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From the FT's Lex blog

Stealth cost-cutting is an art form that Bob McDonald has mastered. The chief executive officer of Procter & Gamble, the U.S. consumer goods group, plans to chop $1-billion (U.S.) from his marketing budget over the next five years. But the company will not spend less. Rather, advertising costs will reduce steadily from 11 per cent of sales last year to about 10 per cent. Assuming sales growth remains on track, an absolute spending cut in any year can be avoided, say analysts at Jefferies.

Non-cut cuts such as these may slip the notice of the odd investor in advertising agencies. But it matters, because P&G is the biggest advertiser in the United States, the world's biggest advertising market, and its decisions frequently influence those of other big spenders. In 2010, P&G spent $3.2-billion in America, almost half as much again as second-placed General Motors. And P&G's peers are already redesigning their marketing plans. Reckitt Benckiser will reduce the four-fifths of its U.S. budget it spends on television to half, and invest in other – probably cheaper – media such as digital. Unilever NV is already doing this. It boosted its digital spend by 15 per cent last year, six times faster than the growth of its overall marketing budget.

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Investors should note that the top two advertising categories in the United States, and most other developed markets, are retailers and car makers – both cyclical industries. And a strong 2011 for ad agencies masked an iffy fourth quarter. In Europe, organic revenues declined by about 3 per cent, and growth in the U.S. slowed compared with prior quarters.

So it looks wrong that the big five global agencies trade at 13 times forward earnings – almost smack in the middle of the industry's peak-and-trough valuations. If P&G is a guide, the next upturn in the advertising cycle may not deliver the level of activity the agencies have seen in the past.

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