Markets

How P&G's Ad Budget Grew to $10B, Accomplishing Less and Less as It Went

By Jim Edwards

Updated on: September 13, 2011 / 3:51 PM EDT / MoneyWatch

If Procter & Gamble (PG) CEO Bob McDonald is really going to restructure the company following the divestment of the Pringles snack business to Diamond Foods, as promised, then he might want to ask some serious questions about the size of the company's ad budget and its relative effectiveness.

P&G has done one thing amazingly well since the 2008 financial crisis: grow sales. But that growth has come at a price. The company spends nearly $10 billion on advertising -- that's billion with a "B" -- and its ad budget is increasingly hurting the company's ability to return earnings per share to investors. P&G's ad budget has grown a lot faster than its sales have grown, according to P&G's annual report through June 2011:

2011 Sales: $82.6 billion
Ads: $9.3 billion
Ads as a portion of sales: 11.3%
2010 Sales: $78.9 billion
Ads: $8.6 billion
Ads as a portion of sales: 10.9%
2009 Sales: $76,694
Ads: $7.5billion
Ads as a portion of sales: 9.8%

Note that P&G's ad budget increased by $700 million last year -- the increase alone is several multiples of what even very large companies spend on ads. More ad spending increases are to come, CFO Jon Moeller told Wall Street in his most recent conference call. Some of that spending will go behind the launch of Tide Pods (pictured above), a line extension of its iconic laundry detergent

P&G, of course, is a very large company with a huge number of brands. It is the largest advertiser on planet Earth. A lot of that spending is structural and necessary. But McDonald promised Wall Street he would begin to pay more attention to the company's productivity in future, as margins are squeezed by raw ingredient prices. He showed them this slide:

If, as McDonald believes, size and scale lead to cost advantages, why isn't that happening in P&G's ad budget? The budget has grown faster than its sales increases -- meaning the average P&G ad dollar is becoming less efficient as the company grows. In 2009, every dollar spent on TV commercials and coupons delivered, on average, $10.20 in sales for P&G. In FY 2011, it delivered only $8.86 in sales -- a 15 percent drop in productivity in three years.

P&G's ad budgets are now sticking out like sore thumbs in the company's financials. P&G actually reduced its overall sales, general and administrative spending -- the management expense line that usually contains advertising -- as a portion of sales last year, but that reduction was offset by the increase in ad dollars. Fewer managers were spending more ad dollars less efficiently, in other words. That's lousy management.

The hundreds of ad agencies, PR firms and promo shops serving P&G ought to sit up and take notice. They will be on the hot seat. Sooner or later, McDonald or his CFO will start asking some uncomfortable questions about why the nation's biggest marketer is becoming worse at its job.

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