Will regulatory change impact FMCG cos? - Views on News from Equitymaster

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Will regulatory change impact FMCG cos?

Sep 28, 2013

FMCG goods being consumed on a daily-basis, a strong recall value guarantees the success of a product. This recall value is generated through advertisements and promotional activities at the point of sale. Therefore advertisement & promotional spends form a major expense for FMCG companies. With rising competition and increased product launches, this expense has risen in the past one year. Companies such as Godrej Consumer Products have seen a steep rise in their ad-spends. The company, in the last one year, has revamped its Cinthol soap brand and launched a number of innovative offerings in hair care and household insecticides. This in turn has led to higher brand investments pushing up the company's ad-spends in the past one year.

Rising ad-spends of FMCG cos
Company nameAd-spends to sales ratio (%)
 2011-122012-13
Procter & Gamble Hygiene10.616.9
GlaxoSmithKline Consumer16.316.1
Godrej Consumer Products9.215
Dabur12.413.6
Marico11.213
HUL12.112.8
Britannia7.68.6
Colgate8.28.1
Nestle4.45
ITC2.72.7

In the world of advertising, television is the dominant medium with 42% share in overall advertisement pie. This is followed by newspaper having a 39% share (Source: Group M estimates). The balance 19% is shared by media such as outdoor & retail, digital, radio, magazine and cinema. Thus television is unarguably the most effective medium for brand endorsements.

In a recent regulatory change by Telecom Regulatory Authority of India (TRAI), the advertisement time on television will be regulated to twelve minutes per hour and will come into effect on 1st October 2013. While this may cheer television viewers, channel broadcasters will have to face the brunt. Thus channel broadcasters are likely to raise ad-rates to compensate for lost revenues. This is likely to push up costs of FMCG companies as they feature among the top ten advertisers (Source: IMRB).

To conclude

FMCG companies are already witnessing rising ad-spends to support new product launches in a competitive market scenario. The new regulations limiting the broadcast time of advertisements on television is expected to raise ad-tariffs and further add to the cost burden of FMCG companies.

Moreover after a series of price-hikes taken earlier, FMCG companies do not have the flexibility to raise prices further particularly with discretionary spending slowing down. Therefore profitability of FMCG companies is expected to come under pressure, going ahead.

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