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FMCG: Advertise, or die! - Views on News from Equitymaster
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FMCG: Advertise, or die!
Jun 27, 2005

It is known that FMCG sector is not asset-intensive in nature i.e. it is not necessary to invest Rs 6 bn to set up a car manufacturing unit like Tata Motors. All it has to do is to make sure that the brands have a high recall value and if there is a high recall value, it is necessary to have the distribution strengths to capitalise on the same. Leave aside distribution. For a product to have a high recall value, all it takes is four P's (Price, Place, Promotion and Product). Like a pharma company invests millions into R&D to develop products, we believe that it is pertinent that a FMCG company spends adequately in advertising and sales promotion to have a high recall value with customers. To us, this is the R&D that is critical for any FMCG company. Given this backdrop, how do FMCG companies fair on this aspect. We take a look at 5 FMCG companies and what have they done to build brands in the last four years.

The absolute spending trend…
  Advertising and Promotion Revenues
(Rs m) FY02 FY03 FY04 FY05 FY02 FY03 FY04 FY05
Dabur 1,461 1,635 1,698 1,715 10,147 10,615 11,178 12,438
Colgate 2,310 1,848 1,476 1,368 11,131 9,475 9,392 9,642
Godrej Consumer 668 585 504 616 4,586 4,701 4,897 5,627
Marico 591 645 752 1,026 6,957 7,755 8,888 10,128
Pidilite 246 326 363 400 4,916 5,737 6,520 7,695

What does the analysis say?
One can see from the table below that spending in advertising and sales promotion has a positive effect of sales growth. Though the magnitude of benefit may vary, in our view, there exist a co-relation over the longer term. The only exception is Godrej Consumer, which reduced its spend, yet posted a rise in sales. Colgate has been reducing expenses (notably, adspend) in the last couple of years and yet showed only 5% loss in revenues. Marico’s spending in advertising and sales promotion has grown by 20% over the years, yet yielding only 13% growth. The main reason for this is its new venture into ‘Kaya Skin Clinics’. In our view, this ratio will turn more favourable for Marico, as the Kaya initiative gains in scale.

Marico - Outpaces peers in spending
CAGR Growth Ad & Prom Revenues
Dabur 5.5% 7.0%
Colgate -16.0% -4.7%
Godrej Consumer -2.6% 7.1%
Marico 20.2% 13.3%
Pidilite 17.6% 16.1%
Colgate - Still at the top
Ad as a % of Sales FY02 FY03 FY04 FY05
Dabur 14.4% 15.4% 15.2% 13.8%
Colgate 20.8% 19.5% 15.7% 14.2%
Godrej Consumer 14.6% 12.4% 10.3% 10.9%
Marico 8.5% 8.3% 8.5% 10.1%
Pidilite 5.0% 5.7% 5.6% 5.2%

Key takeaways for investors:
  1. While analyzing FMCG companies, investors should track advertising and sales promotion spending as a percentage of sales. While companies may adopt different strategy depending upon the demand scenario, if a FMCG company is not spending adequately in advertising and sales promotion, one has to exercise caution. It is likely to have an impact on market share over the longer term. For instance, despite poor sales growth in the last four years, companies like HLL have increased their spending as a percentage of sales. Though one may argue that this is to boost its sagging sales, this analysis highlights that the benefits of such expenses are long-term in nature.

  2. While companies do benefit from this, at times, this is at the cost of margins (Colgate realised this early). So, an investor should compare ad and sales promotion spends as a percentage of sales with its peers to assess the direction.

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Feb 23, 2018 10:23 AM