FMCG firms cut ad spend to offset high input costs

FMCG companies 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.

Experts said these companies were likely to be cautious on their advertising expenses if they had to remain profitable despite high input costs. “Most of the FMCG companies are focusing on volume growth without hurting their operating margins. While they are resorting to price increases, they also have to reduce their operating cost, including their ad spend, staff cost and other expenses, to maintain their margins,” India Infoline Research Analyst Vanmala Nagwekar said.

According to a report by Standard Chartered Equity Research on the Indian consumer sector, the FMCG segment maintained margins at 15.8 per cent last financial year, despite rising raw material costs, by controlling ad spends 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 companies was down by 200 basis points in the previous financial year.

Two of the biggest spenders on advertising, Hindustan Uniliver (HUL) and Procter & Gamble (P&G) marginally reduced their advertising and promotional expenses in the fourth quarter last financial year. In the last quarter of 2010-11, HUL’s advertising and promotional expenses were down marginally to Rs 623.29 crore, from Rs 626.52 crore in the period a year ago.

Similarly, P&G reduced its ad spend to Rs 37.96 crore, from Rs 44.13 crore in the corresponding period last financial year.

In an investor conference recently, Dabur Ltd Chief Executive Officer Sunil Duggal had said the company would not obviously go overboard in terms of advertising and promotion as long as inflation remained the way it was.

“However 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 this financial year,” Duggal had said.

In the last two quarters of 2010-11, Dabur saw its ad spend coming down from 16.4 per cent of sales in the first quarter to around 11.5 per cent of sales in the last quarter. Duggal added: “Our total ad spend will continue to be in the region of 13 per cent in the current financial year.”

Analysts pointed out that FMCG companies would have to strike a balance between maintaining margins and ad spends, as demand could soften further due to high inflation.