HLL passed a key milestone in '05 when its advertising expenses crossed Rs 1,000-crore. But what is more remarkable is that HLL's adspend grew 20% in a year when sales grew by just 11%. And not only HLL, but other FMCG companies have also upped advertising in a big way to sustain the recovery seen in sales growth.
In FY06, for the nine months ended December '05, adspend for the major listed players increased 15-30% against 10-15% sales growth. HLL and Marico Industries lead the pack with a 25% increase in adspend during the nine months ended December '05.
HLL, which follows a calendar year financial closing, ended '05 with a 20% increase in adspend. During '05, advertising spend for its FMCG products as a percentage of sales increased to 10.3% compared to 9.7% in the previous corresponding quarter.
Dabur's adspend has grown by about 16% during the nine months ended December '05, while sales grew about 9%. Godrej Consumer Product's sales grew by 16% in this period, while its advertising expenditure grew by 22%.
Oral care major Colgate-Palmolive India's advertising expenditure grew by 33%, more than twice its sales growth rate of 13.5%. The increase in advertising, by and large, has not been to support major new products, but more towards enhancing investments for existing brands, relaunches and variants.
Companies are resorting to the tried and tested method of spending more on advertising to reach out to consumers and achieve sales growth.
Another change that has occurred is that companies are spending higher on above-the-line advertising activity rather than on below-the-line activity in the form of free offers or volume discounts.
Also, profitability is not taking a hit despite the increase in adspend. Normally, advertising spends lead to a dip in margins; declining margins was one of the reasons why, in previous years, companies started cutting adspend.
But this time, companies are not feeling the pinch because they are ploughing back the savings from their units set up in tax havens like Uttaranchal and Himachal Pradesh.
Since these companies don't pay excise or income tax on output from these factories, they have been able to generate significant savings, giving them the leeway to spend more.
Whether companies keep up the adspend rate at these levels depends on what future sales growth look like. FMCG markets are showing sustained signs of growing sales. So one can expect the uptrend to continue, even if the rate of growth declines slightly.