Advertising, a component of promotional mix has always been effective media to increase sales and revenue, irrespective of the communication model applied in campaign. One-way communication model quite often referred as “Monologue approach” by many experts which dominated advertising arena for a long period of time is on decline & giving way to Two way communication model referred as “Participative model”. Advertising that treated consumers as Passive listeners in earlier contemporary advertising has now become ineffective with a shift of Advertising nucleus from Marketer to Consumer, economic crisis world over in 2009 transformed the advertisers to act upon. The effectiveness of advertising as an effective promotional mix was questioned, as Consumers just refused to buy and consume. Endorsements by couple of celebrities, Brand ambassadors had little or no impact on consumers during the period & forced the researchers o think as to “What is hidden in coming years?”
In a complex and dynamic consumer world when many advertising mediums are available and consumers are open to receive just about any type of message, companies are exploring more low cost advertising with a higher effectiveness. Cost of advertising has been proved to have direct impact on company’s profitability. The basket of lower cost mediums which includes Social networking, tweeting, blogging, e-coupons etc. is expanding. Recently held pro kabaddi league held at various places at 8 venues in India & Common wealth games have made the task easier by creating a pool of sportsperson which are exploited by advertisers as low cost brand ambassadors & endorsers.
Key words: Advertisement, Monologue approach, Participative model
Promotion, as one of the marketing mix has always been at the helm of marketing strategy. Choosing balanced promotional mix has been the key to success for companies in past. Advertising as a promotional mix has always been effective irrespective of the communication model applied by advertisers in their campaign. Advertising has been the major occupant in the promotional mix in the traditional marketing. Print & electronic media dominated the advertisement world in the era of monologue advertising. One-way communication model quite often referred as “Monologue approach” by many experts which dominated advertising arena for a long period of time is on decline & giving way to two ways communication model often referred as “Participative model”.
The advertising industry changed at a fast pace & was occupied for a long period by famous and high priced celebrities & endorsers. Airtime duration cost takes away the maximum of advertising budget followed by production cost, Celebrity or endorser cost takes away the maximum of Production budget. HUL’s yearly advertisement & marketing budget has been estimated to be close to Rs. 2000 crore. Around 30% is absorbed by channel cost where as P&G spends annually around Rs. 1200 crores out of which around 40% roughly 250 crore is absorbed by Hindi channel cost, followed by Advertisement production cost in which, celebrity cost takes away the largest chunk.
In certain cases Endorsements by couple of celebrities, Brand ambassadors had little or no impact on consumers, resulting in a paradigm shift in the face of advertising. Focus on celebrities & famous faces for endorsing the products eating out junk of production cost is leaving space for focussing on a social cause and using common people as their brand representatives. Television which dominated the scene for a long time is leaving space for digital marketing & voice based marketing medium. 5 to 10 percent of total marketing budget goes on digital marketing; HUL expects its digital advertisement expenditure to grow by four times by 2015. Voice based mobile phone campaign is another revolution changing the face of advertisements. HUL launched such campaign for its wheel detergent targeting rural India consumers. Promotion was targeted at listeners of AIR who were asked to call a specific number and the campaign was a grand success.
Various research work have substantiated the view that Sales & profit after tax have a greater dependency upon Advertising expenses ultimately having impact on profits. Mahindra & DE (2014), attempted to study the linkages between advertising expenditure, sales and profit & found positive and significant relation between Sales revenue, profit after tax & advertising expenditure. However they also found an obvious impact of sales revenue on growth.
Andras & Srinivas (2003) reported positive relationship between advertising budgets, R&D intensity to the firm’s performance. Siong (2010) found statistically significant relationship between advertising budget and firm’s value. While analyzing data of 172 companies, Kundu, Murthy & Kulkarni (2010) found positive relationship between advertising expenditure & firm’s size & leverage. Frankberger (2004) concluded that increased advertising budget whenever possible in general creates an asset. Shah & Stark (2004) found a positive influence of advertising expenditure on the market value of firms. Qureshi (2007) while investigating the relationship between advertising budget and the market value of the firm found that Advertisement budget are significantly related with the increase in market value with a strong conclusion that Advertisement budget should be treated as investment.
