FMCG companies need to raise their ad spend from September, say brand experts

The FMCG sector was already facing tough conditions for the last several quarters, as faltering consumption and tight liquidity in the distribution channel forced companies to cut their spend on advertisement in the last financial year.

 Bad times turned into worst as COVID-19 aggravated the demand and supply chain challenges in the March quarter, and now the companies are further prompted to cut down their ad expenditure.

However, brand experts feel that to be back in the game, the firms will have to start spending on advertisement and promotions from September onwards if not early.

“Ad spend was cut way before March (2020) as most FMCG companies did not see an uptick in many items in the same degree as expected,” said N. Chandramouli, CEO of TRA Research, a consumer analytics and brand insights company.

“But they will have to start spending on advertisements and promotions from September onwards. September, October and November usually see freedom buying, which is around Diwali, that will help these companies capitalise and cover up for the losses incurred during the COVID-19 pandemic,” he added.

Concurring with Chandramouli, another brand expert said: “Companies conserving fund is like keeping the powder dry so that they can use the cash reserves whenever they want.”

However, brand consultants feel that FMCG companies may not spend more on ads but just refurbish the ad showing ‘Work from Home scenario.’

According to AdEx data, March-May 2020 witnessed an average of 48 percent ad insertion drop compared to March-May 2019. Meanwhile, June 2020 registered a 23 percent decline in ad insertions when compared to June 2019.

Challenges

Most analysts said costs have gone up for FMCG companies due to overheads such as safety, hygiene maintenance, low utilisation levels, employees working in shifts, dealer margins and dealer credits, along with disrupted or not fully functional supply chains.

“FMCG companies are reducing their ad spend as their plants are not operating at full capacity. These companies believe that ad spend is highly discretionary and it can wait till demand revives. Companies such as Marico and Godrej Consumer are likely to reduce spends on advertising and sales promotion by 100 bps as a percentage of sales,” said an analyst tracking the FMCG sector.

With most manufacturing plants running at 70-80 percent capacity and about 75 percent distributors open, challenges facing the FMCG sector are multi-fold.

The COVID-19 impact was reflected on the volumes of FMCG companies. Marico’s India business saw volume sales decline by 3 percent and overall volume sales drop by 4 percent in Q4 FY20.

Volumes of Hindustan Unilever shrank 7 percent YoY in Q4FY20 mainly owing to lower demand in discretionary categories.

Godrej Consumer Products Ltd posted a volume decline of 15 percent due to COVID-19-related impact in India. In Q4, Dabur posted FMCG volume de-growth of 14.6 percent.

Ad spend dwindles

Marico’s management had said during its Q4 results commentary that the company was evaluating cost-saving measures.

“Spends on advertising and sales promotion (ASP) is likely to drop by 100 bps as a percentage of sales in the current fiscal vs 9.9 percent of sales in FY20. More spends would be for promotion, digital media,” Marico had said in May.

Marico reduced its advertising spend by 18 percent in the fourth quarter of the financial year 2020 compared to the corresponding quarter of the previous year. The company spent Rs 126 crore in Q4FY20, down 18 percent from Rs 153 crore in Q4FY19.

Dabur’s advertisement spends fell by 39 percent YoY and 20 percent QoQ in Q3 of FY20.

Godrej Consumers’ ad spend dropped 20 percent YoY in January-March FY20.

What next?

Advertisement is highly discretionary in nature and the companies are not spending since demand is weak.

However, there is a greater thrust on sales through  own omnichannel along with emphasis on partnering with Amazon Pantry, Dunzo/D-Mart, among others.

In terms of advertisement channels, brand experts say that print media may not be preferred for advertising since people are not spending on newspapers.

Going forward, more focus could be on cellphone advertising (significantly cheaper than TV ads). Tie-ups with OTT platforms may be explored too.