Tuesday, August 27, 2013

FMCG sector faces regulatory risk from TRAI that could impact their advertising spends

According to the report on fast moving consumer goods (FMCG) sector by Centrum broking, the latest regulations by Telecom Regulatory Authority of India ( TRAI) pertaining to television commercials is likely to compel FMCG companies to pay more for advertisements on the television media and thereby increase their ad spend.

Under the latest regulations, from October 1, broadcasters are allowed advertisement time of not more than 10 minutes for commercials and additional 2 minutes for own channel promotion. FMCG companies, which are top advertisers on television with more than 50 per cent share, will face the twin risk of reduced inventory to advertise, which could be cut by 25-30 per cent, and price increase as broadcasters hike prices. This will also have a positive impact where companies will have higher engagement in low clutter, reduction in channel surfing and lower gross rating points that could deliver similar share of voice.
According to the report, the companies will selectively maintain or increase their advertising and promotion spends as a percentage of sales. They have limited opportunities to decrease expenses even as headroom for gross margin expansion is limited in the second half of the current fiscal as commodities including crude and palm oil are expected to surge higher with sharp rupee depreciation.
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