Gupta (2008) found that Advertisement has significant & positive effect on firm’s revenue while it has significant adverse effect on the firm’s profitability. Leong et.al. (1996) revealed in his study that a significant and positive relationship exists between Advertisement budget and sales. Metwally (1997) studied Advertisement expenditure growth rate variation of consumer goods has a significant correlation with the sales growth and growth in Advertisement expenditure is strongly affected by movement in market shares.
FMCG Industry in India- An overview:
FMCG industry’s contribution to employment generation, GDP, Poverty elimination, foreign reserves, Government revenues (Direct & Indirect) on “Economic front” is incredible. As per FICCI Report 2013 this sector contributes on an average 30% of its revenue towards taxes.
It also contributes socially by taking various social projects under CSR, bringing rural customers to financial and consumption inclusion on “Social front”. FMCG Sector in our country occupies 4th Largest in economy with a market size of $44.9 Billion in 2013 with a growth rate of 16.2% for the period 2008-13. Market size estimation for the year 2020 has been done at $135 billion. Sectors contribution to the country’s GDP in 2013 has been estimated to be 2.4%, FMCG Industry revenue growth $ Billion is shown in the figure 1.
Source: A.C Nielson, dabur survey report 2012-13
(2008-2011, FMCG revenues have been taken from AC Nielson & Dabur reports. 2012 & 2013 figures have been arrived at by calculating CAGR of 18% & 9.4%.)
It is quite evident that the FMCG sector has a phenomenal growth since 2008 @16.2% with the market size of $44.9 billion. Figure-1 reflects a moderate figure of 9.4% in 2013 because of economic condition witnessing a moderate GDP & rising inflation rate.
FMCG industry has been witnessing a paradigm shift from traditional trade to modern trade. Traditional trade includes traditional outlets like grocery shops, general stores, chemists etc where as Modern trade includes modern channels like hypermarket and super markets.
Opening of FDI in single and multi brand retail & first time visitors to these modern channels of hyper and super markets is likely to to be the major cause of increase in Modern trade channels in India.
Modern trade channels is likely to occupy 10.12% in june 2016 from a meagre 5% in june 2010 cutting the share of traditional trade channels.
Figure-2 Composition of traditional & modern trade
If we see the segment wise FMCG revenues in Figure 3, we find that Food products are the largest sector with 47% revenue followed by the personal care products.
Figure-3 Sector wise revenue generator
Source: A.C Nielson report industry estimate, economic times 2013
FMCG industry analysis of AC Nielson report reflects few indicators that are likely to dominate the FMCG Sector in times to come.
Indian consumers are slowly shifting to “wellness concept” than “Health concept”. Health, convenience & comfort products which lead to wellness are catching attention of consumers and consumers are willing to buy premium products at higher price. Sale of diet products, baked chips, 100% juices etc are growing at a faster rate.
Indian consumers are even ready to pay higher prices of a product if it has been made to serve their specific need, taste and preferences. Market of customized product is on rise.
Rural customers have started occupying the base of the pyramid by showing higher growth than the urban customers. Rural market of FMCG Products showed a higher growth of 19% in comparison to 15% of urban market in 2013.
Contribution of rural market in the total FMCG Sale was around 33% in 2013 which is estimated to around 55% by the year 2020 by CII-FMCG Roadmap to 2020.
Globalization, Make in India initiative & FDI Policy is likely to impact the future of FMCG growth as these will lead to entry of more international players making the competition stiffer on the one hand. On the other hand, Indian giants are likely to get access to more countries with higher export revenues.
Customer analysis however reveals following characteristics which would be at the focal point & to be considered by the FMCG players.
