Procter & Gamble Not Practicing What It Preaches On Ad Spending Plans

Procter & Gamble ad spending should be closely watched as the bell-weather for how steep the advertising depression will become in 2009 and 2010. Last week, P&G CEO Alan G. Lafley said the company plans to maintain overall marketing budgets at their traditional levels, but acknowledged key brands were shifting funds to coupons, in-store media, point-of-purchase and other promotional initiatives. Media company and agency executives, who hope consumer packaged goods marketers will stay the course as the economy worsens, should not be overly confident.

In fact, P&G's sales in the fourth quarter (the company's second quarter in the fiscal years) fell 3.2 percent to $20.37 billion and "organic sales – those not related to acquisitions – slowed below targets." Investors are not buying the idea that sustaining ad and marketing budgets will ultimately prove a winning strategy. Shares fell 6.4 percent on the company's announcements.

P&G's announced strategy of holding firm on ad spending is inconsistent with its actions, as the company is actually looking to generate the same market presence with significantly reduced ad spending. Total marketing budgets may be holding, but P&G is shifting millions into coupon distribution and redemption costs, retailer slotting allowances and in-store promotional activities. For P&G's fiscal year, beginning in July, the company is likely to require substantial cuts not only in media advertising, but in total marketing as well in order to bring company spending in line with reduced revenue projections. And if sales continue to be slower than the company's more conservative goals, billions will flow from advertising to promotion.

The consumer packaged goods category is replacing automotives in many media categories as the leading investor. However, the prices many media companies charge to CPG advertisers are significantly lower than the costs historically paid by auto manufacturers. CPG advertisers focus their spending on fewer media companies, all but ignoring sports, news and other male and children's targeted media. CPG companies have traditionally maintained a presence in newspapers through their co-op programs, feeding dollars directly to retailers who then make investments locally. Co-op, however, for companies like P&G, has become far more centralized and overtly managed as part of manufacturer-directed programs. As retailers, especially Wal-Mart, struggle to meet forecasts they will require more vendor support funds, which will come directly from manufacturers' ad budgets.

In the fast approaching network television Upfront market, spending by packaged goods, soft drink, fast food and related advertisers will define the marketplace. While overall spending may appear stable, individual analyses of leading marketers are likely to indicate significant spending cut-backs and shifts to promotional initiatives planned for the second half of 2009 and throughout 2010. For the short-term, P&G's announcements of stable ad spending reinforce the ad industry's hope that the recession will not be as deep as feared. For the long-term, over-confidence that P&G will practice what it preaches could be a dangerous strategy.

Jack Myers is a media economist. He advises media, advertising companies and marketers on advertising related issues. He can be contacted at jm@jackmyers.com