Tuesday 19 September 2017

P&G cuts a warning shot for digital ad industry

Procter & Gamble's corporate headquarters in Cincinnati. Photo: Getty
Procter & Gamble's corporate headquarters in Cincinnati. Photo: Getty

John McGee

Slashing your advertising budget by between $100m-$140m and still meeting the expectations of an unforgiving marketplace is a luxury most brands would relish and possibly even aspire to.

For Procter & Gamble (P&G) - the company that brings us household products like Head & Shoulders, Pampers, Gillette, Fairy Liquid and Tampax - that's precisely what it managed to achieve in the first quarter of 2017 according to its results which were published last week.

Despite signals from the company that it was looking to cut its advertising spend, the sheer scale of the cut-backs, however, came as a surprise to some. After all, not many companies spend $100m on advertising in a full year, never mind in the space of three months.

But with an annual marketing budget of around $1.4bn, P&G is the largest advertiser in the world with a reach into billions of households in hundreds of different markets.

The estimated $100m-$140m cut follows on from the company's announcement in the third quarter of 2016 that it intended to slash a massive $2bn from its marketing spend over the next five years. At the time, the company indicated that as much as $1bn of this could flow from savings to its annual media budget with another $500m likely to come from agency fees and a greatly slimmed-down agency roster.

The decision to slash its advertising spend also comes against a background of much deeper cuts across the multinational organisation. This time last year it told investors that, over the next five years, it aimed to trim as much as $10bn from its cost-base in response to sluggish organic growth, spiralling costs and greatly increased competition from parvenu players and private label manufacturers.

As far as its advertising and marketing budgets are concerned, P&G has stated on several occasions over the past few years that the existing advertising ecosystem was essentially failing it and its many well-known brands.

Not only is it way too complex, opaque and cumbersome, but part of the supply chain had also become tainted by dubious practices, particularly in the digital space into which the company has been ploughing an increasingly bigger chunk of its annual ad spend.

What is interesting about the outcome for P&G's first quarter results, however, is that organic sales growth - after the greatly reduced ad spend - were in the order of 2pc while volume growth also amounted to 2pc.

Hardly anything to get excited about, but for a company under so much pressure, it will take any growth it can lay its hands upon.

What is particularly interesting about its Q1 results was that the cuts in its ad spend didn't appear to have any material effect on its sales.

On the surface, this seems to go against the grain of the prevailing wisdom that says any cuts to a company's advertising spend is likely to adversely impact sales and market share.

But in this case, the axe fell on P&G's digital spend in the first quarter. Indeed, P&G was one of the first companies to respond to the brand safety hullabaloo that kicked off earlier in the year when it emerged that advertising from well-known brands was appearing alongside jihadi videos on YouTube. The company's immediate response was to cut back and freeze some of its digital ad spend. And as we already know, other brands followed suit.

But if a company like P&G can dramatically slash its advertising spend while at the same time grow its sales - albeit modestly - what does this tell us about advertising in general and, more specifically, the return on investment in digital advertising?

On the one hand, it would be wrong to suggest that investing in advertising is a complete waste of money. There's no shortage of empirical evidence that clearly demonstrates the important role advertising plays in building brands, delivering sales growth and engaging with consumers. That much is a given.

But as P&G has clearly demonstrated, there's also a lot of money that is being simply wasted by brands, many of which have been seduced by the allure of digital and the glittering promises of effectiveness and transparency that it once proudly boasted.

Well, that game is now up. Digital advertising, when deployed effectively, efficiently and with transparency, is and will continue to be a powerful tool for brands well into the future. While growth in digital ad spend may start to slow down over the next few years, it will still account for a significant chunk of budgets. But as P&G has also shown, the largely advertising-funded digital industry also needs a radical re-think about its future and the direction it should be taking. It has also served to shine a timely light on the industry's worst-kept and dirty little secret: the enormous amount of waste, fraud and complete nonsense that can slosh around a digital ecosystem.

Unchecked, it is entirely conceivable that it could implode if the various stakeholders don't get their act together. P&G has already called this out. Where P&G leads, others will surely follow.

Sunday Indo Business

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