Disposable income of Indian consumers which leads to spending is likely to increase thus acting as one of the focal points reflecting high growth of FMCG industry. As per BRIC’S report disposable income if Indian consumer was $556 in 2010 & is likely to be $1160 in 2015 & $1980 in 2020.
FMCG consumers have started showing a downward tendency in expenditure on food items thus increasing the discretionary income to be spent upon Non food items. This may lead to exceptionally high growth on non food items.
Rural consumers and markets are likely to grow exponentially in years to come. As per AC Nielson report, these consumers and market is likely to grow 10 fold to 4100 Billion by 2025.
Modern trade channels are likely to grow at much faster rate taking larger chunk from traditional trade channels.
Though the above said indicators reflect a very positive picture of FMCG industry but few bottlenecks like parallel market (spurious products), tax structure, infrastructural support would be required if we want to see the FMCG Sector at its peak.
Bright future ahead: Figure 4, a matrix shown in which two variables viz favourable tax and government policy & GDP growth have been taken on two axes.
Industry growth in terms of market size
GDP remains static @5-6% GDP Grows @8-9%
Favourable Regulation Changes
( FMCG Roadmap to 2020 & resesrchers own calculation)
It is quite evident that if GDP growth remains static at around 5-6% until 2020 & there is no major change in taxation and government policies then FMCG Sector is likely to grow@12% annually to become a market of $99 billion in 2020. On the other hand if GDP Growth rate becomes in the range of 7-8% annually & governments regulation changes with rationalization of taxes then FMCG Sector is likely to grow @17% to become a market of $135 billion in 2020. Other two blocks are pessimistic side.
Above picture undoubtedly reflects a brighter days ahead for FMCG industry.
The present study is an attempt to address the above question with following objectives:-
To examine the promotional P of Marketing Mix in FMCG industry
To explore likely impact of changing face of advertising on the profitability of the FMCG Companies.
To study the role of high cost celebrities in endorsing different brands and its impact on profitability
To focus on the future of FMCG Companies & ways to face the changing face of advertising by adhering to an appropriate strategy
Methodology & work organization:
The nature of objectives chosen for the present study compels the study to be descriptive & exploratory which contributes to discover ideas & insights. The present study is based on secondary data collected thru various sources like articles published in journals, books, reports, financial statements of FMCG Companies. In first head FMCG Industry has been analysed in macro context along with its future in coming years under the heading “FMCG Industry In India-An overview”. It is followed by “Increased Competition & its impact on profitability”. Third section gives a brief overview of role and impact of celebrities under the head “Effect of celebrities and brand endorsers on the Advertising budget”. The fourth section concludes the secondary data and other interpretations.
Section-2 Increased Competition & its impact on profitability:
More the industry analysis is lucrative, the more is the competition. Though the industry analysis portrays a bright picture, but staying ahead amidst stiff competition is becoming more and more challenging for the players of the sector. Reducing price per unit & increasing promotional budget especially advertisement budget in order to sustain has been opted by the players under compulsion thus affecting the profitability to a great extent. There seems to be no chance of much change in the scenario in coming years & it is likely that most of the FMCG Companies may only show volume growth with a substantial rise in operating cost thus impacting the profit margin adversely. The objective is to make the brand contemporary & synchronizing with today’s consumer, the direct impact would be on advertising budget and subsequently on the profitability.
In order to stay ahead amidst stiff competition, another strategy being followed by companies is by introducing variation in existing brand with the sole objective of retaining existing customers & luring new customers for new variety. Nestlé’s Maggie share was around 80% in noodles market in 2013. In order to compete with similar players like GlaxoSmithKline consumer health care & HUL in the same category, Nestle introduced Maggie soupy noodles.
This strategy as a result forces companies to increase their advertisement budget because drawing attention of the target market consumers & attempt to influence their buying behaviour becomes a necessity. As a result there is a steep hike in advertisement budget and its adverse impact on profitability.
