A consistent trend across a whole range of big brands over the past few years has been a push for greater efficiency with their ad spend. On quarterly earnings calls executives at major brands, including the world’s biggest ad spenders, have talked about making their ad dollar work harder, looking for better ROI on their ad spend.
For some, increasing ROI on advertising has led them to increase ad spend further. For example P&G’s CEO Jon Moeller earlier this year spoke of how his brand’s investment in advertising efficiency is paying off, leading to higher overall ad spend. There’s a lot of sense in this – as advertising delivers better returns and more value, it should be more attractive to brands as an investment.
But not everyone is taking this approach. Others are focussing on ROI, but then using these efficiency gains to keep ad spend comparatively low. In essence, they’d prefer to drive the same results with less money, than greater results with more money.
Snacks and drinks maker PepsiCo seems to be following this logic. Efficiency in advertising has been a big focus for the company, according to CEO and chairman Ramon Laguarta. “We’re optimising A&M [advertising and marketing], trying to get to higher ROI on A&M and our trade investments,” he said in his opening statements on the company’s quarterly earnings call.
PepsiCo has raised its ad spend over the past year, and plans to continue doing so. But as a percentage of sales, ad investment is still significantly below pre-pandemic levels. When this point was raised on the earnings call, Laguarta referenced the company’s efforts to optimise ad and marketing spend and measure ROI.
Similarly The Hershey Company’s chairman and CEO Michael Buck was asked on his company’s earnings call why ad spend isn’t being raised at a higher rate, given challenges the company is facing with elasticity. Buck replied that his team are “big believers” in advertising, but added that “we also constantly look to try and make those dollars work harder and harder for us.”
“We’ve made some pivots in terms of some of our targeting that are actually going to give us expanded reach levels that will be greater than sales,” said Buck. “So the impact we will get from that media will be more than the dollar increase.”
ROI in focus
If a brand manages to raise its return on ad investment, say from $3 per dollar spent to $4 per dollar spent, it makes sense to funnel more spend into advertising since the returns are greater. So why are some brands using higher ROI as a reason to dampen ad spend increases?
There are a few potential answers. Firstly, brands have limited resources. If they didn’t, it would make sense to invest as much as they could into advertising until the return on ad spend was 1:1. As it is, advertising has to compete with other potential business costs, including distribution and innovation.
In this context, it may simply be the case that some marketers would rather use extra cash freed up by more efficient advertising to spend elsewhere, rather than investing it back in marketing. Or for publicly traded companies where investors look for margin growth, it may be tempting to take savings made in the marketing department as extra profit.
A related potential reason is that as brands focus more on advertising’s ROI, they may actually see it as less valuable when they compare that ROI with other lines of investment, even as they find ways to make advertising more efficient.
PepsiCo’s CEO Ramon Laguarta referenced this when talking about his company’s A&M spend. He mentioned the company’s ‘push’ model, which focussed on in-store promotion. “You should be thinking about our selling and distribution costs not only as a cost, but also as a way for us to execute very granularly across millions and millions of points of sale around the world, where we reach the final point of sale and we create visibility for our brands and impulse for our brands, which are relevant if you think about the categories where we compete,” he said.
In essence, for PepsiCo the ROI on in-store promotion may be greater than traditional advertising, meaning savings in the latter are invested in the former.
The question here is how advertising’s ROI is being measured. Obviously a huge part of advertising’s value is in driving sales not just tomorrow, but next month, next year, even ten years down the line through brand building. This won’t necessarily show up in shorter-term ROI measurements, and may make ad spending appear less favourable as a target for investment, but neglecting this impact can have consequences further down the line.
Sometimes a propensity for short-term thinking is blamed on the need for publicly-traded companies to deliver short-term results. But as the Institute for Practitioners in Advertising (IPA) has reported in recent months, investment analysts increasingly look at the strength of brands’ marketing when assessing the strength of a stock, viewing it as an investment rather than a cost.
