products early last year. “Another increase after the recent hikes (in prices) didn’t seem feasible,” said an executive at one company who did not wish to be identified. Analysts said that intense competition from smaller brands might have also forced the big players to not tinker with prices. “The companies are not able to pass the entire incremental cost of rising input prices to the consumers as they may lose market share to smaller players,” said Rohit Gala, an FMCG analyst with Niche Brokerage Pvt. Ltd, a Mumbai-based brokerage. “So they are absorbing most of the inflation in input costs and cutting down on the advertising spend to protect their operating margins,” he added.
Prices of vegetable oil, a key ingredient for making personal products, rose 50% in the June quarter over the year ago period, while commodities such as milk became costlier by about 16%.
In the June quarter, HUL, the country’s largest FMCG company and the largest advertiser, pared its ad spends by almost 3 percentage points (to Rs336 crore) as compared with the June quarter of 2006. Interestingly, the company’s margins improved by 126 basis points in the quarter and analysts attribute this to the reduction in ad spends. The company, however, in a release said: “The lower (advertising) expenditure for the quarter reflects the planned phasing out of activities and the lower spend in a channel pending conclusion of negotiations.”
Similarly, GCPL also lowered its ad spend in the quarter to Rs21 crore, down 15% over the year-ago quarter. GCPL, however, said it had launched many new products last year, which demanded an increased spend. “We didn’t see many launches this year and hence, (there is) a dip in ad spends,” said Hoshedar K. Press, executive director and president, GCPL.
Colgate-Palmolive (India) Ltd, another leading player, also cut back its advertising and promotional spend by 7% to Rs52.5 crore during the quarter ended June. The company’s spend as a percentage of net sales was 15%, 3 percentage points lower over the corresponding spend in the year-ago period.
“The cut in ad spends (for FMCG companies) seems intentional. It is an easy way of protecting one’s margins,” said Anand Shah, an analyst with Angel Broking, a Mumbai brokerage.
Other leading companies such as Marico and Britannia also reduced their advertising and promotional spends in the said period.
(sagar.m@livemint.com)
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First Published: Mon, Aug 06 2007. 09 47 AM IST
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