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Ad expense: Fight for market share - Views on News from Equitymaster
 
 
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  • Apr 11, 2003

    Ad expense: Fight for market share

    To sell a product all it takes is four P's (Price, Place, Promotion and Product). All these parameters play a very important role in the sale of any product. If any one of the parameters fail then the product in all probability is likely to face pressure in its performance. Promotion or for that matter, advertising, is one of the most important parameter for the success/failure of a product. We take a look at what the top Indian companies have done for the success of their products commodities.

    Over the last few years the Indian consumer industry has come a long way. Spending habits have changed, the consumer is more aware of what he wants and what he gets, the price he is ready to pay for and so on. This resulted in companies pulling up their socks and becoming more efficient and competitive looking at value add consistently. Not only have the methods of advertising changed, the advertisements have become more attractive, more precise and as a result, the consumer is more aware of the quality and pricing.

    Top ad spenders
    (Rs m) FY02
    Advertisement exp. % of Sales
    Hindustan Lever Ltd. 8,238 7.5%
    Colgate-Palmolive (India) Ltd. 2,310 20.9%
    I T C Ltd. 1,801 3.6%
    Dabur India Ltd. 1,545 15.0%
    Nestle India Ltd. 1,543 8.6%
    Reckitt Benckiser (India) Ltd. 907 16.7%
    Britannia Industries Ltd. 906 6.6%
    Hero Honda Motors Ltd. 902 2.0%
    Bajaj Auto Ltd. 888 2.4%

    As is apparent from the table above, the top spenders on advertisements have been FMCG companies. The highest spender for FY02 has been HLL (atleast among the listed companies). But one very interesting factor seen here is that Colgate with only one product segment (oral care) in its portfolio spends the highest in terms of advertising as a percentage of sales. In FY02, its spending touched around 21% of sales.

    Over the last decade (FY92-FY02), Colgate’s advertising spends have increased at a CAGR of 26%, but revenues unfortunately have grown only at 10.4% CAGR in the same period. Colgate has an over 50% market share in the oral care division, which has been slowing sliding down due to competition from other players. The other players in this segment are HLL (36%) and SmithKline Beecham (5%).

    Company Name Sales CAGR* Ad expense CAGR*
    Hindustan Lever Ltd. 19.8% 30.3%
    Colgate-Palmolive (India) Ltd. 10.4% 26.5%
    I T C Ltd. 12.1% 17.4%
    Dabur India Ltd. 14.9% 26.1%
    Nestle India Ltd. 15.4% 20.4%
    Reckitt Benckiser (India) Ltd. 15.4% 26.5%
    Britannia Industries Ltd. 11.6% 27.7%
    Hero Honda Motors Ltd. 29.0% 33.9%
    Bajaj Auto Ltd. 12.7% 21.2%

    *CAGR for period between FY92-FY02

    2-wheeler auto majors Hero Honda and Bajaj Auto are also among the top spenders on advertisements, but their advertisement spending as a percentage of sales has been marginal, around 1% in FY92 to 2.4% in FY02. However, the advertisement spending for both two-wheeler majors has clocked a 21% CAGR over the last decade. While Hero Honda recorded 29% sales CAGR, Bajaj Auto too, clocked respectable 12.7% sales CAGR during the same period. Although Hero Honda continues to be a market leader, Bajaj Auto seems to be catching up with the leader to get a share of the market. What this indicates is that the Indian market place is getting more competitive and consumers getting more sophisticated. Consequently, ad spends have increased rapidly.

    So as time rolls, ad spends reach new highs, which results in the increase in consumer awareness. Companies hope that this will lead to increase in the consumer spending and hence increase their bottomlines. The companies do benefit from this, but sometimes, this is at the cost of margins. As companies fight for increasing their market share, the consumers benefit the most as they get more substitutes at more and more competitive prices.

     

     

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