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CPG Advertising + DTC/E-Commerce Trends During 4Q22 (Part 1)
One of the ways I try to follow the advertising industry is to look closely at relevant trends impacting individual sectors whenever possible. Consumer and packaged goods (“CPG”) companies are particularly useful to study because advertising is disproportionately important for this sector. Consequently, the percentage of revenues these companies allocate to advertising is very high, which means public commentary and disclosures are better than what we can find in most other parts of the economy.
Now well into earnings season, many of the largest of this group of companies have reported results for the calendar fourth quarter, including Unilever, L’Oreal, Pepsico, P&G, Mondelez, Kellogg and Colgate-Palmolive. In this note I highlight some of the key trends I’ve noticed and which I think other observers of the advertising industry should be mindful of as well.
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I’ll start with the 2023 outlook, recent quarter results, comments on current advertising spending and additional observations that companies provided around e-commerce, direct to consumer brands and digital marketing.
2023 Outlook: Positive Expectations Ahead.
2023 organic growth (i.e. growth which excludes the impact of acquisitions and the impact of changes in foreign exchange) guidance provided so far has been relatively healthy, even in the face of a range of expectations about how the global economy will play out. Recognizing that guidance is often conservative - i.e. numbers provided are typically numbers that each company expects it can beat – and real expectations are probably slightly higher. Pepsico guided towards 6-8%, while Mondelez and Kellogg both stated a 5-7% range. Colgate indicated the “high end” of a 3-5% range. Meanwhile, Unilever and L’Oreal were not specific in their guidance but Unilever said they would achieve “strong” underlying sales growth and L’Oreal called for “another year of growth.”
Fourth Quarter 2022 Revenue Growth Trends: Ending The Year Strong
For the fourth quarter of 2022 most companies reported single-digit to low double organic with P&G on the low end at 5%, but L’Oreal and Colgate at 8%, Unilever at 9%, PepsiCo and Mondelez at 15% and Kellogg’s at 16% on the high end. These figures were generally similar to full year trends, with high levels of price increases passed along to retailers driving the outcomes, more than offsetting weak volumes of sales.
Advertising Spending: Likely Up in 4Q22 and All of 2022, But Probably Not By As Much As Revenue Across Sector
Unilever spoke of its increase in overall Brand and Marketing Investment (BMI – essentially advertising and promotional expenses), which rose by 500 million Euros in constant currency terms. This figure included a 400 million Euro increase in paid media spending. The overall BMI figure rose by 7% for the year slower vs. underlying sales growth of 9%, although presuming paid media accounts for well below 80% of total BMI, spending on paid media as a percentage of revenue would have risen.
For L’Oreal, the company discloses a broader notion of advertising (including a wide range of promotional activities) which amounted to $12.1 billion for the year, and $6.3 billion for the second half of 2022. This was up by 11%, but currencies likely drove 8% of the figure indicating a lower single digit increase in constant currency terms as the share of revenue allocated to A&P fell by 150bps in the half and 130bps in the year.
At P&G, while the company said on its earnings call with investors that they increased spending sequentially by $140 million, reporting by Ad Age from a call with the press indicated that the figure was down by $100 million year-over-year. Given annual advertising expenses of around $8 billion and therefore around $2 billion quarterly, this implies a mid-single digit decline in USD. Accounting for the impact of currencies, we can infer that spending would likely have been stable on an underlying basis. Interestingly, in discussing some of the in-house activity P&G has been undertaking in recent years, management referenced how it is now “developing proprietary algorithms,” an increasingly important trend, for purposes of buying programmatic TV, which the company claims is saving $65 million annually.
Meanwhile, Pepsico disclosed that its full year advertising expenses were stable at $3.5 billion in both 2022 and 2021 as-reported, implying a mid-single digit increase in constant currency terms. Management stated on its fourth quarter earnings call that the most recent figures “reflects a strong double-digit increase in our advertising and marketing spend as well as additional investments to build digital capabilities and integrate purpose throughout our organization” including Frito-Lay, Quaker and its beverage divisions.
