Strong branding, high advertisement expenditure critical to growth of consumer goods companies

Consumer goods companies which have consistently invested in their brands in the past few years are likely to outperform their peers who curtailed their advertisement expenditure in a high inflationary environment.

During the last fiscal, companies such as HUL, Dabur,





Jyothy Laboratories

had significantly cut down their advertisement expenditure to protect their margins as high raw material prices were hurting. For instance,


brought down its advertisement to sales ratio in FY12 by 250 bps to 11.5 per cent, the lowest in the last three years. Similarly,


India’s domestic advertisement to sales ratio was at 10.6 per cent, its lowest in the last four years. Jyothy Laboratories’ advertisement to sales ratio was only 6.5 per cent.

Compared to this, companies such as GSK Consumer Healthcare and


have a higher advertisement to sales ratio and have been consistent in their brand investments. While GSK Consumer Healthcare’s advertisement to sales ratio has been consistently over 15 per cent for the last few years, it has been around 13 per cent for Colgate. This will allow these companies to sustain their sales growth and enjoy higher pricing power. Also, these companies will have flexibility with their spending in the coming quarters.

Strong branding also allows these companies to have a better pricing power and, hence, higher profit margins. The PBIDT (profit before interest, depreciation and tax) margins of GSK Consumer and Colgate are the highest among the lot. In FY12, PBIDT margins of GSK and Colgate were above 22 per cent and 24 per cent, respectively, while that of others were below 20 per cent. HUL, Dabur India and Marico’s PBIDT margins were 16 per cent, 17 per cent and 12 per cent, respectively.

Interestingly, in the June 2012 quarter, companies which lagged behind have also started to increase their advertisement spends. Dabur, HUL, Marico and Jyothy Laboratories increased their advertisement spend by 51 per cent, 30 per cent, 60 per cent and 77 per cent, respectively. This is likely to continue in the coming quarters as advertisement spend is the key driver for sustainable growth. While the sales growth in the previous fiscal was mainly driven by price hikes, volume growth will be critical in the current year to sustain growth. As gross margins are likely to improve for all the consumer products companies due to stabilising raw material prices, the rise in advertisement spend will offset this and restrict the improvement in profitability. However, GSK Consumer and Colgate will have no such constraints. Also strong marketing activities in the earlier quarters will ensure strong volume growth for these companies.