Mumbai: The world’s biggest advertiser, Procter & Gamble Co., recently rewrote the definition of ad spends in its financial reports.
It included in-store advertising through displays or third-party vendors in its restatement, along with the usual traditional media and agency fees, and omitted salaries and benefits of P&G marketers. In one stroke, its ratio of ad spends to sales could have scaled to 10.4%, from 9.9% in 2006, say analysts.
Again, the stated ad spends of (overseas) companies such as Kimberly-Clark Corp. includes nearly all media, while Colgate Palmolive Co. includes everything marketing-related, Sanford Bernstein analysts told international media.
With media platforms proliferating, ad spends as an accounting/marketing term is hardly innocuous, transparent or standardized any more. Its definition varies by company, and includes or omits all sorts of non-traditional media and marketing activity. This makes comparison of ad spends to sales ratios between firms difficult. It has become equally nightmarish to compare the effectiveness of marketing/media plans and spends.
Says Tim Ambler, professor of marketing at the London Business School: “Companies have always redefined what they include in advertising and/or marketing expenditure in their published accounts. It is done largely for presentation purposes. In this case, P&G is trying to make the link with sales look better. There is solid research evidence that maintaining a share of voice larger than share of market helps build share of market. P&G is trying to associate with that.”
Sometimes, the change is driven by good accounting practice. Ambler says including salaries in published ad expense was never good practice, and he is surprised P&G’s auditors allowed them to do it. On the other hand, including point of sale advertising is correct and the only wonder is that it wasn’t done before.
A more common error is to include payments to retailers, for example “promotions”, in published marketing costs when they should be treated as discounts or appear within net sales turnover. A large British drinks firm, Allied (Domecq), got into trouble for that a few years back, says Ambler.
How are ad spends shaping up here? Says Shashi Sinha, chairman, Lodestar Universal Ltd: “In India (by balance-sheet definition), most companies club their ad spends along with sales promotions and other merchandising spends. A shift from one to the other is thus not easily differentiated on the P&L (profit and loss) statement of any company. Big packaged goods companies such as Hindustan Unilever Ltd (HUL) and Nestle India Ltd have a similar proportion of reported marketing spends as a host of other companies, due to the clubbing of all expenses under one head.”
Interestingly, HUL may have a high proportion of ad spend. A cement company such as UltraTech Cement Ltd or a paint firm such as Asian Paints (India) Ltd may offer a lot more in terms of dealer and consumer offers (which too get reported under the same head), and retail facing companies such as banks (ICICI Bank Ltd and HDFC Bank Ltd) or telcos such as Airtel (Bharti Airtel Ltd) and Reliance Infocomm Ltd spend a lot of their money on signages and other retail merchandising mechanisms. However, the balance sheet for all these three sets of companies may show similar marketing to sales ratios, says Sinha.
The real issue everywhere is that companies are not consistently rewriting their definitions of advertising or marketing for their financial reports.
“Reporting is patchy. Clients’ accounting systems are often not designed in a way to reliably capture marketing spends in a consistent way. One large multinational we worked with last year was struggling to create a chart of accounts which could consistently record the total spend and its component parts for comparison between its many subsidiaries and from period to period. The difficulty is that some define spend such as advertorials or sponsorships as advertising and some do not,” says David Haigh, CEO, Brand Finance Plc., UK, one of the world’s leading brand valuation firms.
Broadening the matter from just advertising, there is also the problem of how staff costs, internal costs, research and analysis are treated. But, probably the largest problem is that many companies define costs such as discounts and dealer incentives as “marketing investment”, while in other companies, such expenditure is treated as a “price discounting”, adds Haigh.
“The implication is that if sales are booked gross and such promotions are booked as a marketing overhead, the accounting treatment flatters what is actually happening. The sales line looks higher and so does ‘investment in marketing’. In fact, it is just a short-term price discount with little long-term benefit to brand equity. However, companies don’t want to own up and explain the details, since such disclosure might adversely affect investors and tell the competition more than they want rivals to know,” says Haigh.
Still, large global advertisers such as Unilever Inc., P&G, Diageo Plc. have reportedly tried to create clarity by drawing the distinction between price discounting, which should be deducted from gross sales, and genuine brand building marketing expenditure. Haigh says the Federal Accounting Standards Board (FASB) in the US has tried to tackle this by specifying under what circumstances discounts and promotions should be treated as deductions from the sales line. This is to create comparability and to help investors.
The key issue is that in the US, accounting standards are “rules based”, whereas in the UK and elsewhere, they are “principles based”. This gives chief financial officers room to use different treatments. If there is a significant change in this area, it is in the US as a result of FASB intervention.
The other effect is created by equity analyst pressure on large spending consumer branded companies. Thus, John Wakely, a well-known alcoholic drinks analyst, who covered companies such as Diageo for Lehman Brothers in London, lectured widely on the need for more transparent reporting of marketing spend to help understand how companies were performing. Companies have responded, but the response doesn’t seem to be universal, explains Haigh.
How could these redefinitions of ad spends impact brand valuations? According to Haigh, the reason equity analyst valuations and brand valuations are affected is that the treatment will affect the valuer’s perception of sales growth and future profit growth. If the valuer believes that sales are higher and marketing investments higher, he or she will make an assumption of higher future sales and profits, which will push up the valuation.
The Dow Jones Sustainability Index (DJSI) is now helping to push companies towards conducting brand valuations and monitoring and reporting marketing expenditure in more detail. Companies which have a system for this are marked up on the DJSI, and this affects investor perceptions. So, more companies are striving to improve their performance on marketing analysis and disclosure, says Haigh.
“A time will come when the brand itself becomes content, then probably the investment behind the brand itself will become advertising as well,” says R. Gowthaman, managing director, Mindshare India, a WPP Group media services agency.
Media buyers agree that if companies apply different definitions to promotional expenses, it will be difficult to do cross-company comparisons. “But, from the point of view of competitive analysis, agencies use a more evolved approach for measured media—using media delivery figures and applying internal methods to cost deliveries, rather than go by balance sheet reported figures. It’s the un-measured media and below-the-line spends which will pose a challenge in future and, obviously, agencies will need to develop methods to estimate spends in those areas,” says Ravi Kiran, CEO-South Asia, Starcom MediaVest Group.
The moral of this story is an accounting, not a marketing, one: “Accounting institutes should ensure international standards define these headings properly in the modern context and auditors should apply those standards. Companies should not be able to pick and choose treatments to change the gloss on their accounts,” advocates Ambler.