Industry experts say narrowing gross margins due to rise in raw material price and slump in rural demand have forced companies to cut down on ad spends, as reflected in their third quarter results Festive period is traditionally the time when companies open up their purse strings to go all out on advertising, with the FMCG sector leading from the front. However, the third quarter of the current fiscal turned out to be different. Despite recording good sales during the festive quarter, most FMCG brands either cut down their advertising and promotional expenses or increased the spends very marginally. One of the country's biggest advertisers, Hindustan Unilever (HUL), reduced its promotional spends by 14% on YoY basis to Rs 1,193 crore for the quarter ended December 31, 2021 against Rs 1,392 crore in the same quarter of the previous year. Similarly, Dabur posted a 17% decline in advertising spends. The company spent Rs 237.07 crore in Q3 FY22 compared to Rs 282.38 crore in the same quarter of last year. Colgate too brought down its advertising spends by 27%, spending Rs 150.89 crore in this quarter against Rs 198.3 crore in Q3 FY21. Further, Godrej Consumer Products Limited (GCPL) spent Rs 228.63 crore as advertisements and publicity expenses for the quarter ending December 31, 2021, as compared to Rs 229.06 crore in the same period last year.   Emami’s advertisement and sales promotion expenditure for Q3 FY22 too remained almost flat, with the company spending Rs 158.25 crore in this quarter against Rs 155.36 crore in Q3 FY21, a marginal increase of 1.84%. Marico was one of the very few FMCG majors that increased its A&P spends. The company hiked the expenses by 14% in Q3FY22.     The trend was highlighted by the recently released Pitch Madison Advertising Report (PMAR) 2022 too. According to the report, FMCG, the most dominant sector with a share of 51% in 2020, lost as much as five percentage points and was down to 46% in 2021. The PMAR attributes this drop to the headwinds faced by the FMCG category on account of inflation in price of raw materials on the one hand and aggression by e-commerce companies on the other hand. Industry experts too say FMCG companies had to cut down advertising spends as their gross margins have narrowed down due to the rise in the price of raw material. Also, there has been a slowdown in the demand in rural areas due to multiple factors, including inflation and economic slowdown. According to them, the ad spends are expected to be lower for the next six months. Talking about the reduced ad spends, Ritesh Tiwari, CFO and Executive Director, Finance and IT, HUL, during the December quarter 2021 earnings call, said, “We continue to ensure that competitive levels of A&P is put behind our brands, with our share of voice ahead of our share of the market. I would also want to make it clear that this does not mean that we put in the same levels of A&P spend every quarter. But what we're doing is to dynamically manage and optimize the spend to ensure competitive levels of investment whilst maximizing returns. In times of such high inflation, it is imperative to look at growth from the lens of competitiveness.” “Looking forward, I don't see an immediate respite from commodity headwinds. In fact, we are witnessing sequentially more inflation in MQ compared to DQ. Hence, we will continue to dynamically manage the business on the same principles that I spoke of,” he added. Tiwari explained how HUL plans advertising and sales promotion. “There are two or three parameters which determine the amount of investment HUL do in the quarter. The amount of innovations and activations we have determines how much we want to invest in a quarter. The second important element is competitiveness. Our share of voice, which means the amount of money we spent in relation to the industry, has been more than our share of the market. We have maintained that in this quarter as well. Now of course, what has happened given the very high amount of cost inflation and cost versus price equation across the FMCG industry, we have seen different levels of A&P investment across categories. But our very clear strategy has been to ensure that we maintain healthy investments across our brands and keep driving market development across the portfolio. So, we have not pulled back on any of those,” he added. Sudhir Sitapati, MD and CEO of Godrej Consumer Products, too expects some volume bumps in the next few quarters, but is sure the sector will come out quite well. Speaking at the Q3 FY22 earnings conference call, he shared, “I think while the overall media may be flat YoY (and YoY has various things if you look at it sequentially and in absolute crore rupees), it has significantly gone up in Q3 versus Q2. Ultimately, the media is a good thing to look at sequentially and in rupees, and that is generally our strategy. Some of these media investments don't pay back immediately, but they pay back pretty soon. We will continue to do that as we go along because our strategy remains committed to category development. There will be some volume bumps, as all of us know, in the next few quarters. I think if we are focused on category development driven through increased brand investments, we'll come out of this quite well.” Emami’s Director Mohan Goenka also shared, during the earnings call, that they would be very wise in terms of expenses, spending only at the right time. “By and large we would not disappoint on the margin front as I said that the markets are not very conducive for growth. So we would be very wise in terms of our spending. We would only spend at the right time,” he shared. Saugata Gupta, MD and CEO, Marico, during the earnings call, talked about the company increasing ad spends when the FMCG sector in general is cutting it down. “We have a slightly different mix where we face unprecedented inflation starting from quarter one of this year on copra. Number two, I think we will continue to invest behind three things: One, the digital part of the business; two is the food business, and also in value-added hair oil premiumization, you will see far more action. We have a very strong innovation calendar, reasonably ready over the next 6 to 12 months.” “In terms of our execution capability, our resilience as well as our ability, we might suffer from setbacks, but every time we will fall down, we will come back running, and therefore, our approach to innovation is far more resilient in terms of risk taking, and aggression appetite has changed because we believe that our execution capability has improved substantially. According to Punit Goenka, Managing Director & CEO of ZEEL, FMCG generally accounts for almost 50-60% of the total advertising spend for television and all the other sectors range between 6% and 8%. However, during the ZEEL earnings call, he highlighted that even though FMCG ad spends have gone down, it has no major impact on broadcast media. “No, it has not gone down much, it's just that they have reduced some amount of spending, but in the overall composition, they still remain between 50% and 60%.” Goenka believes that advertising will come back after a lag of a quarter or two. “Given the fact that our business has generally a lag effect from getting viewership to monetization, we do believe that the advertising will come back in maybe a lag of a quarter or two,” he said. According to Karan Taurani, SVP, Elara Capital, cost inflation is one of the major reasons why companies are holding back their ad spends. “Most of the FMCG companies are seeing huge gross margin pressure, which they started witnessing in H2 CY21 after the second wave. Due to this, they have decided to pull back advertising spends and it's going to continue for another six months.” He said it could be last year's base impact. “Last year, when other advertisers were not very active because of the impact of Covid on business, the FMCG sector was resilient. In CY20, the share of FMCG was growing as compared to earlier years. I think because of the base effect, now the growth rate has been slightly lesser. Therefore, cost cutting measures have been taken to protect the overall profitability. And because of a lot of headwind on raw material cost, the companies have decided to pull back advertising money.” He mentioned that other verticals like travel, edutech, e-commerce, crypto and telecom have bounced back which is why FMCG’s growth is looking slightly lesser. Nitin Menon, Co-founder of NV Capital, added, “To a certain extent it has been because of the base effect in rural demand as compared to Q3 last year when rural demand was very high because of multiple factors including government initiatives. There has been a slowdown in rural consumption which has exacerbated the drop in demands primarily because of inflation.”