In an attempt to regain lost market share, FMCG major Hindustan Unilever (HUL) is said to have gone in for an advertising blitz in the September quarter. This, according to industry analysts, is expected to hurt its profitability.
Analysts said HUL’s expenditure on advertising and sales promotion (A&P) in the September quarter of the current fiscal is expected to be higher by around 40% over last year’s corresponding quarter. HUL is slated to announce its September quarter performance on Saturday, October 31.
The company is projected to have upped its A&P spend to around Rs 570 crore during the just ended quarter, while the same was Rs 404 crore during the September quarter of 2008. Analysts expect this spurt in ad spend to translate into a 250-basis-point hit on margins.
The higher ad spend is expected to offset the improvement on margins from lower input costs. Benign commodity prices provides an opportunity for companies to improve their operating margins. “Our channel checks in the media industry indicate that the HUL ad blitz has been very costly,’’ said Anuj Bansal, research analyst with DSP Merrill Lynch (India), in an earnings preview.
Daylong blockages of time on select media channels, product relaunches and promotions go on to show that HUL has accelerated its drive to boost volume growths across categories.
According to Anand Shah of Angel Broking, the higher ad spend will be a downside for HUL even as input costs have comparatively eased. According to the projections of Angel Broking, HUL is likely to report a profit after tax of Rs 474 crore on net sales of Rs 4,450 crore in the September quarter. This represents an 8% rise in PAT and a 10.5% growth in net sales.
However, the trend of an increase in advertising expenditure seems to be across the FMCG sector. With little room to take price increases, companies are banking on volume growths by upping the ante on promotions. “With the focus back on volume growth and sustaining market shares coupled with the room to spend more (due to higher gross margins), most FMCG companies have increased their advertising spends (except Colgate) in recent times, and we expect this trend to continue,’’ a report by Angel Broking said.
During July-August this year, HUL lost market shares in soaps, detergents, toothpaste and skincare with marginal gains in shampoos and coffee. Tea and ketchups were the only categories that did well. This indicates that the process of revival is slow. “Adding to the disappointment could be the continued weakness in topline (approximately 11% YoY). We expect volume growth to improve in the September quarter but it may still remain weak at mid single-digit levels,’’ the DSP Merrill Lynch report said.
Source:TOI
