The upbeat soundbites “brand-building” and “brand investment” have long been absent from the financial statements issued by many traditional packaged goods giants set on a course of cost-cutting. But that appears to be changing.
Last week Kellogg announced that it is about to embark on a “dramatic” increase in brand-building activity, despite an increase in net income of seven per cent for its third quarter. But there is a catch. The cereal manufacturer has warned that higher spending on marketing will hit the next quarter’s profits.
Kellogg joins other packaged goods manufacturers, such as Unilever and Colgate- Palmolive, which have also pledged to increase marketing investment while admitting that this higher spending is likely to dent profits.
Although it is not completely unexpected that companies alter their marketing spend according to economic conditions, it is unusual for them to issue statements that an increased focus on marketing will prove to be so expensive that it will take its toll on profits. Observers have interpreted these warnings as a signal of the rebirth of traditional brand marketing – a move that could result in more of the big, powerful advertising campaigns that in recent times have seemed few and far between.
Over the past few years, many consumer goods companies have been forced to focus on cost cutting and have slimmed down their brand portfolios. Now some might have found they have gone too far, and are facing problems that are forcing them to refocus.
More than they can chewYet Rob Rees, a marketing consultant who has worked at Campbell Grocery Products, says that many companies still have too many brands: “Mars and Procter & Gamble have focused on a few brands and have enacted all their innovation under these. Other companies support too many brands.”
Those packaged goods companies that have continued to perform well appear to have continued their commitment to marketing. P&G, which recently saw a 14 per cent rise in net profits for the last quarter, increased its UK advertising spend by &£18m this year. Nevertheless, even it has admitted that discounting by retailers and the strength of own label has forced it to cut prices in certain sectors, such as nappies. Whether the investment in marketing will stem the increasing power of retailers remains to be seen.
Nestlé, in its results presentation two weeks ago, produced two charts – one showing the market share in the grocery sector held by discount retailers, such as Aldi and Lidl, across Europe, and the other that taken by own-label brands. According to Nestlé’s figures, own-label goods now account for 41 per cent of total grocery consumption. And although discount retailers take only eight per cent of the grocery market in the UK, their share across Europe is on the increase and now stands at 21 per cent.
The development of own-label goods has hurt big brands. Premium own-label ranges, such as Sainsbury’s Taste the Difference and Tesco Finest, have moved on so much that they have become aspirational. Consumers’ perceptions of own label have shifted from believing that products are inferior in quality, to a position where they are considered to be, at best, better or, at worst, the same as branded goods. This has also been helped by retailers launching new products before branded manufacturers.
Observers also believe that the supermarkets will be able to control pricing for a long time to come. But, along with “retailers’ discounting” and “the growth of own brands”, other factors such as “unsatisfactory innovation, poor pricing, insufficient above-the-line support” have played their part in Unilever’s poor performance, says Investec food analyst David Lang.
Lang believes that an increased focus on marketing can help ease Unilever’s woes. Unilever has pledged to spend an extra &£100m on advertising globally in the run-up to Christmas in an effort to halt a slide in sales. “Where it’s been attacking the problems, things are healthier,” he says. He points to innovation within the spread business with Flora Pro.Activ brand and the &£60m revamp of the Birds Eye frozen food business, a brand all but ignored for a decade, with advertising that uses the line “We don’t play with your food”.
In household goods, he says Unilever “has been beaten up by Reckitt Benckiser in markets such as dishwasher tablets and surface cleaners”. But like other packaged goods giants, Unilever has been slow to pick up on changing trends and let its Slim-Fast brand suffer when the low-carbohydrate eating fad emerged before ordering a relaunch.
Meanwhile, faced with growing concerns about obesity, McDonald’s has been forced to promote a healthier menu and is spending millions of pounds on advertising to get its new message across. “If you want to change people’s perceptions, advertising is still the most effective way to state your case for why consumers should buy your brands,” says TBWA/London chief executive Andrew McGuinness.
Like Unilever, Kellogg has also been slow, says one food insider, to innovate and to react to new eating trends: “Kellogg’s innovation has been more a copy-cat approach than anything more clear cut. It must have been the last company to move into food-on-the-go such as cereal bars, and now it is moving into hot cereals, following the lead of Weetabix.”
Perhaps it has now decided to take the lead in its sector with the decision to increase marketing investment. But Green is sceptical about the degree to which companies like Unilever and Kellogg are committed to increasing marketing spend. He is suspicious that these recent statements of intent have been made in order to protect share prices: “It’s a game these companies play with the City. Share prices are in the doldrums, so it’s better to sound as if you are doing something.”
Green also makes the point that manufacturers often decide to undertake advertising merely to convince retailers to stock their goods. The creative execution is also often found to be lacking, he claims, as they fail to remind customers why they should buy the brand. Delaney Lund Knox Warren chairman Greg Delaney agrees: “Consumers are more savvy. You have to give people reasons to buy your brand; it’s not just advertising, it’s the quality and value of the product that count too.”
Where big manufacturers have cut back on their marketing, Green says they have allowed newer brands on the shelves to define markets: “A few years ago Ski yoghurt was always advertising and was the top-selling brand in its sector,” he says. “You don’t see advertising for it any more and now we are seeing the rise of brands, such as Yeo Valley, which offer consumers something more.”
But advertising is not the only way that a dialogue is conducted with consumers and the supermarkets have recognised this. Rob Rees says: “The retailers now have the advantage because they have developed a relationship with customers through relationship programmes, direct marketing, loyalty schemes and customer magazines.” Green agrees that loyalty schemes have helped: “The launches of Tesco’s Clubcard and such, filled retailers with confidence that they understood customers better than the brands they stocked.”
It seems that if the packaged goods giants want to wrestle control from the mighty retailers and to re-establish a healthy relationship with consumers, the only weapons available to them are marketing and innovation.