How to do cost-cutting right: lessons from P&G

The CPG company continues to post impressive growth in spite of reduced investment in advertising.
P&G

Pictured: P&G president and CEO David Taylor.

For several years Procter & Gamble has been ridding itself of advertising waste by cutting costs and becoming more efficient. That endeavour, as the industry found out this month when P&G released its 2019 annual report, appears to be working, with its sales performance continuing to hold strong.

The Coles Notes on P&G’s cost cutting since 2015

In 2017, the CPG giant and world’s second-largest advertiser shed $200 million from its digital ad spend over concerns that its ads weren’t effectively reaching their intended audience. The announcement followed a previous $100 million reduction that proved to have little impact on the company’s bottom line.

Continuing down that path, last year P&G announced plans to slash an additional $400 million from its advertising budget by revisiting its agency models and reducing the number of its agency partners by 50%. Cost-cutting measures undertaken in 2015 had already reduced the number of partners it works with from 6,000 to 2,500, which reportedly helped it save $750 million in agency and production costs.

The company has looked for efficiencies in other areas of the business as well. In November 2018, it announced a global restructuring that reduced its ten product categories into six business units, with the goal of streamlining operations, driving growth and giving individual brands more “executional freedom.” At the time, P&G chairman, president and CEO David Taylor described the move as “the most significant organization change [P&G has] made in the last 20 years.”

A review of the company’s performance in 2019

Released this month, P&G’s 2019 annual report showed that, during fiscal 2019, organic sales grew 5% – the best organic sales performance P&G has reported in eight yearsMoreover, the uptick was above its “going-in estimate and represents a significant improvement, with sales by quarter improving sequentially from 4% to 4% to 5% to 7%,” according to the company’s annual report. (In comparison, competitor Unilever saw 3.1% growth last year, when excluding its spreads business, while Kimberley-Clark and Colgate-Palmolive posted organic gains of more than 1% and 0.5%, respectively.)

The report suggests further reductions are on the horizon, as the company looks at “eliminating substantial waste in the media supply chain.” Over the last five years, it notes having “delivered $1 billion in savings in agency fees and ad production costs – and we see more savings potential in these areas.”

In fiscal year 2019, total global advertising costs (across television, print, radio, internet and in-store advertising) amounted to $6.8 billion, down from $7.1 billion in 2018 and 2017.

Think smart, not lean

While P&G can report that it’s business as usual following a series of sustained cuts, not all companies have been as successful: Kraft Heinz is a recent (and famous) example of the adverse effects that cost-cutting can have on a company’s bottom line.

But that could be the result of motive: while P&G looked to create efficiencies and streamline operations through cost-cutting measures, Kraft Heinz looked to lower costs (at all cost, even to its brands) through a zero-based budget approach in which every expense is justified at the start of each year.

Instead of reducing expenses to make way for profits over growth, P&G has worked to remove advertising waste by focusing on reach, rather than frequency online, according to chief brand officer Marc Pritchard when speaking with Marketing Week at the 2019 Cannes Lions Festival of Creativity.

“The reason I don’t want to talk about spending anymore is because that’s not what’s important. What’s important is how many people we’re reaching,” he said“We’re finding that we’re reaching more people and we’re trying to reduce the amount of times we reach the same person over and over again. Excess frequency is the biggest waste and in every aspect of our media we’re finding waste to allow us to be able to invest back in creating reach.”

It was previously reported that Kraft-Heinz’ radical reductions came at the cost of building its brands through marketing campaigns, and is likely one of the reasons it issued a US$15 billion asset write-down for its Kraft and Oscar Mayer brands.

“In my experience, when you stop investing in a brand it erodes,” says Karen Howe, founder of creative consultancy The Township.

Howe notes how companies are grappling with the rise of brand disloyalty, also known as “newism,” as a result of consumers growing “culturally restless” in light of unprecedented choice in all aspects of their lives. It’s a conundrum facing CPG companies, in particular, which must compete in categories where price can often be the biggest purchase driver.

Tony Chapman, consultant and CEO of Tony Chapman Reactions, says the new reality means mass brands must appeal to consumers who are buying “more and less,” meaning “more personalized, more tailored, more for me and [with] less effort and inconvenience.”

Recent Nielsen research suggests “consumer disloyalty is sweeping the globe,” especially in markets outside of North America, where advertising spend is lowest. In North America, 36% of respondents said they “love to try new things,” compared to the global average of 42%. At 47% and 45%, respectively, disloyalty was highest in the regions of Asia-Pacific and Africa and the Middle East.

Elucidating those findings in an online post, Matthew O’Grady, global managing director at Nielsen Media, notes that this is “no coincidence” as consumers “lack that constant reminder in markets where advertising spend is low.” This leads them to consider more options and, ultimately, try other brands.

As for P&G’s investment in its brands, Howe says she has seen the company make a “fervid commitment to becoming a portfolio of purpose-led brands over the last three years… Perhaps what has helped them to stave off the softening is the social commitment in concert with a hard lean into purpose.”

Similarly, Chapman acknowledges the challenge facing any conglomerate that is hoping to reduce costs for the long term. “Your brands must stand for more than profit, they must have a greater purpose that resonates with your consumer, but at the same time doesn’t make you more expensive.”