As another recession looms over the West, slowing growth and bringing runaway inflation in the Indian economy, are marketers doing a rethink on advertising spends? Dipali Banka analyses the outlook for the media industry.
If new product launches are an indication of the health of the industry, then the media truly recovered from recession in 2010. Companies like UTV, Viacom and the ADAG Group lined up a slew of channels to hit the market. Many among them were plans that had been postponed in 2008-09, when the first wave of recession came to India. India, like China and other emerging economies, managed to spend its way out of trouble and was back on track faster than the developed world. Experts actually predicted the next few years to be the golden growth years for the Indian economy.
Now, a combination of factors ranging from another looming recession in the West to high inflation and rising interest rates have threatened to subdue India’s growth prospects. CRISIL Research, in a release dated September 26, expects corporate India to report a significant moderation in revenue growth and lower E ITDA margins in July-September 2011 (Q2 FY12). The moderation is expected to be primarily due to decline in consumer confidence, on account of stubbornly high inflation and rising interest rates, and slowdown in investment growth. The report says, “Based on an analysis of the aggregate financial performance of select companies across 21 industries (excluding banks and oil companies), CRISIL Research expects year-on-year (y-o-y) revenue growth of around 15 per cent, as compared to 19 per cent in the preceding quarter and 22 per cent in Q2 FY11.”
“Sales volumes in consumption-linked and interest rate sensitive sectors such as automobiles, real estate, textiles and retail have been significantly impacted. In infrastructure-linked sectors such as cement, capital goods and construction as well, order book/volume growth has declined. We anticipate this slowdown to manifest in significantly muted topline growth during Q2 FY12,”explains Prasad Koparkar, Head - Industry and Customised Research, CRISIL Research.
In a report released last week, the International Monetary Fund (IMF) has scaled down India’s projected growth to 7.8 per cent for the current fiscal and 7.5 per cent for the next financial year as against 8.2 per cent and 7.8 per cent respectively projected earlier. That is almost half a percentage point being shaved off from each year. These figures per se don’t indicate a downturn scenario, but India Inc’s boat has certainly been rocked. The kind of buoyancy and optimism in the economic environment has now turned to a cautious and uncertain one. This is apparent in the stock market volatility and margin pressures faced by most companies.
The cumulative impact of 12 interest rate increases in 18 months has squeezed demand and high inflation has forced the Reserve Bank of India to continue raising rates. As developed economies sink deeper into fiscal problems, the Indian economy cannot shy away from the worsening global demand for exports and expansion plans of MNCs present in India. Also, given a slower number on the Index of Industrial Production (IIP) and an over-cautious Indian marketer, one does have a cocktail of reasons for the media and advertising community to be a wee bit cautious. “The Indian media and advertising industry will see an impact when some of the large MNC advertisers go slow on launching new brands and products, given the global slowdown or they go on a major cost-cutting drive. Then there is a possibility that they would cringe on the spends in India and companies here will be impacted,” says Farokh Balsara, National Leader – Media & Entertainment Practice, Ernst & Young.
In fact Jehil Thakkar, Head of Media and Entertainment Practice, KPMG, says until the macro environment stays questionable, there will be a slowdown for the short to medium term. “We were expecting the industry to grow closer to 16-18 per cent this year. Now I think that will probably come down to maybe 14.5-15 per cent. But I think within a five year horizon, we will still hold to a 16-18 percentage.”
IMPACT ON ADVERTISING
Indian markets typically go through two cycles of ad-budget cuts. One, when there is a cautionary recession and second when there is a real recession. At this point of time, we are going through this cautionary recession at the consumer end for high-ticket items, says Harish Bijoor, brand-expert & CEO, Harish Bijoor Consults Inc. To further validate his point, he says, “In cautionary recession, there is no real recession in India, but the marketer is watching Western market trends and so is the consumer. There is money in the pocket, but the consumer will not spend. He will postpone his purchase, waiting to see how things are panning out. In real recession, customers postpone and even cancel purchases.
