In the past couple of weeks, many of the world’s biggest CPG and grocery store brands have reported their latest earnings.
One thing is clear: CPG brands are under pressure by retailers to squeeze their margins, lower prices and spend more on ads.
But what else is new?
Pricing pressure
Legacy CPGs are fighting to maintain market share in the face of digital-native startups taking over in-store shelf space and retailers themselves growing their private-label lines. This means, in some cases, brands are committing a higher percent of their sales revenue to advertising than they have for decades, if not ever.
Unilever increased its brand marketing in Q2 2024 by 700 million pounds (almost $760 million), CFO Fernando Fernandez told investors a week ago. More than 15% of its earnings are now going to ads and marketing, he said.
Although, there is room to create promotional spend because CPG prices have gone up in the past few years. (Inflation, perhaps you’ve heard of it.)
“We’re increasing our couponing by about 20% or so,” said General Mills CEO Jeffrey Harmening on his recent earnings. “We have found, because we have a lot of first-party data, we can target effectively with good ROIs.”
Pepsi is also investing in advertising with a focus on targeted price cuts.
“The sweet spot for us is not to promote, but to promote to who needs it, in the products that need it, versus a blanket approach to promotion,” said Pepsi CEO Ramon Laguarta.
Procter & Gamble increased its investment in advertising as a percent of its revenue by 3% in the past quarter, according to Kevin Grundy, an analyst at the investment bank BNP Paribas, based on the earnings data.
Procter & Gamble knows its key competitors – mainly Colgate-Palmolive – increased advertising and marketing to the highest as a percent of sales in at least a couple of decades, Grundy said.
Those competitors’ dollars are going to trade marketing, he said.
In other words, they’re spending heavily with retailers, which have retail media networks that are facilitating greater market share conquesting to products that spend more on ads.
Spending within reason
Big CPG ad budgets aren’t just going up year-over-year; they’re increasing as a total percent of what these companies earn and spend.
Investors are wary of the increased spend. Even if sales go up, they may not be rising profitably if ads eat up too much of the profit margin. And there’s a strong demand to see results now, which favors the retail media and trade marketing, rather than branding.
While P&G fielded tough questions about market share losses and being outspent on advertising by Colgate, the Colgate-Palmolive team faced a tough investor inquiry to justify the high ad spend.
“We are all over trying to improve the ROI of that spend in terms of getting more bang for the buck … not increased advertising for the sake of increased advertising,” said C-P CEO Noel Wallace last week.
“I think I’ve seen about 100 ads for Procter & Gamble products, some of them great,” said Robert Moskow, an analyst at the investment bank TD Cowen, during P&G’s call this week. “But I haven’t noticed an increase in merchandising activity in our Nielsen tracking data in the US.”
Don’t sweat the Olympics ads not causing a jump in US Nielsen market share reports, assured Procter & Gamble CEO Jon Moeller. In Europe, where the store activations are live, there is an increase in store sales. But for a brand-building exercise like the Olympics, the idea is to reach new people and set an impression for the brand, so he said the benefits will play out over time.
Marketing is becoming a more prominent lever of growth for CPG businesses, at the CEO and CFO level. But the category still bears the burden of being a cost center, not a revenue driver.
“Take some assurance that you’ve got a former CFO in the CEO’s chair,” Moeller told P&G’s investors. “We’re not interested in wasting your money.”
