Sporting events, premiumisation fuel FMCG Q1 AdEx
FMCG behemoths such as Hindustan Unilever, Marico, Dabur and Godrej Consumer Products Ltd have witnessed a substantial uptick in ad spends during the April-June quarter of 2024, compared to the same period last year. Experts say this surge in ad spends is most likely propelled by a number of factors, including mega sporting events, sluggish volume growth, a digital advertising surge, and a strategic shift towards premiumisation.
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According to industry observers, while the T20 World Cup, Elections and the Indian Premier League offered lucrative platforms, the underlying trends of digital expansion and premiumisation have been equally influential. "The April-May-June quarter is typically a high-spending period for FMCG companies, but this year, the addition of the World Cup and elections created a perfect storm for increased ad spends," said a senior media planner. "TV continues to be the dominant medium for FMCG advertising, but digital is gaining ground rapidly, with a growth rate of around 20-25% year-on-year." The FMCG Media Mix Additionally, while TV continues to be the mainstay for FMCG advertising, the role of print and outdoor media cannot be ignored, especially during elections when ad rates skyrocket, experts further suggest. According to media planners, while the exact split between digital and traditional media varies across brands, there's a general trend of equal growth in both mediums. However, the rising costs of inventory for key events have led to a slightly higher allocation towards traditional media, they say. But digital advertising has also held its ground and remained an important driver of the overall ad spend increase. Dabur India’s CEO Mohit Malhotra said in an analyst call that the company’s advertising and promotional expenditure increased by around 16% in the quarter, with digital spends now more than 30% of overall media spends. Rohit Jawa, Chief Executive Officer and Managing Director, HUL, shared on an earnings call that HUL has also stepped up digital investments leading to a 90-bps or 0.9% year-on-year increase in advertising and promotional spends. Slow Volume Growth & Premiumisation Despite the higher ad spends, FMCG companies have reported muted volume growth or gradual volume growth during the quarter. One can even look at it the other way around and say that due to the slow volume growth, the marketing was intensified by the companies. While product prices have increased, leading to higher revenue, the overall consumption remained subdued, especially outside the festive season. “In the last 2 years, market volume recovery has been gradual and much lower than what we would have liked due to the impact of sustained high inflation, combined with erratic weather patterns. Consequently, rural growth which used to surpass urban growth had lagged behind urban growth over the last year,” Jawa mentioned on the earnings call. Analysts believe that the slow volume growth might have prompted FMCG majors to invest more aggressively in advertising to stimulate demand and maintain market share. However, the long-term impact of this strategy on profitability and market share remains to be seen. Karan Taurani, Senior Vice President - Research Analyst, Elara Capital, further pointed out that inflationary pressures are seeing some level of a cool-off, so gross margins for some of the companies would have improved or remained at stable levels. “Rather than passing that benefit or reporting better EBITDA margins, they are trying to invest into marketing and ad spends to drive better growth and actually accelerate the overall volume growth.” According to a senior digital head at a leading agency there's a direct correlation between revenue growth and advertising spends for FMCG companies. “While profits have seen modest growth, the pressure to expand the top line has compelled these giants to invest heavily in advertising," he pointed out. The increasing cost of digital advertising, driven by platforms like Google and Meta, has further exacerbated the situation, industry observers mentioned. FMCG companies are compelled to maintain reach and frequency levels to protect their brand value, leading to higher advertising costs. The shift towards premiumization is another factor driving up ad spends, added the digital head. "FMCG companies are focusing on launching premium products, necessitating higher marketing budgets to establish and promote these offerings." Jawa mentioned that HUL’s premiumisation strategy has yielded tangible benefits over the last few years. “This can be evidenced by a circa 300 basis points increase in our premium contribution over the last 3 years,” he said. According to Taurani, gradually these companies are also trying to prepare for the festive season, wherein we can expect to see a lot of strong volume growth potentially. “I think this increase in ad spending will continue going ahead because most companies are now realising that to push volume growth, they will have to spend more in terms of campaigns.” As for other industry experts, as these companies continue to navigate a complex business landscape, the coming quarters will determine the efficacy of this aggressive advertising strategy in driving long-term growth and profitability.