Digital advertising: Boon or bane?

Hard sell for the ad men

Some analysts say the reduction in advertising spend among consumer groups may reflect longer-term woes as big multinationals struggle to cater to changing consumer tastes.
Some analysts say the reduction in advertising spend among consumer groups may reflect longer-term woes as big multinationals struggle to cater to changing consumer tastes.PHOTO: ISTOCK

Consumer goods groups are cutting costs in the face of slowing sales growth, ineffective online campaigns and pressure from activist investors. The advertising industry is the first to start feeling the pinch.

A surprising thing happened when Procter & Gamble, the consumer goods giant behind Gillette razors, Crest toothpaste and Pampers nappies, trimmed US$100 million (S$135 million) from its digital marketing costs in the second quarter: nothing changed.

"We didn't see a reduction in the growth rate (in value or volume of sales)," P&G's chief financial officer Jon Moeller told investors. "What that tells me is that the spending that we cut was largely ineffective."

P&G's cuts were aimed at websites where its ads were more likely to be viewed by bots - computer programs that simulate the activity of real people browsing the Web - and those where its brands were appearing next to undesirable content. "We want our advertising to be seen by real people," a spokesman said.

But P&G, which spent US$7.1 billion on advertising last year, has a bigger target in sight. It wants to trim its marketing budget by more than US$2 billion over the next five years, part of a US$10 billion cost- cutting programme. Planned cuts run across the marketing supply chain, from reducing agency fees to cutting back on in-store signage.

It is not alone. From Unilever and Danone to Mondelez and Nestle, many of the world's largest consumer goods companies are slashing costs to boost profits amid lacklustre sales growth and pressure from activist investors.

The impact of those cuts is rippling outward. Last week, shares in advertising and media companies tumbled after WPP, the world's largest advertising group, reported a slowdown in global ad spending in the second quarter and cut its sales growth forecast to between zero and 1 per cent this year. That followed a warning last month from US rival Interpublic. It said weaker spending by consumer goods groups took a toll of nearly 1 per cent on quarterly revenue growth.

For WPP and its peers, cutbacks by their deepest-pocketed clients are sapping revenue at a time when the advertising industry is already weathering multiple storms. Ad spending has slowed, most notably in North America, with Magna Global, the media buying agency, forecasting global growth of 3.7 per cent to US$505 billion this year compared with 5.9 per cent in 2016.

CARRIED AWAY

In our quest to do dynamic, real-time marketing in the digital age, we were producing thousands of ads, posts and tweets because we thought the best way to cut through the clutter was to create more ads. People are voting with their fingertips: they're saying that too much of our advertising is uninteresting, uninspiring and therefore ineffective.''

MR MARC PRITCHARD, P&G's brand officer.

Technology companies like Google and Facebook are becoming ever more powerful as advertising continues to migrate online - soaking up 72 US cents of every new dollar spent on digital ads in the US last year, according to eMarketer.

Agencies are also under scrutiny over accepting undisclosed rebates from media companies for the advertising they buy. Fierce competition has also prompted some advertising groups to offer discounts on contract renewals and reduced creative and media fees, further constraining growth.

"These practices cannot last and will only result eventually in poor financial performance and further consolidation, the premium being on long-term profitable growth," WPP cautioned. "Our industry may be in danger of losing the plot."

COUNTING EVERY DOLLAR

The warning signs have been flashing for several months, especially since Unilever and P&G - WPP's second and third-largest clients, respectively - announced shake-ups in their marketing strategies.

WPP depends on packaged goods companies for 30 per cent of its US$14.4 billion annual revenues. But consumer products groups are battling huge shifts in what people want to buy and how they want to shop, which has depressed sales. Sprawling companies have been pressured to prove they can turn their businesses around, as activists such as Trian Fund Management's Nelson Peltz, Third Point's Dan Loeb and 3G Capital, the private equity group that controls Kraft Heinz with Mr Warren Buffett's Berkshire Hathaway, hone in on the sector.

WPP's chief executive Martin Sorrell says the fashion for zero-based budgeting, the model popularised by 3G of justifying every cost every year, "has ratcheted up significantly... the pressure on companies for short-term returns".

