P&G's $1 Billion Problem: Is Its Ad Budget Too Big?

Last Updated Aug 4, 2010 1:17 PM EDT

Procter & Gamble (PG) upped its advertising spend by $1 billion -- one billion dollars -- last year, an increase so vast that it reduced the company's profits and sent its stock tumbling 3.4 percent. The company now has the task of convincing investors that it knows what's it's doing with its galaxy-sized marketing budget. Adspend increased more than $1 billion to $8.6 billion, or 10.9 percent of net sales, the company reported. That led to headlines you just don't want to see P&G generating, such as "Ad Spending Hurts Profit at Procter & Gamble," from Reuters.

Of course, P&G is famously the master of marketing. Only idiots bet against P&G. But giants sometimes stumble, so it's worth asking whether, in an age when you can reach ever-larger audiences on the web and on mobile devices for ever-smaller sums of money, P&G is spending too much for the sales gains it forecasts in the coming year (2-4 percent in total).

Let's start with the plaudits: P&G's Old Spice campaign is genius and has boosted sales. Its online component has delivered many millions more eyeballs for very little money than any TV advertising would have done a decade ago. So P&G knows how to use new media.

But there are areas of P&G's advertising that leave me scratching my head. Exhibit A: The company's obsession with sponsoring the Olympics. I've bored BNET readers before with arguments about why sponsorship of one-off sporting events for non-obsessed masses is a waste of money, but here's a new example. In his call with Wall Street analysts, CEO Robert McDonald said:
All you have to do is look, for example, at our ad called "You'll Never Walk Alone" which supported the 2010 Winter Olympics in Vancouver and generated 6 billion impressions that we didn't pay for to see how effective that money is being spent.
This statement puzzled me because the Old Spice YouTube channel has received a "mere" 12 million views. I figured something that had been seen by the equivalent of the entire population of Earth might have popped up on my radar. But the YouTube version of that ad, a tribute to moms everywhere, has been seen by only 70,000 people. It's just not that interesting a piece of media. (If you want to hear You'll Never Walk Alone sung properly, BTW, watch this.)

McDonald also told investors that he keeps his ad budget at 10 percent of sales. Surely, if media is becoming cheaper and more targeted, there's no need for such a rote policy? That will simply drive P&G's spending towards the psychologically stressful level of $10 billion sooner rather than later. At that point, McDonald ought to think about trading his cash firehose for a set of scalpels.

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