If we spend, will they buy?
That's the key question facing consumer-staples companies that continue to ratchet up their advertising activity.
As recently reported by The Wall Street Journal, companies including Procter & Gamble
In fact, this is more of a continuing story than breaking news. Ad spending among consumer-staples companies such as Kraft
I suspect that the increased ad spending of 2009 generally aimed to defend existing brands' market share. Today's additional marketing appears more focused on supporting the rollout of new and updated products, and establishing a stronger value message.
First and foremost, investors should wonder how these initiatives will affect margins. An analyst referenced by the WSJ report expects consumer-products companies to spend an average 9.7% of annual sales on advertising this year, significantly higher than the 8.6% they spent in 2009. In other words, yes, expect a margin hit -- assuming no positive offset from a decline in other costs.
So why bother ramping up ads if it'll only come out of the bottom line? Most likely, companies feel that they have to firmly get ahead of private-label goods in order to reap benefits down the road.
Their unease about future sales and market-share growth seems well-founded. According to recent survey data, today's more confident consumers are more inclined to splurge on discretionary items -- note the significantly improved results at Nike and luxury retailer Coach
Of course, we saw this development coming. Last fall, then-current research revealed that consumers found themselves quite happy with private-label and store-brand wares. If the quality is good and the price is right, why go back to brands?
First-quarter results should shed more light on this issue. In the meantime, I wouldn't necessarily despair.
Even amid lower-than-hoped-for growth, history supports the investment case for consumer-staples names. As recently observed by The Globe And Mail's Market Blog, consumer staples tend to do well in a rising rate environment -- and the Fed may begin raising the key rate sooner rather than later.
In the mid-'90s, when the key rate doubled from 3% to 6%, consumer staples gained more than 10%, outpacing the S&P 500 and handily outperforming consumer discretionary stocks. During the 2004-2006 period, when the Fed lifted the key rate from 1% to 5.25%, consumer staples again beat out the discretionary sector, advancing roughly 6%.
Granted, those aren't the sorts of returns that will make you rich, but for those who want to stay invested through a potentially rocky market, all while collecting reliable dividends, it ain't so bad, either.
Wal-Mart is a Motley Fool Inside Value pick. Coach is a Stock Advisor recommendation. Unilever is a Global Gains selection. Kimberly-Clark, Procter & Gamble, and Unilever are Income Investor recommendations. The Fool owns shares of Procter & Gamble. Try any of our Foolish newsletter services free for 30 days.