Healthy FMCG margins result in ad splurge

By ZRG | Updated: May 10, 2013, 18:28 PM IST

Rohit Joshi and Siddharth Tak/ZRG

What do you do in times of slowdown? Cut down on advertising costs to try and remain healthy or else expand the ad kitty? If you go by what FMCG companies have been up to and intend to stay course this fiscal, conventional wisdom might be in for a beating!

In a scenario where the economy is all set to touch a decade low of 5 per cent GDP in 2012-13 , major fast moving consumer goods (FMCG) companies have raised their advertising and promotion spends in FY13 and are likely to persist with the trend this fiscal as well.

A study of sales volume of these companies even in difficult times for economy has been more than encouraging hence the decision to increase ad spends is not to retain volumes but actually grow them. Also, this decision comes about due to the hefty margins these companies have had in recent times due to the fall in raw material prices.

While Hindustan Unilever (HUL), the FMCG giant has reported a 22 per cent increase in advertising and promotion spends to Rs 3290 crore during fiscal 13, Dabur has witnessed a 27 per cent increase in these spends to Rs 837 crore. Similarly, Godrej Consumer Products (GCPL), Marico, and Emami have seen an increase of 45 per cent, 40.4 per cent and 22 per cent respectively during the period under review.

Looking at the ad spends to sales ratio, in case of HUL it stood at 12.5 per cent during FY13, up nearly 77 basis points over the previous fiscal. While Marico’s ad spends as a per cent of sales stood at 13.04 per cent, up nearly 231 basis points over FY12, Dabur’s ad spends accounted for 13.62 per cent of sales, an uptick of 113 basis points over FY12.

Even in the fourth quarter of FY13, ad spends of FMCG companies were on the rise. Amongst these five companies, GCPL saw the maximum per cent increase of 48 per cent, followed by Emami (34 per cent), HUL (21 per cent), Marico (11 per cent), and Dabur (5.5 per cent).

Citing the reason for the increase in ad spends, HUL in its latest result press release stated, “While commodity costs were relatively benign during the quarter, competitive intensity remained at high levels. We continued to invest behind our brands - A&P was up 144 crores (+90 bps) in the quarter.”

Likewise, Kaustubh Pawaskar, Research Analyst at Sharekhan said, “Low input costs have provided a leeway to FMCG companies in increasing the ad spends.”

Explaining the factors behind the increased ad spend, V Srinivasan, Research Analyst at Angel Broking, who tracks FMCG sector closely averred, “Slow down is one reason and in order to increase the volume growth they have to spend more on advertisements. Another reason is the heightened competitive intensity.”

When asked about the outlook for ad spends in the current fiscal, Pawaskar at Sharekhan opined, “Companies will be increasing their advertising and promotion spends to support product launches and in order to maintain/gain market share.”

In sync with Pawaskar, Srinivasan at Angel Broking asserted, “This fiscal also there will be increase in ad spends as advertisement is more like a brand building investment. Magnitude of ad spends depends upon the economic slowdown, and the pipeline of new product launches.”

Talking about the broad outlook for Media and Entertainment (M&E) sector, which is heavily dependent on ads from FMCG sector, a recent FICCI – KPMG report stated, “2012 has been one of the toughest years in recent times for the M&E industry. Advertising revenues saw a growth of 9 per cent in 2012 as against 13 per cent in 2011 and 17 per cent in 2010. The Indian M&E industry is estimated to achieve a growth of 11.8 per cent in 2013 to touch Rs 917 billion.”

According to Credit Suisse report, consumer- driven sectors rule the advertising space on television. FMCG being the biggest contributor (with categories such as food & beverage, and personal care at the top) contributes to around 40 per cent of total volume in aggregate. Nine of the top-ten advertisers on TV are FMCG companies, indicating the importance of advertisements to these companies in reaching out to consumers. HUL due to its strong presence across segments is by far the biggest advertiser on TV (with 8 per cent of the total and over four times more than the next largest company in Reckitt Benckiser).