Inflation woes: Agencies wary as advertisers get cautious with AdEx
The word in the industry is that brands are going for a nearly 15 per cent cut in ad budget
Indian advertising agencies are bracing for tough days ahead as advertisers have started tightening purse strings due to a steep rise in inflation.
In April 2022, retail inflation surged to 7.79 per cent- 84 basis points higher than March (6.95 per cent) and the highest since May 2014, according to the latest statistics of the Ministry of Statistics and Programme Implementation.
The sharp rise in inflation has been driven by significant price pressures on fuel prices and Consumer Food Price Index. It has narrowed the profit margins of FMCG and auto advertisers, which have just started recovering from the blow of the pandemic. For instance, Maruti Suzuki (-11%), Nestle (-1.3%), Dabur (-22%) and Adani Wilmar (-26%) have reported a drop in profit in Q4 although they all have reported an increase in sales in the same period.
We spoke to industry experts to get a sense of how this was impacting the advertising industry.
According to Sam Balsara, Chairman of Madison World, it's an early trend. “It does look like ad spends of the start-ups in e-commerce, adtech, fintech and edutech sectors are going to get constrained because of tight money supply.”
Sharing similar sentiments, Shashi Sinha, CEO of IPG Mediabrands India, says, “Consumer Packaged Good (CPG) companies have started feeling the pressure of inflation. Their profit margins are narrowing due to higher input costs. The listed CPG companies have started cutting down on advertising. If inflation continues for some more time, advertising agencies will have to bear the brunt.”
With a decline in COVID cases followed by the economic rebound, ad agencies had expected growth in ad budgets this year. Industry reports released early this year also predicted an increase in ad spends in 2022. For instance, Pitch Madison Annual Report (PMAR) predicted a 20% growth for AdEx in 2022, taking the advertising expenditure of Indian companies to almost Rs 90,000 crore.
“Although big brands have not cut down on campaign development so far, inflation and decline in rural consumption have made them cautious on AdEx,” says Virat Tandon, CEO of MullenLowe Lintas Group.
Putting a figure on the impact, Vaishali Verma, CEO of Initiative, says: “Many advertisers are cutting ad budgets upwards of 15 per cent.”
On what changed after positive predictions, Verma says: “When industry predictions were released, inflation was under check. Moreover, a third wave of the pandemic also hit India in January-February. Although it was a weak wave compared to the two previous ones, it impacted the business scene.”
Sharing the marketers’ perspective, Shashank Srivastava, Executive Director (Marketing & Sales), Maruti Suzuki India, says the company has been cautious on ad spends. “We are cautious about the AdEx on existing brands. Inflation and high-interest rates are primarily responsible for it. There is no impact on ad budget for new launches though.” The company has so far not slashed its ad budget but is on ‘wait and watch’ mode, Srivastava added.
Auto, electronics and CPG brands have been the most affected, say leaders across the board.
According to Tandon, inflation returns to haunt India every few years. “In an inflationary economy, local and regional brands lose out and consumers either stay with big brands or switch to proxy habits."
Srivastava says, “Inflation forces consumers to curtail discretionary expenses. Since vehicle purchase is a discretionary expense, people are avoiding doing so. They can’t stop buying essentials though. However, lesser disposable income forces households to cut down on detergents, soaps, oils and groceries. They tend to buy cheaper brands.”
However, some sectors have managed to stay unaffected. “Digital brands in the Entertainment and Gaming sectors, and Aggregators have been fairly less impacted by inflation compared to categories like Auto, which have already hiked rates across,'' says Rahul Vengalil, Managing Partner of Isobar, a dentsu group company. Brands caught in discretionary spending like those in F&B will also have an adverse effect, he noted.
FMCG brands cut down expenses
In its filing to the Bombay Stock Exchange on April 21, Nestle cited rising inflation in India as the reason behind dwindling profits (-1.3% in Q4) although the company delivered double-digit domestic sales riding on its key brands Maggi Noodles, KitKat, Nestlé Munch, Nescafé Classic. The company reported a 20 per cent drop in profit in the December quarter.
“As highlighted in previous quarters, costs of key raw and packaging materials are witnessing 10-year highs, and costs continued to surge this quarter which has impacted profit from operations. Continued inflation is likely to be a key factor in the short to medium term,” Suresh Narayanan, chairman and MD of Nestlé India, said in an earnings call with investors.
Britannia also reported 8 per cent growth in the FY 2022, 15 per cent in Q4 alone, but noted that inflation in this period was something beyond their estimation forcing them to increase prices “judiciously”, and control ad and promotion spends.
“The commodities have witnessed inflation of 17% and 14% for the quarter and full-year…I must say we have not been able to keep pace with this inflation because we never estimated the kind of inflation that we've seen but we continue to take judicious price increases,” Varun Berry, MD of Britannia industries, said in an earnings call in May first week.
“We have focused on our advertising and sales promotion spends, we've controlled our overheads and we've leveraged our fixed costs as much as we could,” Berry noted.
Reporting 11% growth in the financial year 2022, Sanjiv Mehta, CEO and MD of HUL, said in the earnings call, “Net absolute inflation (NMI) in the March quarter of ‘22 was 4.5 times higher compared to the June quarter ‘20. In fact, the NMI in full-year ‘22 has been higher than the cumulative NMI we had seen in the last five years.”
Yet, HUL has been able to keep its margins almost flat versus last year's and got the highest YoY market share gain in more than a decade, Mehta says, adding that HUL has “calibrated” price increases.
“Due to unprecedented inflation, FMCG market value growth has significantly slowed down and volumes are declining in high single digits. The impact is more pronounced in rural areas, where even value growth has started declining. Consumers are tightening volumes and essentials are being prioritized over discretionary categories,” Ritesh Tiwari, Executive Director, and Vice President, Finance for Unilever, South Asia said in the earnings call.
He further said, “We expect to see more sequential inflation. Growth will be predominantly price led. We will continue to drive savings harder and take calibrated pricing actions whilst ensuring we protect and grow our consumer franchise. Our margins will decline in the short term as the price versus cost gap increases.”
Hopes for better H2
The industry hopes that H2 (the second half of 2022) would be better than H1.
“In India, H2 is always better due to festivals. The world cup (FIFA at the end of the year) also gives hope,” Verma says, although she doesn’t think it would cross the 2019 numbers.
As for Vengalil, he hopes “market leaders do not reduce ad spends, otherwise the challenger brands will use the opportunity to eat into their market share”.
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