P&G, L'Oreal and Nestle Earnings: Read-Throughs For Advertising
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Several additional massive advertisers reported calendar third quarter results this week providing further confidence in the likelihood of growth in advertising during the second half of the year, at least from its biggest spenders.
First, at Procter & Gamble, across the portfolio, organic sales growth amounted to 7%, and each of the company’s segments were within a couple of percentage points of this figure. Volumes remained light, with the growth in revenue led by price increases as we’ve seen across the category.
Although the company said in its 10-Q that marketing spending increased by 130 basis points (in terms of a percentage of revenue) during the third quarter – more than $280 million - on its press release announcing earnings the company stated that there was 260 basis points of new “marketing investments” which would equate to around $570 million of incremental spending during the quarter. Separately, the company stated that the actual increase for advertising (which would be a subset of marketing) was $445 million, according to a separate press call which Ad Age reported on. Whatever the best number to focus on, P&G – already one of the world’s largest marketers – is poised to increase its spending on advertising by double digit levels this year.
Meanwhile, L’Oreal continued its string of double-digit organic revenue gains with 11.1% organic growth in for the quarter, with double digit gains everywhere except North Asia. The company’s Luxe segment with higher end products was weak, rising only 3.2%, but the mass market consumer goods segment was up 13.4%. Although no commentary was provided on marketing or advertising spending, the company always allocates significant resources to total spending on advertising.
Lastly, Nestle announced that it grew 6.0% organically in the quarter, and that company did provide some additional details about its marketing efforts. The company said, “across the board, we continue to increase our marketing investments, and we see the benefits of our portfolio optimization program kick in.” More specifically, Nestle indicated it continues to increase its marketing spending, reiterating that the company will spend about 100bps more in the second half of 2023 vs the year-ago period, which would compare to the second half of 2022’s 6.6% allocation, for a roughly 15% increase.
Much of the focus on the Nestle call and consistent with the focus on volumes we’re see with other companies’ results, , was the weak volumes of sales, as growth has been driven primarily by pricing over the past few years, and volumes have essentially been negative since the beginning of last year. However, pricing is now moderating (up only 6.3% in the third quarter)
Nestle’s CFO also provided useful insight about how they are thinking about optimizing Nestle’s portfolio of products. “As we have previously commented, (portfolio optimization) includes 2 components. First, freeing up resources through the discontinuation of low-growth and low-margin businesses. This part is nearing completion, having discontinued annualized sales of around CHF 700 million. The negative impact on (volumes) of this portfolio optimization actions was around 60 basis points for the first 9 months. The largest example of this pruning exercise is frozen food Canada, which we are winding down faster than originally planned.
The second component is a more interesting part as we are redirecting resources towards high-growth and high-margin products. We are now seeing the positive benefits of this resource allocation. One example is a material and progressive step-up in customer service levels with an almost 600 basis point improvement over the last 9 months. There is further room for improvement, and we expect to return to above 99%, where we were pre-COVID, which will support a recovery in (volume growth)”
One consideration that might follow from the above is how marketers will shift from driving pricing at retailers to driving volumes instead. Through the pandemic, many CEOs made reference to the importance of advertising in supporting pricing increases or otherwise helping to justify premium prices relative to store brands. If the focus shifts primarily to volumes for the industry, different marketing strategies may be required.