Colgate increased its advertising spending by 3% in the quarter, reducing the share of revenue deployed towards advertising slightly, but with a 5% currency drag, underlying growth in spending was probably closer to 8%. Full year spending growth amounted to a 1% decline (although fx was a 4% drag, indicating closer to 3% underlying growth for the year).
At Kellogg’s, management comments noted that “our advertising and promotion investment was ramped back in the second half and finished the year roughly flat with 2021”. As with the others, with a negative impact from foreign exchange, like-for-like ad spending would have been higher.
For Mondelez’s full year, advertising expense was $1.67 billion vs. $1.564 billion in 2021. This was a gain of 7% as-reported. Presuming currency would have been a nearly 6% drag as it was on revenue, advertising expanded by 12-13% in constant currency terms. Management indicated continuing support for brands, stating on its earnings call that “we will continue to invest A&C (advertising and commercial) regardless of pricing negotiations (with retailers) going on.”
E-Commerce, DTC Business Models and Digital Marketing
Commentary related to e-commerce did not feature prominently in the results out so far, although L’Oreal did state that e-commerce represented 28% of their sales in 2022, up from 23% in 2021, and Unilever stated that its digital commerce channels accounted for 15% of their revenue in 2022 vs. 13% in 2021. Note that definitions of digital commerce or e-commerce may vary widely from company to company.
However, one e-commerce angle that stood out to me were the write-downs of prominent DTC brands Dollar Shave Club (by Unilever) and Sodastream (by PepsiCo). While underperformance vs. expectations is not news for these units, it’s hard not to recall the hype around many of these businesses five years ago, when many CPG companies were evidently concerned about losing share to these upstarts especially in the face of low single digit organic growth across the sector.
My own analysis of dozens of these companies around the peak of DTC hype (2017-2018?) indicated that most of the best known entities accounted for no more than a low single digit percentage of all revenue for CPG and apparel companies, with growth among the DTC brands reducing growth for larger incumbents by very little. This was not to say that what DTC brands were doing didn’t matter but that the impact on the industry was almost certainly overstated and not reflected in actual financial trends at the time.
Of course, where large incumbents did acquire competencies that DTC brands were focused on – such as highly iterative media buying, establishment of direct-to-consumer relationships and new skills in evolving products quickly to take advantage of what consumers wanted and media could help to target – there were benefits to be had from many of these transactions, if those benefits were scaled enough.
Towards these ends, Unilever has invested heavily in internal digital capabilities. On its earnings call management said “we've invested in 29 leading-edge digital marketing, media and e-commerce hubs. We call them our DMCs. They're aligned to our 5 business groups, and those DMCs comprise experts in media, in data-driven marketing, in content excellence and sales capabilities. And they will ensure that we deliver seamless consumer experiences and optimize our investment across all channels. And these DMCs represent a key investment to ensure that Unilever continues to win in this important channel of the future.”
Relatedly, on its earnings call L’Oreal talked about how it has evolved its own digital activities in deepening relationships with independent stylists, as its management said “to reach them all, we are building the most powerful data-driven digital ecosystem. There are 7 million hairstylists in the world. Every week, the division is interacting with 2.5 million of them and the number keeps growing. Digital now drives our relationship with salons and stylists through commerce, thanks to our B2B commerce platform, L'Oréal Partner Shop; for education, thanks to online academy L'Oréal ACCESS and through services, thanks to the recent launch in the U.S. of the first-ever marketplace dedicated to beauty professionals. Capitalizing on all these transformations, the division is uniquely positioned to reach consumers and stylists at scale and recruit new clients.”
The company also pointed out an important issue that many general market brand owners have now figured out. “D2C is really part of our luxury brands, our premium brand strategy. It's obviously a bit more difficult to make it a very profitable business on mass market. But on premium brands, it's really part of the strategy, both in terms of consumer connection and data.”
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