FMCG cos control ad expenses to balance high input costs

FMCG firms are tightening their purse strings by controlling advertising spends and other marketing expenses to maintain their margins as high raw material prices continue to pose serious challenge, according to analysts.

Going forward, they said companies are likely to be cautious on their advertising expenses if they have to remain profitable despite the high input cost.

"Most of the FMCG companies are focusing on volume growth without hurting their operating margins.

While they are resorting to price hikes, they also have to reduce their operating cost, including their adspend, staff cost and other expenses to maintain their margins," India Infoline Research Analyst Vanmala Nagwekar said.

As per a report by Standard Chartered Equity Research on Indian consumer sector, the FMCG segment maintained margins at 15.8% in the last fiscal despite rising raw material costs by controlling adspends and cutting operating costs during the period.

"Inflation in input costs led to a slight decline in gross margin, but operating margin was steady on the back of cut in ad-spend and better operating leverage," the report said, adding that ad-spend by several firms were down by 200 basis points in the last fiscal.

Two of the biggest spenders on advertising, Hindustan Uniliver (HUL) and Procter & Gamble (P&G) marginally reduced advertising and promotional expenses in the fourth quarter of the last fiscal.

In the last quarter of financial year 2010-11, HUL's advertising and promotional expenses were down marginally to Rs 623.29 crore from Rs 626.52 crore in the year-ago period. Similarly, P&G also reduced its ad-spend to Rs 37.96 crore from Rs 44.13 crore in the corresponding period last fiscal.

In an investor conference recently, Dabur Limited Chief Executive Officer Sunil Duggal had said: "The company will not obviously go overboard in terms of advertising and promotion as long as inflation remains the way it is".

However, Duggal said: "There is no concerted effort to cut back on ad spends to protect margins. The ad spend was lower in the fourth quarter of 2010-11 as we had postponed some new product launches to the current fiscal".

In the last two quarters of last fiscal, Dabur saw its ad-spend coming down from 16.4 % of  sales in the first quarter to around 11.5% of sales in the last quarter.

"Our total ad spends will continue to be in the region of 13% in the current fiscal," he added.

The analysts pointed out that FMCG firms will have to strike a balance between maintaining margins and ad-spends as demand could soften further due to high inflation.