Unilever lifts their advertising spending to reinforce brand loyalty

Unilever is increasing advertising spending to reinforce brand loyalty and thereby reducing price elasticity of demand for their products.

In theory this will make it easier for them to pass to higher input costs onto consumers and help to maintain operating profit margins.

In 2020, Unilever spent £137 million on advertising in the UK alone. Marketing spending on this scale is a good example of how an incumbent firm with market power uses advertising as a barrier to entry to new challenger brands.

This FT article makes for fascinating reading and gives a clue as to the short-run coefficient of price elasticity of demand across a range of products

According to the FT, “ Prices for its merchandise rose 11.2 per cent in the three months to the end of June, but at the cost of a 2.1 per cent drop in sales volumes.”

A rough and ready calculation suggests that demand for brands is price inelastic.

PED = % change in demand / % change in price.

Thus, PED = -2.1/+11.2 = (-) 0.19.

When brand loyalty is strong, consumers will tend to consume products even when prices rise - the size of the substitution effect is low.

But when brand loyalty diminishes, consumers are willing to spend more time searching for relatively cheaper alternatives including own-brand (white label) products which are essentially the same but carry a much lower retail price.

Supermarket own-brands have been taking market share in recent years and the cost of living crisis is magnifying this effect.

The continued surge in sales at deep-discounters such as Aldi and Lidl is a direct result of this change in our shopping behaviour.

Unilever has engaged in significant cost-cutting and reorganisation in recent times. Bloomberg reports that Unilever has plans to to cut 15% of senior managerial positions in a bid to cut fixed costs, speed decision-making and improve accountability.

And the business is developing independent units for ice cream, beauty and personal care which includes the brand Dove.

Unilever is one of the four companies in the world with the largest plastic footprint.