Oral-B Mocks Colgate in Ad Wars Risking Profits: Corporate India
Readers seeking the news on the front page of the Times of India one day last month found something unexpected: stories from 1963 and a man in a white lab coat holding a red toothpaste packet.
The full-page ad by Oral-B maker Procter & Gamble Co. (PG) sought to mock Colgate Palmolive Co. (CLGT)’s iconic toothpaste as dated, one example of record marketing expenditure by the providers of consumer goods to India’s 1.2 billion people. The outlay is imperiling profit margins as the weakest economic expansion since 2003 curbs sales and raw material prices surge, according to Angel Broking Ltd.
“Ad spends have been extraordinarily high,” said Sunil Duggal, chief executive officer of Dabur Ltd., a company controlled by the billionaire Burman family that sells everything from air fresheners to food. “We will try to taper it down a bit because there is pressure on margins.”
Five of the nation’s top consumer-goods companies -- Hindustan Unilever Ltd. (HUVR), Dabur Ltd., Godrej Consumer Products Ltd. (GCPL) and the local ventures of Procter & Gamble and Colgate -- increased ad spending by 20 percent to 61.3 billion rupees ($979 million) last year. The pace of growth is unsustainable as India’s slowdown and inflation close to 10 percent push consumers toward cheaper products, said Espirito Santo Securities Ltd.
The S&P BSE FMCG index has tumbled about 15 percent from a recent peak in July last year, more than the 0.8 percent drop in the benchmark S&P BSE Sensex over the same period.
The index, whose 10 members include Hindustan Unilever, Dabur, Godrej Consumer Products and Colgate Palmolive India Ltd., trades at 27.5 times projected 12-month earnings, compared with the 12.6 times for the Sensex. (SENSEX)
Dabur’s earnings before interest, tax, depreciation and amortization, or Ebitda, as a percentage of sales -- a measure of profit margin -- dropped to 17.4 percent in the three months through December from 18.2 percent in the same period a year earlier, the company said last month.
Colgate India’s margin fell to 16.9 percent from 19.1 percent, while at Godrej it slid to 15.7 percent from 16.8 percent, according to Espirito. Hindustan Unilever’s bucked the trend, rising to 17 percent from 16.4 percent.
Cincinnati-based P&G, the world’s biggest maker of consumer products, ratcheted up the competition in India’s toothpaste market with the introduction of its Oral-B brand last year.
The company enlisted Bollywood actress Madhuri Dixit for a promotional blitz aimed at fighting Colgate’s 77 year-old grip on the market. Colgate responded by hiring Sonam Kapoor, a younger Bollywood actress, and offering additional incentives to shopkeepers to promote its dental creams.
Mumbai-based Colgate India spent an average 26 percent more on promotions and ads in the last three quarters, exchange filings show. Similar expenditure at Hindustan Unilever, also based in Mumbai, rose 15 percent. Dabur’s (DABUR) climbed 20 percent.
“The level of advertising and promotion spend that we see going up is a clear reflection of the level of competitive intensity,” Sridhar Ramamurthy, chief financial officer of Hindustan Unilever, said on Jan. 27. The slowing demand for discretionary goods has made it “even more challenging” to ensure profitable growth, he said.
The outlay is colliding with moderating consumer demand in an economy that may expand less than 5 percent in the 12 months through March, according to Reserve Bank of India estimates. Average annual growth in the past decade was about 8 percent.
Costs are also rising amid a consumer-price inflation rate of 9.9 percent, the highest in a basket of 17 Asia-Pacific economies tracked by Bloomberg. The rupee’s 15 percent drop against the dollar in the past year is among the contributors to price pressures in Asia’s third-largest economy.
Companies have less leeway for ad spending after prices of raw materials such as palm oil and copra revived from 2013 lows.
Prices of palm fatty acid distillate, a key ingredient in soaps, have jumped about 39 percent since March last year, according to data compiled by Bloomberg. Copra, dried coconut flesh from which oil is extracted, has surged 85 percent.
The economic environment makes consumers more likely to switch to cheaper, local-brand substitutes, said Arvind Singhal, chairman of consultant Technopak Advisors Pvt. in New Delhi.
In contrast, the headier pace of growth in earlier years swelled the middle class, helping companies such as L’Oreal SA and Unilever sell more higher-end packaged foods, shampoos and lotions.
Among the consumer businesses, Ghaziabad, Uttar Pradesh-based Dabur and Mumbai-based Godrej are poised to deliver better returns, according to Srinivasan Viswanathan, an analyst at Angel Broking in Mumbai.
Dabur is likely to gain from its recently expanded distribution network and Godrej’s operations in Africa could help it benefit from any decline in the rupee, he said.
India Brand Equity Foundation estimates India’s consumer goods market will be valued at $110 billion by 2020, a growth potential that may limit scope for swingeing ad-spending curbs as companies vie for market share.
“As media expenditure is concerned, it continues to be a focus area,” Amit Singhal, head of direct trade at Colgate India, said in an interview at an industry event on Jan. 24.
P&G didn’t immediately reply to a telephone call and an e-mail seeking comment.
While some savings may come from elsewhere -- Godrej Consumer and Unilever have scaled down promotions such as combo packs and freebies -- companies face pressure to introduce new products and add variants to lure consumers.
“Every time you come out with a new innovation or launch, they will have to increase their ad spend,” said Balaji Prasad, an analyst at Barclays Plc in Mumbai. “The only hope is that the economy recovers fast, and consumers get back to buying.”
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