Mumbai: Consumer firms in India are raising advertising and promotional spends this fiscal to lure shoppers and garner volumes but margin pressure due to rising costs may spoil the party.
“There is certainly a pick-up in sentiment... and with the release of money, advertising volumes are following,” Naveen Talreja, senior vice-president, Ogilvy & Mather India, said.
While Hindustan Unilever Ltd, India’s top consumer goods maker, raised its ad spend by 38% in the September quarter from the same period a year earlier, smaller rival Marico Ltd increased it by 60% and Godrej Consumer Products Ltd more than doubled its spend.
“Our ad-spend this year will be almost 40-50% higher than last year. We are focusing on our three main brands-Godrej No 1, Cinthol and our hair colour portfolio,” said V. Suresh, vice-president, marketing, Godrej Consumer.
Paints maker Kansai Nerolac is also raising ad-spend in FY10 by upto Rs100 million. Last year it spend Rs500 million on advertising.
With a sharp correction in raw material prices after they surged through the roof and having raised prices to boost sales last year, companies are reinvesting a portion of their high margins on brand building this fiscal.
“FMCG companies would not like to retain all of their gains, so they are increasing the promotion, ad spends to get more customers,” said Anand Shah, an analyst with Angel Broking.
“This year due to high gross margin expansion they are reinvesting certain portion of their gains on ad spends.”
This trend also holds true for consumer durable makers.
“We are beginning to see growth come back and we are beginning to spend more,” Shantanu Dasgupta, vice-president, corporate affairs and strategy, Whirlpool of India Ltd, said.
“This year we are going to spend 10-15% more than last year,” he said.
Mirc Electronics which sells the ‘Onida’ brand of products has doubled ad spend to 1 billion rupees this fiscal, Sriram Krishnamurthy, vice-president, sales and marketing, said.
The firm is relaunching its brands by promoting a new brand mascot in place of its iconic ‘devil´, which helped popularise the campaign “Neighbour’s Envy Owner’s Pride”.
Margins may play spoiler
Although firms are bullish on their consumer strategy, analysts say the growth story does not seem as promising going ahead for consumer staples makers as input costs have started rising again, which is likely to put pressure on margins.
“Raw material costs are beginning to rise again with major commodities like oil already recovering... and other agribased commodities expected to see inflation,” an analyst with the Noble Group said.
“This will result in the gross margin gains of the past few months unwinding with a number of FMCG companies reporting year-on-year increase in ad spend,” he added.
This fiscal may also be a one-off in terms of high advertising budgets, which companies may be forced to trim in the coming year to safeguard margins.
“For the last 2-3 quarters they have had significant gross margin expansion due to the fall in input costs. Because of that leeway they had increased ad spends,” said Angel Broking’s Shah.
“That strategy has worked so far. Going ahead if they see any pressure in terms of margins because of input costs again rising then they will cut ad spends next year,” he added.