 
 
 

"If you look at the root cause of the slowdown, it is the trifecta of digital disruption, activists and zero-based budgeting," he says. "When volumes fall in packaged goods companies, that is a warning sign and alarm bells start ringing."

When it comes to cutting costs, advertising is one of the first places companies look to trim. "The truth is, no one really knows what the (return on investment) of television is to build a brand," says Mr Ali Dibadj, an analyst with Bernstein Research. "That has driven many companies to say: maybe I'm not getting the most bang for my buck, and is something I can cut, given the pressure I'm feeling."

Eight of the 10 large European consumer brand companies that have commented on marketing this year - including the brewer Carlsberg and Beiersdorf, which owns the Nivea brand - say they spent less as a proportion of sales in the first half of the year, according to Mr James Edwardes Jones, an analyst at RBC Capital Markets.

Unilever, the target of a failed takeover attempt by Kraft Heinz in February, cut the fees it pays agencies by 17 per cent in the first half of the year, contributing to WPP's revenue slowdown. The Anglo-Dutch group, the world's fourth-biggest consumer goods company by sales, has adopted zero-based budgeting in order to generate €6 billion (S$9.7 billion) of savings over the next four years.

At the first-half results last month, Mr Graeme Pitkethly, Unilever's finance director, cheered investors with examples of how zero-based budgeting "is helping us to reduce wasted investment". But the news was grim for ad agencies, consultants - and airlines: Unilever staff have taken 30 per cent fewer flights this year and each seat costs a quarter less.

The group is cutting the number of ads it makes by 30 per cent and reducing the average cost of making one by 14 per cent. It is halving the 3,000 creative agencies with which it works and reducing by 40 per cent the number and cost of consultants it uses.

"Not so good for the consultants but they can probably afford it," Mr Pitkethly said.

DIGITAL SCEPTICISM

The more measured approach from consumer goods companies also reflects growing scepticism over the value of their investments in digital media.

Mr Marc Pritchard, P&G's brand officer, has become an unsparing critic of digital advertising. "We fell into a content crap trap," Mr Pritchard told advertisers at a conference in March. "In our quest to do dynamic, real-time marketing in the digital age, we were producing thousands of ads, posts and tweets because we thought the best way to cut through the clutter was to create more ads.

"People are voting with their fingertips: they're saying that too much of our advertising is uninteresting, uninspiring and therefore ineffective," he said. "The media supply chain is so murky and non-transparent, and so wasteful and even fraudulent - we're wasting huge amounts of money."

WPP says it will "weather the storm" over the near term, noting that some clients have said they will ramp up spending in the remainder of the year. Unilever chief executive Paul Polman said as a result of new product launches, the company's investment in brand and marketing will end the year in line with last year's €7.7 billion.

"At some point, if (brands) are losing volume or volume growth, they're going to have to invest more money both in media billings and then agency fees," WPP's Mr Sorrell told analysts last week.

But some analysts say the reduction in advertising spend among consumer groups may reflect longer-term woes as big multinationals struggle to cater to changing consumer tastes.

"It could be that managements are deliberately cutting marketing, recognising that as the relevance of some big brands diminishes, those brands are becoming less responsive to marketing investment," says analyst Edwardes Jones.

Professor of marketing Scott Galloway at New York University's Stern School of Business said: "There is one thing in common among the largest advertisers in the world: they're all losing (market) share."

A new generation of start-ups such as Dollar Shave Club, the online razor business bought by Unilever for US$1 billion last year, and Warby Parker, the glasses retailer, have built their brands and customer bases through digital marketing and social media influencers. The biggest consumer brands are now following their playbooks, tapping Instagram and YouTube celebrities to endorse their products.

Professor Galloway says they need to go further, especially as the traditional retailers, their main source of sales, face pressure from online rivals and price wars. "Their capital needs to be allocated out of broadcast media and into innovation... If the spending does come back, they will put more money into research and development, more money into social media, more money into developing different distribution channels."

He adds: "P&G's biggest problem isn't their brand equity. It's finding the distribution that supports their current brand equity. If they don't find places other than Kroger (the grocery chain) and Amazon to sell Tide, it doesn't matter how good their ads are."

FINANCIAL TIMES

A version of this article appeared in the print edition of The Sunday Times on September 10, 2017, with the headline 'Hard sell for the ad men'. Print Edition | Subscribe