“It bites the market and the marketer the worst when this cautionary recession hits low-ticket items as well. Therefore, the Indian GDP might be growing robustly, nearly touching the 8 per cent mark, but cautionary recession is an Eastern trait. It goes with our culture of being cautious. This bites the marketer. And this surely bites advertising moneys,” he says.
Given the inflationary climate and the rising input costs, many sectors have been facing pressure to maintain their profit margins. Across many sectors, companies have had to pass on this increase in raw material cost to the consumer by increasing prices. According to CRISIL’s financial performance preview of Q2FY12, “Although companies have hiked prices, it will not be enough to offset the rising cost pressures on account of an increase in raw materials and wage costs. Limited pricing flexibility – the result of slower volume growth and intense competition – is forcing companies to absorb a part of the rising costs. EBITDA margins would therefore remain under pressure both on an annual as well as a sequential basis.” In such a situation, most of the companies are trying to rationalise their costs across different functions and advertising and marketing spends are usually the ones which are curtailed on priority basis in order to achieve the company’s objectives. Only in exceptional cases are they maintained.
If we look at the percentage of advertising spends to net sales of leading FMCG companies in India, they have been consistently reducing it since the last three quarters. Only those companies which have launched new products have increased their advertising spends (see table: advertising spends). Dabur India, Marico and HUL saw reduction in their advertising spends. Ad spends percentage ofSales for HUL was 15.7 per cent in Q1FY11 which was reduced to 11.5 per cent in Q1FY12. In their June 2011 quarter results statement, the company says, “Commodity inflation continues to be at high levels with cost of goods going up by 480bps. Cost pressures were managed dynamically through aggressive savings programme coupled with judicious pricing. The overall competitive intensity remained high. Advertising spends were stepped up in Personal Products and Packaged Foods while spends in Soaps and Detergents were calibrated in line with industry trends. A&P spends at 11.5 per cent of sales remained competitive. The business continued to focus on driving buying efficiencies, cost-saving programmes and return on marketing investments.” Colgate-Palmolive India launched Colgate® Sensitive Pro-Relief and GlaxoSmithKline Consumer Healthcare Ltd launched Boost Glucose and Glaxose-D in the Eastern states, in the first quarter of FY11, which led to increase in their advertising spends.
“FMCG companies are reducing their advertising spends and cutting down their promotional offers along with price hikes in order to maintain margin. They are also postponing new product launches in order to focus on margins,” says Sreekanth PVS, Research Associate, FMCG & Media, Angel Broking Ltd. According to IMRB, while 83 new products were launched in the period Jan-June 2010, in 2011 for the same period, 54 new products were launched. (see graphic: New launches 2010-2011). “Year 2010 started on a positive note after the recession. All launches which were on hold for a year got launched in 2010. But 2011 is more of a cautious spending year, especially when the inflation rates are still high,” explains Manoj Menon, Group Business Director of IMRB International.
In an information update to the Bombay Stock Exchange, dated September 14, 2011 Marico stated that its slew of new product launches will call for advertising and sales promotion expenditure that may have a marked skew over the next few quarters. “This may influence the operating margins in a different manner from quarter to quarter. Such support for new products across businesses is crucial to the long term sustenance of Marico’s growth plans. We believe that this investment will be worthwhile, despite the possibility that as a result margin percentages may vary from quarter to quarter.” According to a Group M report, FMCG contributed 24 per cent of to total Indian Advertising in 2010.
Kamal Nandi- Executive VP Sales & Marketing, Godrej Appliances said with the growth trajectory of the sector goin down, they have revised their marketing budgets too. “We expected the market to move at least at a 20 per cent plus growth trajectory, whereas the market is currently moving more or less, flat and in many categories there is de-growth. We generally earmark five per cent of our revenue as marketing investment. So in a situation where the revenue is not going at the targeted level, our marketing spends will get reduced accordingly. Our marketing budget has been curtailed by 20-30 percent roughly.”
Praveen Kulkarni, General Manager (Marketing) at Parle Products, says, “We have not reduced our advertising spends, but we are not even increasing it too much this year.”
