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Fuel price hike can lead to increased ad spends

01-June-2012
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Fuel price hike can lead to increased ad spends

The hike in petrol price last week came as another rude shock to many and even led to an all India bandh on May 31, 2012. Many auto manufacturers have stated that the price hike is likely to impact auto sales, as it has done in previous instances. The key question however facing the Indian advertising and marketing industry is whether the dampened mood could impact advertising spends in some form.

In an interview with The Economic Times last week, Maruti Suzuki’s Managing Executive Officer (Sales and Marketing) Mayank Pareek said, “Last year, the overall price increase in fuel was around Rs 6 in three parts. That had led to a nearly 14.5 per cent decline in the sales of petrol cars. A Rs 7.50 hike will adversely affect the car market.”

Most auto manufacturers believe that the development will affect entry level cars and first time buyers, considering most entry level cars are the petrol version and first time buyers are sensitive to cost. Manufacturers such as Honda Siel are players in the petrol car segment and this development is expected to have implications for such companies.

An expectation of surge in activity
For many industry leaders, the hike in petrol price is an emotional issue that often does lead to slowdown in auto sales. “The sentiment of wariness that comes with any announcement of fuel hike will stay for perhaps a month and in that much time, actual auto sales may be impacted. But this is more of a short-term effect,” said Nandini Dias, COO, Lodestar UM.
 

If history is to be observed, auto manufacturers in India have often upped their activity at a time like this. “There can be a flurry of intense competitive activity during the rest of the year,” said Ravi Rao, Leader, Mindshare South Asia. A point agreed by Dias and Satyajit Sen, CEO, ZenithOptimedia India.

 

Sen reminded that demand is an important aspect for all car manufacturers. He said, “The economic indicators are not the brightest at present but investment is done and come September, there would be a certain momentum, especially in the small and medium car segments. There would be more competitiveness in the market due to it then.”
 

Opportunity cost vs. incremental cost
For any auto manufacturer, it is a minimum of three-year planning to bring out a car in the market. “The investment can be anything to the tune of Rs 3000 crore. Advertising is a very miniscule part of this investment. When there are cars in warehouses, they need to go out. Auto manufacturers have to push for sales and for that, they will advertise,” observed Dias.

Diesel car segment can benefit from this development and some manufacturers may deploy schemes to make best use of the situation.

“Automotive companies have adopted multiple strategies by increasing the price of diesel vehicles while offering better value for petrol cars. The most interesting one is higher engine efficiency from Ford’s sports utility vehicle EcoSport with a one litre engine that works like a 1.6 litre petrol engine,” informed Rao.

Sen said, “All said and done, it is a growing economy, with new demand and energy. And it is coming from the Indian middle class that has a certain kind of disposable income and a certain mindset. This will not be impacted in the longer run and auto manufacturers who deploy the right strategy today will benefit because the incremental cost is nothing compared to the opportunity cost.”

Forward, reverse, neutral...
On the whole, the advertising industry is of the opinion that the petrol price hike is not likely to impact ad spends at the moment. “Let us also not forget that for many companies, meeting demand is turning out to be tough. Some cars even have a five-month waiting period today. I don’t see a pull back in ad spends due to petrol price hike,” stated Dias.

“The inflationary spiral is bound to affect ad spends eventually if sales show a slump. All automotive marketers whose strategy pays off with more unit sales will continue to increase ad spends and those who fail will eventually slow down,” added Rao.

Sen said, “I don’t foresee a dip in ad spends. In the super premium segment, in fact there would be growth. In the mass segment, there would be optimisation but not really pull back.”

Basabdatta Chowdhuri, CEO, Platinum Media stated, “Given the competitive marketplace, I don’t see an upward or downward swing in ad spends in the short term.”

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