Domino Effect: Packaged Goods Woes Spreading To Ad, Media Firms

By Saabira Chaudhuri Features Dow Jones Newswires

The long-simmering pressure facing the world's consumer goods giants is now ricocheting more widely, hitting advertising firms and the media companies dependent on them.

Continue Reading Below

WPP PLC, the world's biggest advertising holding firm by sales, said a sharp pullback among these core advertisers sent revenue in the first half sharply lower. Investors sold down WPP shares heavily and some European media firms also suffered early Wednesday on worries that ad buying could dry up further.

The world's biggest makers of packaged goods, including Procter & Gamble Co., Unilever PLC, Kraft Heinz Co. and Nestlé SA, have all struggled with a host of headwinds. Changing consumer tastes are favoring healthier, fresher options for food makers. New, often smaller, local upstarts are competing for sales of everything from shaving cream to ice cream. Low inflation in many parts of the world, until just recently, has kept them from raising prices to make up for slowing volumes.

The industry--in many cases encouraged by activist investors--has responded by ratcheting back hard on costs. The penny-pinching is hitting advertising budgets hard.

Unilever's ad spending as a ratio to sales--a metric that measures marketing against the ups and down of actual revenue--fell by 1.3 percentage points in the first half of 2017, compared with the previous six months, according to RBC. Eight of Europe's 10 biggest consumer-goods firms lowered their ratio of marketing to sales in the period, averaging a drop of just over half a percentage point.

It isn't just cost-cutting. Packaged foods makers and personal-care and household-goods giants are facing competition from new upstart brands, many of which have used social media and online "influencers" to target consumers. Some big companies have tried to follow suit, shifting their own advertising focus to include these often cheaper approaches.

Continue Reading Below

The strategies have also made it more difficult to justify big-budget, multimedia campaigns--the sort of projects that made Madison Ave. what it is today--to boost flagging sales. The ad-spending falloff could be "recognition that throwing money at marketing isn't the panacea it was," said RBC analyst James Edwardes Jones.

Unilever earlier this year said it planned to cut the number of ads it created by 30% and reduce the number of creative agencies it works with by half. Like its peers, the Anglo Dutch maker of Dove soap and Hellmann's mayonnaise has been turning to YouTube stars and beauty bloggers to seed its products, diverting some money from traditional advertising channels.

Investors and analysts are divided on whether the cuts in spending are a response to a new reality or a short-term attempt to lift profit, which could ultimately dilute big brands. At least one activist investor calling for change in the sector thinks cutting back on ads is the wrong approach.

Last month, Nelson Peltz's Trian Fund Management, now a big holder of P&G stock, criticized management for " reducing advertising, specifically digital, a tactic we believe will damage the value of the company's brands if continued in the long term."

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

(END) Dow Jones Newswires

August 23, 2017 09:30 ET (13:30 GMT)