Photo: Flickr, CC / CodePinkHQ
For the last two years I’ve grumbled on a regular basis that Procter & Gamble’s ad budget—$10 billion annually—was too bloated, accomplishing less and less as it ballooned ever-larger. In an age when digital media enables advertisers to reach vast audiences at very little cost, P&G’s billion-dollar increases in traditional media spending looked like a bubble about to burst.Yesterday, CEO Bob McDonald finally woke up to reality. P&G will peg its marketing costs at no more than 16.5 per cent of sales. With 5,700 job cuts, many of which will come from its vast army of brand managers, P&G will aim to save $10 billion in five years, and $1 billion of that will be lopped from the growth of its ad budget.
The ax will also fall on ad agency budgets, especially those handling non-consumer facing efforts and traditional media, if Citibank’s analysis is correct.
To give you an idea why P&G needed to to do this, look at this chart (below) from McDonald’s presentation to investors yesterday. It shows how P&G’s marketing budget grew unchecked as a percentage of sales, from 2009 through 2011. Although the percentage movement doesn’t appear dramatic, bear in mind that this represents billions of dollars in spending.
Sensible companies try to peg their ad budgets as a strict percentage of sales so that they can monitor the efficiency of their spending. It’s called managing your margins. That discipline was lost at P&G in recent years and only rediscovered yesterday. That’s the explanation for why 5,700 of P&G’s 130,000 people won’t be working there any more.
NOW WATCH: Briefing videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.