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FMCG: The power of advertising

Aug 4, 2009

The days are improving for advertisers at least. Two cricket tournaments and launch of new products have seen the consumer goods companies increase their spending by 25% - 40% YoY in the June quarter. It is estimated that Rs.5 bn - Rs.6 bn (Rs.1 bn = Rs.100 crores) were spent by companies during the IPL tournament and the T20 world cup while FMCG companies pushed up their advertisement spending to push new launches and to gain market shares. Hindustan Unilever increased its advertising spending by 26% YoY to support promotions and new launches in the personal products category. Marico increased its spending by 27% YoY on brand building. Advertisement for Godrej Consumers grew by 26% YoY on the back of new soap launches and relaunch of its mehendi. Dabur increased its advertisement spending by 40% YoY to support new launches.

Margins for consumer goods companies stood firm as the raw material costs fell YoY. While the companies passed on some savings to the consumer, they reinvested the rest behind their brands. The increased spending went towards launch of new products, increase in rural penetration and brand building resulting in volume growth for the FMCG companies. Volume of soaps for HUL grew by 2% YoY albeit after a decline of 4% in March quarter while the volumes of soaps for Godrej Consumers grew by 15% YoY. Marico increased its volume sales by 14% YoY while for Dabur volumes increased by 16% YoY.

However, in the face of sub-par monsoons in the country, the advertisement growth for the September quarter is expected to be muted. Companies with a large rural presence though are hopeful that in spite of a sub-par monsoon, rural sales will continue to be robust with support from rural employment scheme. Yet, it is expected that the consumer goods companies will be preserving their resources for the October- December festival season.

The outlook for key raw material for consumer goods companies continues to remain benign. We also expect these companies to improve their operating (EBITDA) margins in the September quarter over the June quarter from savings in advertisement costs. However, if rain gods fail to oblige, there will be a negative impact of monsoons on rural FMCG demand .

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