On a call with investors to discuss the company’s first quarter results last week, chief financial officer John Moeller said P&G is looking to cut marketing costs by up to $500m with the savings set to be reinvested to “improve positions and support new innovations”.
A P&G spokesperson told Marketing Week that the opportunity for cost savings includes production costs and agency fees across advertising, media, public relations, package design and development of in-store materials.
“We want the best creative quality and talent working on our business,” P&G added.
“This should help us improve creative effectiveness and operate more efficiently across all agency types worldwide.”
Global Brand Officer Marc Pritchard told Ad Age last week that the company started looking at this a few years ago “because the amount of content required and the fragmentation of media and the number of touch points where consumers were going and agency sub-specialization have created a lot of extra work and in some cases a lot of extra cost”.
Money is also being moved from traditional media channels to what the company sees as more efficient digital channels, which now account for about 30% of its communications budget.
The race to drive efficiency
The company is not the only one looking to its use of agencies to cut costs – rival Unilever has also focused on driving efficiencies in the cost of producing its advertising over recent years by continuing to increase its digital ad spend while significantly cutting non-working media spend – production costs and agency fees.
Elsewhere, last year Coca-Cola announced plans to make $1bn in productivity savings by 2016 through more efficient resource and cost allocation, with savings to be invested into global brand building initiatives with increased consumer-facing media spend.
The move by P&G is largely due to pressures the Pampers, Ariel and Fairy owner is under to cut costs because of foreign exchange concerns – currency fluctuations hit sales in the three months to March, tumbling 8% to $18.1bn. Excluding the impact of foreign exchange rates, sales were up by 1%.
However, a re-examining of agency relationships isn’t just about cutting costs – companies such as P&G and Unilever are recognising that the world has changed, and traditional marketing models, many of which were developed before the age of digital, no longer work.
Further, as the world of media has evolved many brands have added multiple specialist agencies, a move that has proven to be inefficient in terms of efficiently using marketing budgets.
Richard Robinson, managing partner of Oystercatchers, who help agencies and brands create efficient models for partnerships, told Marketing Week that companies such as P&G are looking for “a model fit for purpose today, not five years ago”.
“Agencies need to look at themselves and ask if they have the most appropriate model for their clients or if they are hanging on to a colonial past,” he added, suggesting that some of P&G’s savings will come from its agencies better organising and streamlining their processes.
Developing a better process should involve “encouraging the agencies to proactively identify who their best talent is” and “elevating the decision making process” so that agencies take feedback from marketing directors rather than junior marketers, according to Robinson.
He believes P&G will look to remove duplication and consolidate at a local level, while its main lead agencies will stay the same, in an effort to develop “top quality creative that grows the business on every brand”, according to the company.
Advertisers set to adopt the same approach
P&G likely won’t be the last to adopt this structure.
Debbie Morrison, director of consultancy and best practice at ISBA, told Marketing Week that she expects to see more advertisers taking a similar approach in the coming year.
“In the desire to grow business in an ever challenging and competitive market many advertisers are now seeking ways to extract greater value from their spend and maximise effectiveness,” she said.
“To do this they are looking at their rosters and many are currently working on consolidation projects.”
She added that some brands, like BA, have already “restructured their marcoms ops and their agency relationships consolidating down into fewer more manageable relationships.”, while ISBA is having “many conversations with our members of a similar ‘consolidation’ and ‘ more value’ or ‘more agile’ nature”.
This suggests that instead of looking at P&G and Unilever’s cost-cutting strategies simply as responses to financial pressure, marketers should view them as models of more streamlined and modern marketing strategies.
“If I was the CMO of a major organisation, I would certainly be taking note of this,” Robinson says, adding that CMOs too often believe a faltering marketing performance can only be fixed by hiring a new agency.
“The problem doesn’t lie with the agency, but with the fact that they have not addressed the model their consumers now need,” he adds.
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