As other competitors are also resorting to similar brand expansion strategy, opponent fear losing its existing customers and are compelled to increase their promotional budget to retain their customers. In order to retain customers, companies are also adopting the reduction of prices/ same prices with more discounts/bundle pricing etc. The tactic again helps in retaining the customers but with an adverse impact on profitability.
The above said points are substantiated by few financial parameters of HUL
Figure 5: Financial indicators of HUL Rs. In crores
Profit after taxes
Source: HUL financial papers
Section-3 Effect of celebrities and brand endorsers on the Advertising budget
Celebrity endorsement is not a new phenomenon, 20% of the advertisements in India are endorsed by celebrities (Prakash, 2012). Number of celebrities endorsing one or other brand/product has risen remarkably in past many years. According to Pul Nayya, a celebrity endorsement helps in achieving two things at a time viz;
To draw attention/create awareness
To communicate that the product/brand has been tried and tested
However, using celebrity involves high cost leading to high production budget and cannot guarantee success. Many companies have roped in celebrities involving huge cost to endorse their products but only few have been successful in generating long term revenues.
Celebrity cost depends upon the likely success of their endorsement & the key predictors for the success revolves around, Celebrity performance (Agrawal & kamakura, 1995), Celebrity credibility & expertise (Ohanion, 1990), Celebrity trustworthiness (Baseheart, 1969), Celebrity attractiveness (Joseph, 1982). Celebrity cost depends upon the degree of possession of all these predictors. More predictors the celebrity has, the more cost it is involved in roping him/her in the campaign.
Source- Adex India (TAM Media research report-2013) & author’s compilation
Margin pressure due to high advertisement cost & its Impact on profitability is beyond doubt. What are FMCG Companies doing to cope up with it; One of the strategies being followed by FMCG Companies is to change the promotional mix.
HUL and Dabur India have started giving more weight age to media advertising expenditure while lowering the budget for promotional activities in Q4 FY14. Likewise, Godrej Consumer Products has also allocated 65% of its promotional budget to be spent on advertising in the last two quarters of FY14. FMCG companies are allocating a higher proportion of their promotional budget to be spent on media advertising to reach out to a wider target audience.
Godrej, manufacturer of Cinthol, has increased the Advertising budget proportion from 60% to 65% in 2014.
The rationale behind allocating a higher proportion to advertising in Q4, HUL chief executive Sanjiv Mehta gave the logic behind higher proportion to advertising when he said that, “Input cost are going up because Oil prices have gone up . As retail prices are up, we reduced our promotional activities to recreate value for consumers & to absorb pressure on margins.”
Dabur India has also reduced its promotional activities in Q4 of FY14 to counter rising input costs.
Other strategy could be to reduce the advertisement cost by exploring the possibility of finding low cost celebrities and endorsers.
Though FMCG Market potential growth reflects India to be in the top 10 advertising market by 2015, In India celebrity endorsement are believed to be more useful in comparison to other developed countries. However extent of their positive influence on consumer buying behaviour is yet to be established in Indian context. Film stars and cricketers being popular amongst the masses have been occupying the centerstage over the years leading to high advertisement production cost eating out major portion of Advertising budget,
Recently held pro kabaddi league held at various places at 8 venues of the country & Common wealth games along with Asian games going on have made the task easier by creating a pool of sportsperson which can be exploited by advertisers as low cost brand ambassadors & endorsers.
Rakesh kumar, Deepak nivas, navneet gautam from pro kabaddi league & Abhinav bindra, amit kumar , sushil kumar, kashyap parupalli & lot many emerging from sports like wrestling, shooting, badminton in recently held Glasgow commonwealth games could be changing the world of endorsers & brand ambassadors in coming years. Many advertisers are likely to resort to theses low priced endorsers & brand ambassadors in times to come thus changing the face of advertising.
Another strategy that could be considered is to reduce the advertisement cost by exploring the possibility of getting higher volume discount by channel providers, Channel airtime duration cost eating out the largest chunk of advertisement budget needs to be reduced.
