FMCG companies have reduced their advertising and promotional expenditure to safeguard their margins, as demand for their products has remained subdued. According to a study by BNP Paribas analysts, advertising spends as a share of revenues rose in Q3FY22, but remain significantly lower than in the past. The combined ad spends of nine companies were slightly below 7% in the December quarter, an improvement from the 6.5% seen in the previous quarter but lower than the 10% level recorded in Q2FY20.
Over the last year, FMCG firms have been increasing prices to combat inflation caused by higher raw material costs. However, this strategy has negatively affected their volumes and margins, as volume growth for most companies has been negative to mid-single digits due to the price hikes and a slow rural market.
Industry analysts believe that the prices of key commodities are softening, and rural demand is displaying signs of recovery, which could lead to better margins and increased advertising spends. Kunal Vora, from BNP Paribas, wrote in a report that they expect an improvement in margins in FY24, but earnings estimates are below consensus, as an increase in advertising spends and selective price cuts are required to drive volumes under pressure.
The consumer goods firms index in India has lost approximately 3% since reaching its peak in February and is currently almost flat, after rising 17% in 2022. Although demand was strong in October due to the festive season, November saw a sharp decline. December showed some improvement, though it was weaker than expected. “Demand is yet to revive till mid-Feb, which is concerning,” according to analysts at Jefferies.
FMCG firms are keeping a close eye on margins and managing costs to ensure profitability. While advertising is an essential part of their marketing strategy, cutting back on expenditure is a prudent move in the current climate. By prioritizing cost management, companies are demonstrating a commitment to long-term profitability, and this is expected to be reflected in their performance in the upcoming quarters.
The companies’ focus on margin improvement is likely to continue, with advertising spends set to rise as demand recovers. BNP Paribas analysts believe that the advertising spends will likely increase selectively, with companies implementing targeted promotional campaigns that are likely to yield better returns. Companies must strike a balance between maintaining margins and investing in advertising and promotions to drive sales growth. Finding this balance is crucial for FMCG companies looking to secure their position in a highly competitive market.
FMCG firms have had to resort to measures like increasing prices and reducing advertising expenditure to protect their margins in the face of subdued demand. However, analysts expect better margins as key commodity prices stabilize and rural demand improves. Advertising spends are also expected to rise, albeit selectively, as companies seek to drive sales growth.
