Tuesday, September 04, 2007

P&G redefines "ad spend" to include in-store media

While P&G has been shining a spotlight on their plans to increase their presence inside stores potentially at the expense of traditional media, the news from AdAge today is that they're taking the plan so seriously that they'll be restating 11 years of ad-spending data in an effort to align their past marketing expenditures with their new terms and plans. AdAge speculates that the new restatement has as much to do with the company's internal goals as it does with the firm's share price, which has stumbled due to lack of organic growth and a slipping ad-to-sales ratio, the primary measure by which its growth was measured throughout the 90s and early this decade. Here's the quick summary from the article:
In-store advertising accounted for "the bulk" but not all of the increases, she said. At the same time, P&G subtracted the pay of many of its own marketing executives from the reported number. That reduced ad spending by as much as $163 million in 1998, when P&G apparently had little in-store advertising to offset the salaries and benefits

In all, P&G's restatement added $349 million to 2006 ad spending, with much smaller adjustments in other years, though Sanford C. Bernstein analyst Ali Dibadj believes the differences between the old and new definitions could have boosted P&G's reported 2007 outlays by $350 million, too. P&G said it hadn't calculated or disclosed the 2007 impact.
Essentially, the company added in budgets for in-store advertising (which it does a ton of), and removed the salaries and benefits of its marketing and advertising employees, essentially highlighting external and media-related expenses instead of more nebulous internal ones. The new numbers indicate that P&G has been spending about the same percentage of its sales -- roughly 10.5% -- for at least the past decade, as opposed to the last round of figures that indicated the firm was reducing its overall ad spend. Unfortunately, though, AdAge notes that even with these changes the firm still doesn't include consumer promotion spending as part of advertising, so we still don't have a complete picture of what the world's largest advertiser is really doing.

So why is it so important to know anyway? Well, as the article notes, "P&G's figures in the past 11 years show a very high statistical correlation (0.78) between ad spending ratios and organic sales growth under the old advertising definition, and an even higher one (0.87) under the new definition. For the past five years, however, the new ad definition shows a much lower correlation to sales growth than the old one." Consequently, investors like to see a slightly increasing (or at least steady) ad spend ratio, since that should imply higher (or at least steady) sales in the near future.

We know that P&G wants to continue winning that all-important First Moment of Truth on the sales floor, and given media fragmentation and the difficulty of reaching so many different mini-demographics with ad messages these days, it looks like they'll be bringing their A-game to the sales floor, which makes a lot of sense to me. Whether or not it will improve their overall performance as they shift more attention to retail media remains to be seen, but if nothing else, this looks like a really solid hedge in the age where TiVo and the Internet are making traditional media buys more speculative and often less successful.

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