The FMCG industry is a low-margin business. Volumes hold the key to success in this industry. That is why the industry places so much emphasis on marketing. FMCG majors fight out in the marketplace to reach out to the masses and compete with brands in similar product categories. Brand perception influences purchase decisions here and so building that perception is critical.

Little surprising then that FMCG majors opt for high-decibel advertising in a bid to build and reinforce the notion of perceived superiority, and convert that notion finally into sales volumes. For new brands, spending more on advertising is all the more crucial. Product launches entail large initial investments in advertising and sales promotion. Launch costs are known to climb as high as 100 per cent of sales revenue during the first year of the launch.

Rising FMCG adspend
Why are the FMCGs clamouring for more advertising space and time? Advertising creates a two-dimensional awareness: about the brand name and about the product category. Then there are functional advertisements, which talk about the value of innovation that has gone into the product. Advertisements are also used to induce changes in consumer behaviour. It is not surprising that companies spend fortunes on building a brand through high-decibel advertising.

What is brand building all about? It is a name, term, sign, symbol or design or a combination of all these which is intended to identify the goods or services of one seller or a group of sellers and to differentiate them from those of the competitors. Brand-building is very crucial for FMCG companies. For, the consumers are reluctant to try out unknown brands. And brand loyalty is fickle. FMCG bluechips know this tenet which is why they work relentlessly towards brand-building through high-power advertising. True, most commercial breaks are hogged by FMCG brands. Wooing a consumer is an ongoing process and the show must go on: adspend needs to be kept up.

The arithmetic is simple and straight. FMCG majors are already spending anything between five and 12 per cent of their sales revenue on advertising and brand building. Though average sales of most leading MNCs and Indian companies in the FMCG industry have grown in only single digits over the years, their adspends have been moving up in double digits. Hikes in adspend in some cases have been as high as 200 per cent. Consider the case of Henkel Spic: the company’s adspend during 1999 was Rs 252 million, an increase of 157 per cent over Rs 98 million incurred during 1988.

Among the FMCG majors, Hindustan Lever (HLL) continues to be the largest advertiser: out of every ten television commercial, HLL accounts for more than half of them. During 1999, HLL spent a whopping Rs 7,154 million on advertising (1998: Rs 6,690 million). This is six times higher than what Dabur, the next largest advertiser, had incurred on advertising and much more than Rs 5,202 million spent by the remaining nine among the top ten.

Not surprising then that the top three rankings for 1999 have again gone to HLL, Dabur and Nestle, with a recorded annual adspend hike of 6.9 per cent, 7.9 per cent and 4.2 per cent respectively. However, in terms of adspend as a percentage of turnover, it is Dabur and Reckitt & Coleman that hog the top two slots with each of them spending annually 12 per cent of their revenues. With an adspend of 10 per cent on revenues, Cadbury and Henkel Spic rank second followed by Marico and Indian Shaving with an adspend ratio of nine per cent.

An aberration
A curious case here, however. Of the FMCG majors, only Procter & Gamble (P&G) seems to have slashed its adspend during 1999. The figures: a slash of 20 per cent, pulling its 1998 adspend ratio of 10.1 per cent to 7.8 per cent. Is this an aberration? Answers Nirav Sheth, an analyst with the Mumbai-based SSKI Securities: --This is possible because P&G has decided to concentrate just on the top hundred towns.--

Possible. But, there are chances that these figures do not reveal the real picture. Consider the fact that P&G has three companies -- P&G India, P&G Home Products which is a 100 per cent Indian subsidiary -- and P&G Distribution. --One does not really know who spends what and how much,-- adds Sheth. It is P&G Home Products that markets Ariel, Head & Shoulders and Pantene. It is quite possible that in totality adspend might not have been actually slashed. Commercial logic says it would not have been.

Key to success
Yes, we are in for greater brand clutter. The marketplace should soon see as many as 1,600 new brands jostling with the existing ones for occupying the mind-space. That is the emerging post-WTO scenario. And the brand battle is expected to be fought mostly on the television screen. Says Sheth: --Media inflation will continue to be in double digits.-- Mind you, this media inflation is only for holding on to the current mind-space, not to speak of increasing the marketshares. Says Namit Nayegandhi, an analyst with the Mumbai-based Motilal Oswal Securities: --Investing in brand-building through marketing, advertising and promos will hold the key to success in the FMCG industry.--

It is not that the FMCG players do not understand this. For instance, Henkel Spic raised its 1999 adspend by 157 per cent over what it had incurred during 1998. This 157 per cent hike was necessary to take care of new launches, re-launches of acquired brands and geographical expansion into new markets. Reckitt & Coleman and Marico too have raised their adspends by over 50 per cent.

Do such hikes in adspend make sense? Answers an analyst from a Mumbai-based foreign brokerage house: --It does. For, operating margins too are going up across the board on account of savings in raw material costs, packaging and internal overheads.-- There are scores of others who believe adspends in the Indian FMCG industry are not at all outrageous. Says Michael Fernandes, senior engagement manager, McKinsey & Company: --Adspends in India are not really out of line with global trends.--

HLL vs Nirma
Outrageous or not, adspends reflect corporate philosophy. Consider here the contrasting cases of HLL and Nirma. HLL is a heavy-duty advertiser and Nirma is not such a heavy-duty advertiser. But, both are successful. HLL has positioned itself right from day one as a national player. Says Fernandes: --HLL has always looked at the national market aggressively. It had always wanted to be the leader.-- Not just that, HLL has always believed in volumes. And thirdly, HLL has deep pockets to support its India commitment.

Nirma is a different kettle of fish. It is relatively a newcomer and a niche-player. Says an analyst with a Mumbai-based investment bank: --Nirma is one player which does not feel the need to advertise and is one which believes in passing on cost-benefits to consumers in a bid to gain volumes.-- For Nirma, this philosophy has worked pretty well. Primarily, for one reason: the company has understood the economics and rules of the rural game better than anyone else. Nirma believes that expensive advertising has no place in a market where only value-for-money product sells and where the buyer is too price-sensitive. So, there is no question of going for raising adspends and passing on that increased advertising cost over to the customer. Nirma feels that posters, banners and mobile vans among others are better media options.

Rationalising costs
What emerges from this contrast? One, there is nothing like an ideal adspend. Two, FMCG companies will have to increase their adspends to sustain their marketshares. What is vital is an FMCG company’s ability to keep its operating margins high enough to sustain that rise in adspend.

Put differently, FMCG companies should be able to prune their costs. That is why almost all FMCG players in India are constantly working on ways to trim their costs. Some have been able to show heartwarming results.

Consider Marico. The company has been bogged down by high material costs, which is at a high of 59 per cent of its sales. That is why Marico has taken up to total cost management practices and has roped in Anderson Consulting to advise on its cost initiative. Says Harsh Mariwala, Marico’s managing director: --We are looking at building an aggressive cost structure, which will help in improving our margins.--

Dabur too needs to look at its cost matrix proactively. For, Dabur’s margins are low and the company wants to hike its adspend. The only way out for Dabur is to rationalise its costs.