Source: http://wsj.com
April 9, 2008
Yogurt, cheese and Froot Loops may provide a much-needed life raft to the advertising market.
While overall advertising spending is threatened by the battered economy, makers of household staples, such as General Mills Inc. and Kraft Foods Inc., are holding the line or increasing their ad and marketing budgets, partly to try to make sure penny-pinching shoppers don’t switch their favorite shampoo or macaroni for a cheaper off-brand substitute.
“As they’re battling for shelf space for their brands and products, one of the things to back that up is advertising and marketing support,” said Jon Swallen of market-research concern TNS Media Intelligence.
In 2007, companies making consumer products such as food and drugstore salves increased their ad spending by 8% or better, even as the overall ad market was nearly flat, according to TNS. That’s significant because makers of such household staples are big spenders, responsible for roughly one in 10 ad dollars spent in the U.S.
While continued strong spending by such companies is unlikely to lift the whole ad market, especially if advertisers move to nonconventional pitches, it at least offers a spot of good news to media companies hurt by overall slower ad growth.
Hearst Corp., publisher of Good Housekeeping and Cosmopolitan magazines, reported its most profitable year in 2007. Nearly a dozen top accounts each juiced spending by $30 million more in Hearst magazines last year, led by an 80% jump from Campbell Soup Co., according to Jeff Hamill, senior vice president of Hearst’s corporate advertising unit.
Consumer-product companies say increasing marketing costs translate into higher sales.
General Mills, which makes Cheerios cereal, Hamburger Helper and other pantry favorites, raised consumer-marketing spending by 13% for the third quarter ended in February. The company posted a 12% sales increase for three months ended in February, a jump General Mills credited to its ad spending uptick.
“We believe this investment is and will continue to fuel sales growth,” Chief Financial Officer Don Mulligan told investors last month.
Last year, Kellogg’s ad spending rose 16% to $1 billion, and the cereal maker isn’t backing off. “We believe that continued investment in our brands increases our dependability as a company,” Kellogg Chief Executive David Mackay said at a conference in February, when he discussed his company’s increases in ad spending.
Overall Market
The pickup in some categories, however, may not be enough to salvage the overall advertising market. Forecasts are calling for U.S. ad spending to grow at an anemic pace of 4% or slower this year, even with the significant lift expected from the U.S. presidential election and the Summer Olympics. In 2004, the last presidential and Olympic year, the pace of growth was about 10%.
The ad pain results from a storm of factors. Many financial-services firms, battered by the housing-lending crisis, are paring marketing. General Motors Corp. and other top advertisers in auto, media and telecom are cautious, too, spurring ad watchers to retreat from their spending forecasts in recent months.
Robert Coen, the closely watched ad-spending maven at Interpublic Group of Cos.’s Universal McCann, expects ad spending to be 3.7% higher this year than in 2007, down from a 5% increase he initially expected. Others also are wary.
“No question this is going to be a challenging year,” said Richard Beckman, chief marketing officer of Conde Nast Publications. “As the economy goes, so goes the advertising market.”
However, media companies and ad-agency giants say they haven’t felt any advertising pullback, for the most part. But pessimistic observers say ad budgets, set months in advance, have not caught up with the cooling economy yet. The second quarter or later could start reflecting the ad weakness in media companies’ bottom lines.
Madison Avenue acknowledges the weakness but says advertising and media will weather the economic storm.
“The truth of the matter is there are too many people saying the sky is falling,” Mr. Beckman said.
Media companies say they’re benefiting as companies focus less on winning low prices for ad pages or TV air time. Instead, media outlets and advertisers are working more closely together to develop elaborate and potentially pricey full-service ad campaigns.
Hearst worked with Unilever NV’s Dove on a campaign for hair-care products. Ads ran in the magazine, and Hearst created a Web site called “Love Your Hair,” packed with content and video touting the benefits of Dove’s wares.
Non-Traditional Spending
Consumer-staples companies can afford to boost ad spending because their sales hold steady even in a weaker economy. But even as they pitch their wares, not all of their dollars may go toward traditional advertising.
“You could see shifting of some marketing dollars into the store,” said Jason Gere, a household-products analyst at Wachovia Capital Markets.
In-store merchandising can refer to anything from the way products are displayed to signs. About 70% of consumers’ purchasing decisions are believed to be made while in the store.
“It’s important the message inside the store is just as sharp, particularly in a weaker economy,” Mr. Gere said.
Other deep-pocketed companies are spending in different ways, homing their marketing on a few important brands or key consumer groups.
“We are spending more, but not in ways we always have,” says Doug Moore, vice president for advertising at General Mills. The company, for instance, is spending more on digital marketing and targeting Hispanic consumers with ads in Spanish for Yoplait and Honey Nut Cheerios.
Anheuser-Busch Cos. plans to allocate 10% more for media spending this year compared with 2007 spending, but the leading U.S. brewer has shifted its budget to focus on a few key brands such as Budweiser and Bud Light beers.
Marketers continue to shift ad money to the Internet, where overall ad costs are lower. Online advertising also produces measurable results, arming strapped marketing executives with spreadsheets to prove that their ad campaigns rang digital cash registers.
Consumer-products companies spend about 3% of their ad budgets on online advertising, less than half of what auto makers and other major advertisers spend in that area. The slipping economy may, however, push more advertising dollars toward the Internet.
Write to Shira Ovide at shira.ovide@dowjones.com and Anjali Cordeiro at anjali.cordeiro@dowjones.com
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