FMCG companies need to work on it & try to get heavy large volume discount ranging from 30-40% lower than the rack rates, in order to negotiate rates, giants like HUL, P&G pulled out of advertising TV channel to have a better deals and higher volume discount.
Another strategy that could be considered is to reduce the advertisement cost by exploring the possibility of finding low cost advertising mediums.
The basket of lower cost mediums which includes Social networking, tweeting, blogging, e-coupons etc will have to be expanded.
Another strategy being followed by the companies is adherence to Innovation, expansion & Acquisition.
Operational innovation & product innovation are being emphasized by FMCG Companies.
With “Winning in Many India’s (WIMI)”, Fifth region has been added by HUL i.e. parallel geographical structure that converts India into 14 consumer clusters. There is a paradigm shift from concentration on Homogeneous Market (Seeing country as few big markets) to Heterogeneous (seeing country as Mosaic of markets). This would enable HUL to reach smaller markets effectively. Launch of e-tail pilot project by HUL is another example of process innovation being adopted. This would ensure HUL to capitalize its presence in 3.2 million outlets across the country to ensure direct delivery of its products to the consumer’s door step. Kirana shop is likely to play a significant role in this. HUL may consider selling some non competing products through this route. As per the economics time report, e-tailing has the potential to reach around 20-30 billion $ in five to six years as this sector is riding on growing internet user base.
“Project double” initiative introduced by Dabur is a classic example of process innovation. Dabur’s wearable mosquito repellent including wrist band & patches under its odomos brand with positioning of “protection not only inside but also in outdoor” is likely to attract many new customers.
Godrej launches smaller sizes in its product category they expects INR 150 Crore revenue from Cinthol confidence simply by introducing smaller size. As per the IMRB Report, Indian’s prefer premium buys despite consumer slow down.
From “Family to kid” to “women”
Many FMCG Companies are resorting to the shift strategy from family & kid to women. Revital, Horlicks, kellogs have launched many products targeting women.
From “single celebrity” to “married celebrity”
Many brands like Dabur (Odonil), kelloggs, oral-B, HUL (VIM) and Bournvita have started signing celebrity mothers in its effort to cut down the production cost. Karishma kapoor, madhuri dixit, juhi chawla, kajol, sakshi tanwar with endorsing fee from 50 lakhs to 2 crore has proved to be a relief to the advertising budget. “A woman with a family can easily relate to these mature & celebrity mother faces along with the reduction in production budget”.
From “high cost celebrity pairs to parents child pair or many low cost celebrities”
Nirma shuddh namak (Dana Dana ek saman), Shakti race win of mother son promoting Bournvita or a group of 4 female low cost celebraties promoting nirma shuddh safedi are classic examples backing the findings.
Technology in advertising is going to pressurize the advertisement industry to change further, FMCG companies are forced to go with it by exploring and finding low cost media & production cost. Expanding pool of celebrities in sports & film industry and Innovation in operations as well as product will help the companies to design their own strategy to release pressure on margins.
Time is not far when technology will ensure that instead of Print & electronic media, consumers start getting personalized SMS of product detail & USP of a particular shop/product once he/she crosses that zone. Imagine one gets a SMS about heavy discount on products/lucrative offer when one passes through big bazaar along with some welcome offer on the spot. FMCG Companies have only one option that of adaptation to the changing technology supported by frequent innovation, well thought of expansion & calculated risk of acquisition backed by low cost advertising as one of the promotional mix.
Companies are already heading towards these conclusions. To quote one example, web world GOOGLES has capitalized on advanced technology and launched a revolutionary idea for advertisers. Recently launched Product gives a facility to the advertisers to pay on the basis of users click. Users click only when they are interested & companies have to pay once the users click. Such products are going to have a remarkable effect on the world of advertising & will surely help the advertisers to reduce the media cost to a great extent.
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1 Professor at Invertis University, Bareilly, U.P.
2 Associate Professor at Invertis University, Bareilly, U.P.