KEY SECTORS THAT WILL SEE THE IMPACT
Analysts feel that even though FMCG companies have reduced their advertising spends in the last few quarters, it will plateau out in the coming couple of quarters as they have to maintain a certain level of visibility for their brands because the demand for basic goods and services will remain constant. “Basic consumption is not coming down. People are not consuming less of basic goods and services like food and beverages and tobacco and telecom. What people are postponing a bit is what they call high digit item purchase or long gestation period item purchase--like purchasing a house or a foreign holiday. Consequently, I don’t see advertising of the basic goods and services and retail being affected,” says Peshwa Acharya, Senior VP-Marketing, Reliance Communications.
According to Shubha George, Chief Operating Officer, South Asia, MEC, “At the moment, we are not seeing an appreciable softening of the ADEx to raise concerns. Specific sectors could well be affected because of developments intrinsic to that sector, but overall the consumer consumption outlook remains positive.” The categories that are directly impacted by the increase in interest rates are likely to cut their advertising spends. This includes Auto, Real Estate, Education and Retail to a certain extent. Looking at the figures given in the latest Group M report on ad spends of different categories, we can derive that these four categories together contributed to about 26.55 per cent of the total advertising spends in 2010 and 18.16 per cent in 2009. (see table Contribution...to total advertising) Nikhil Rangnekar, Joint CEO of media audit firm Spatial Access Solutions, says that categories that will undertake a cut in advertising spends would be BFSI, Auto, Telecom, Luxury, Durables, Liquor etc. He further adds that some categories may shift their focus from premium to mass segments, as discretionary demand goes down. “Categories that operate in segments, like the automobile industry, would see a shift in budgets from the premium to the mass segments. Durables, liquor and apparels would be other examples of such industries.”
IMPACT ON MEDIA COMPANIES
In 2008-2009, when India experienced the impact of the global recession, the worst hit domains in media sector were OOH and Print industry, in that order. According to PwC India’s Entertainment and Media Outlook 2011, OOH advertising went down by 16.7 per cent, and print reduced by 3.4 per cent. (See table Growth of Indian Advertising). On the other hand, television maintained a 5.7 per cent growth with the help of FMCG spends and reducing prices to fill up volumes.
A similar trend is expected this time, and according to Thakkar of KPMG, television too may face the music. “OOH and print will certainly be impacted. To some extent, television as well, although I think regional television will still hold up,” he says.
Around 70 per cent of advertising on GECs comes from FMCG companies and given the current competitive scenario in the space, price cuts by channels and innovative media solutions are not very far off. Sunil Lulla, CEO & MD, Times Global Broadcasting, says FMCG does have a larger share in their entertainment business, but they always try and buffer that with alternative product categories. “I also think that one of the advantages we have in our network is not just about buying space, which is media, in terms of fixed spots, but also working very cleverly with certain innovative solutions. It is becoming a great supplement,” he notes.
Impact in the print segment is already being seen by DB Corp signalling a reduction in their ad revenues due to the economic scenario. In a statement on behalf of the company, Sanjeev Kotnala, Vice President, Brand Comm & National Head, Dainik Bhaskar Group, says, “We are definitely concerned and are keeping track of developments. But it is too early to comment and tough to make any statement on future possibilities.” Even Jagran Prakashan reported a slowdown in its advertising revenues in Q1FY12 on account of slowdown in ad spends by the education sector and lower national advertising, according to Angel Broking’s quarter result update.
Given the scenario, media companies too are being cautious with their expansion plans. Also, hiring at the senior level in the media domain is slow and more investments are being made on the roles that justify themselves with revenue and growth. According to Uday Sodhi, CEO, HeadHonchos.com, “While media companies are hiring aggressively at the junior level, they are being careful while hiring middle and senior level talent as they do not want to pay ‘excessive’ salaries and are ready to wait and search for the right candidate at the right cost.”
Way forward
Consumer caution is bound to make the marketer cautious, and this caution will eventually make for media caution. Even if the threat of another slowdown becomes a reality in the West, the industry has been forewarned and will know how to cope. The caution that has been generated will only make the media and advertising industry more innovative in their approach towards closing deals.
Feedback: dipali@exchange4media.com
