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P&G’s Ominous 15% Solution

Why the world’s largest advertiser is cutting $300 million from its TV ad budget 6/24/2005 08:00:00 PM Eastern

There is a lot to be read into Procter & Gamble’s decision to slash its national TV ad spending by 15% next year.

Given the timing of the announcement—in the middle of the 2005-06 upfront TV-advertising marketplace—some observers see it as a ploy designed to give the packaged-goods marketer some negotiating leverage to get better ad prices for its TV buys next year.

But executives familiar with P&G, the world’s largest advertiser, say the move is part of a longer-term campaign by the Cincinnati-based giant to reengineer the way its ad agencies and internal marketing team think about media—specifically, how they think about the kind of TV-centric media plans P&G has relied on for the past half century.

Where P&G’s TV money goes
Of the categories, syndication took the biggest hit in first quarter 2005, off more than 47% from the year-ago period; Spanish-language cable was up nearly 129% (figures in thousands)
Reporting period Total Broadcast network Cable Syndication Spot Spanish-language broadcast network Spanish-language cable
1Q 2003 $469,978 $189,967 $136,629 $60,225 $30,122 $45,703 $7,332
1Q 2004 $594,189 $223,523 $223,710 $86,668 $34,829 $24,389 $1,070
1Q 2005 $534,414 $168,860 $225,580 $45,516 $62,777 $29,231 $2,450
Annual Totals
2003 $2,189,266 $825,361 $751,744 $269,770 $180,109 $146,464 $15,818
2004 $2,433,410 $851,909 $1,002,975 $293,557 $161,136 $117,765 $6,068
Source: Nielsen Monitor-Plus

CABLE HURT BADLY

The TV cuts amount to a decline of about $300 million in P&G’s broadcast- and cable-network ad budgets next year. This will be especially harsh for cable, which currently has the lion’s share of the marketer’s national-advertising budget. P&G said it would slash its $1 billion-plus cable ad budget by 25%, while its $850 million broadcast-network ad budget would drop by 5%. P&G indicated plans to make unspecified cuts to its $300 million syndication budget but is not expected to slash spending on spot TV or on Spanish-language TV outlets.

The marketer is not speaking publicly about the move, and executives at its agencies declined to comment on the record, speaking off the record in only the most general terms. But one former P&G media buyer who now advises other big marketers on their national-TV ad spending believes the move is part of an effort by P&G to not be so dependent on TV.

DID GILLETTE PLAY ROLE?

“They’ve essentially been doing the same media plan I worked on 25 years ago,” says Michael Lotito, managing partner of New York-based Media IQ, a company that audits the national-TV advertising buys that agencies make for big marketers. Lotito is a former media executive at Benton & Bowles, which ultimately spawned MediaVest, the agency that currently buys P&G’s national-TV ad time.

Although he doesn’t currently work for P&G, Lotito thinks it is just catching up with other major marketers that have already shifted away from TV as a so-called “base buy,” meaning they begin their media plan with television and then layer other media on top of that. (One of Lotito’s own clients, American Express, has whittled its TV budget down from 80% of its total ad spending to just 30% over the course of the last six years.)

P&G invested nearly 80% of its 2004 advertising budget on TV, according to a B&C analysis of estimates from Nielsen Monitor-Plus. Kicking out 15% of that in one year will leave a big bruise.

Some analysts say P&G’s recent acquisition of men’s-grooming-products company Gillette plays a role. These analysts think that Gillette was paying a higher cost per thousand than P&G and that the new owners will demand the same P&G rate while also downsizing Gillette’s overall TV presence to help pay for the cost of the acquisition.

MOVE NOT A SURPRISE

Lotito is not so surprised by the move. “The honest truth is that TV spending on a broad basis by all of our clients is down only about 5%. But 5% is still a ton of money,” says Lotito. “They honestly want to be in other places than TV.”

In fact, that is exactly what the top executive of a major P&G shop—Carat CEO David Verklin—indicated last week when he spoke to a group of magazine advertisers.

“I hope you are paying attention to what’s going on in the television business. The TV business is as soft as possible. The market is down, TV budgets are down,” Verklin asserted at the Association of National Advertisers’ Print Advertising Forum in New York. “What’s interesting is my clients’ budgets aren’t down. They’re up. TV budgets are down.

“In my company,” he continued, “you need to get my approval before you can put more than 50% of a budget in television.” He’s also striving to ensure that every Carat media plan considers online-search marketing as a core element.

Fortunately for the TV industry, Carat does not buy P&G’s media. But last July, Carat and Starcom Media­Vest Group were named by Procter & Gamble as its new “communications-planning” agencies, to lead it away from its heavy dominance on TV.

While P&G is not the first big marketer to begin readdressing the role of television in its ad mix, it is an important one for the TV industry because it is known as a marketer that others tend to follow.

“They have a historical prerogative in leading the pack in anything they do,” says a top advertising consultant who advises Fortune 500 companies on their marketing strategies. “It’s not that they’re necessarily first in doing things, but when they do them, others feel like it is something they should be doing, too.”

DON'T READ TOO MUCH INTO TV CUTS

Another influential ad consultant, Erwin Ephron of New York’s Ephron, Papazian & Ephron Inc., cautions against reading too much into P&G’s TV cuts.

“I really don’t think television is going to die because of this. What’s going to happen is, it’s going erode at the margins as people discover what they can do with other media,” Ephron says.

A big factor accelerating that shift now, he adds, is that TV-advertising costs have been rising and confidence in the medium’s ability to reach consumers has been eroding.

“When television was cheap, you could look at it to do everything,” Ephron says, “but as it’s gotten more expensive, people are starting to see what tasks are done better by other media.”

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