Procter & Gamble's (PG) Q1 2012 earnings were the same old story: a healthy sales increase based on an unhealthy increase in ad spending. P&G's marketing spending is up 24 percent over the last two years, CFO Jon R. Moeller told Wall Street. Sales in Q1, however, were only up 9 percent, to $21.9 billion, and up less than 6 percent over the two-year period through Sept. 30.
P&G is the largest advertising spender in the world, burning through nearly $10 billion a year in TV, web and print ads. CEO Robert McDonald justifies the adspend by noting that the company has successfully sustained price increases across a range of its products without significant loss of market share. That, indeed, is the usual test for strong brands: extracting higher prices from consumers in the face of fierce competition.
But, as I've noted before repeatedly, P&G's progress requires a higher price of its own. It needs to blow more and more cash on advertising to sustain those price increases and that market share.
This cannot last forever. Eventually, P&G will either have to reduce its ad spending -- and let its brands stand on their own two feet in the market -- or extract price further increases that more than compensate for the money its throwing at ad agencies and TV stations. The latter scenario is unlikely in a world that's getting used to perma-recession conditions.
McDonald and his brand managers do not yet appear to be ready to accept this reality. Total selling, general and administrative expenses increased 10 percent -- more than the quarterly sales increase -- to $6.5 billion. That's the budget line within which the ad budget is ensconced. More importantly, McDonald said he would not take his foot off the ad gas pedal anytime soon. When probed by John A. Faucher of JP Morgan Chase on his runaway marketing costs, he said:
First, I'd say, marketing spending, as you rightly point up -- out, John, is up 24% over the last 2 fiscal years. So there's significance strength in that program. We're planning on increases again this year, albeit more in line with sales growth, as opposed to ahead of sales growth. And we're committed to that spend. And we have a very exciting initiative program in the back half, which we will support.He also said Tide Pods -- a new laundry detergent that utilizes a plastic bubble to deliver soap inside the machine -- are set to launch in February 2012. Tide is one of P&G's flagship brands and the spend behind this, via ad agency Saatchi & Saatchi, will require another massive ad budget.
The overall picture is of a company that is out of control, addicted to advertising budget increases, that lacks discipline and is kidding itself it is healthy because it is getting higher prices for its brands. Success that only comes after heaping increasing amounts of cash into the maw of the marketing beast isn't really "success." It's brute force. At some point, even McDonald will have to admit this is unsustainable and a pullback will be warranted. Net income, conspicuously, remained flat for the quarter, at just over $3 billion.