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Table of Contents

Abstract 2

Introduction 3

Advertising 3
Media Planning 4
The Company 6
The Product 8

Analysis 10

Quarterly 10
Consumer Promotions 14

Evaluation 16

Increasing Advertising Cost 16

Summary 20

References 21
 Abstract
The main objective of this assignment is to study the relationship between advertising
expenditure and generated revenue due to the advertising. If any business, small or big, is ready
to get the word out about its business, one of the steps that they need to do is to select the right
advertisement strategy to promote the business. Nowadays for any business, every rupee is
precious. Businesses want to get the most return for their spending and maximize the wealth of
their product and services. This assignment analyses the trend of the revenue according the
advertising expenditure. For this purpose, we have selected the product, Nestomalt for the
analysis. This product has a direct competition from Horlicks and Viva, while competing with
the other hot drinks like coffee, tea and Milk (Share of Throat). Our analysis examines the data
of 20 quarter years starting from first quarter of 2005. During this study we have also come
across and explored the effect of advertising spends during consumer promotions to sales
volumes of Nestomalt. In summary this assignment presents a real business scenario of a
product‟s sales behaviour according the advertisement expenditure.
 Introduction

Advertising
Advertising is the name given to the process of commercial promotion of goods and
services in order to increase its sales. It's probably the toughest part of any business. The
business organizations need to find clear answers for the questions such as How much to spend,
where to place the advertisements, how often, what message to send, and to who? Advertising
can be done by means of a number of mediums like television, newspapers, wall paintings,
billboards, magazines, Internet, by the word-of-mouth and in many other ways. Advertising
informs the buyers about the availability of a certain product or service in the market and
encourages them to buy it.

The main objectives of advertising are:

1. Increasing the usage of a certain product and hence acquiring more orders.
2. Creating new customers and increasing brand recognition.
3. To obtain feedback from customers regarding a certain product.
4. To indicate introduction of new products or replacement of old ones.

Advertising is a powerful tool which is capable of reaching to the far out masses.
Nowadays, we find many advertisements on the internet too. These advertisements in most cases
have been successfully in connecting the user with the information he requires and the details of
the organizations‟ products and services.

In order to evaluate the success of the advertising, a cost benefit analysis is used to find,
quantify, and add all the positive factors. These are the benefits. Then it identifies, quantifies,
and subtracts all the negatives, the costs. The difference between the two indicates whether the
planned action is advisable. The real trick to doing a cost benefit analysis well is making sure
you include all the costs and all the benefits and properly quantify them. Other factors such as
the consumer behaviours, business environment, new competitive products and other factors
which affect the market condition also need to be considered during this cost benefit analysis.
 Advertising that doesn't work is like an employee that doesn't work...it's costly. The
organization must be able to track whether the ad is working or not and why. Creating a tracking
sheet for each and every ad you produce is very much useful for the study of the performed
advertisement campaigns. When the time comes to run this promotion again, the history of both
the costs and results of the advertisements will be readily available.

The first phase of any advertisement campaign always requires a clearly set target for the
allocated spending. In general, a specific percentage of the previous year‟s sale amount is
allocated for advertising. Depending on the business this amount may be a daily, weekly,
monthly or quarterly expense. The percentage amount will also vary depending on the
organization‟s profit margins, industry, location and market size. If the organization is new in
business, industry standards can be used from associations or trade magazines devoted to the
same type of business. One of the main reasons most businesses like this form of budgeting is the
safety factor. Rather than having to "predict" the future and adjust, they are always dealing with
a known amount. The down side is an opportunity to capitalize on changing events or customer
trends are often lost due to the restrictions of the budget which is tied to a set amount, not the
current business climate.

Since major part of advertising budget is spent on media, it is important to select best media
vehicle to advertise, which can effectively communicate to the target audience. If advertising
budget is not spent well, or vain, companies may not achieve their marketing objectives.
The Company
Nestle Lanka PLC is part of Nestle S.A., of Vevey, Switzerland. It is a public quoted
company, 90% of the shares are held by Nestle S.A. and the balance held by the public. It was
founded in 1866 by Henri Nestle as a baby food company, later it became the Anglo Dutch
company and marketed a diverse range of products including Food, Cosmetics &
Pharmaceuticals. Today it operates in 130 countries and territories across the Globe with 475
factories employing 250,000 people with an annual turnover of 15 Bio. CHF (Swiss francs).
Nestle mostly concentrates on its core food business, through a range of Globally accepted
Brands, including Nescafe, Kit Kat, San Pellegrino, Buitoni, Milkmaid, Maggi, Nido and Milo to
name a few of the 10,000 products/ brands it owns.

In Sri Lanka, Nestle was established during the middle of the 20 th century. Initially
Marketing Food, Stationary and Miscellaneous items including match sticks. In 1965 it took over
the Milk board operated Sweetened Condensed Milk factory in Polonnaruwa. In 1981 it set up its
own factory in Pannala manufacturing up to 70% of its products and helping the local farming
community immensely. Today it boasts of the finest Nestle factory in the South Asian Region
(SAR) which includes Sri Lanka, India & Bangladesh.

Nestle Lanka manufactures and imports Food products in Sri Lanka, overlooks the
Maldivian operation and exports coconut Milk powder to over 50 countries in retail and
industrial packs, they are used as food ingredients or manufacturing ingredients. The leading
local Brands are NESTOMALT, NESPRAY, NESPRAY 1+, MILKMAID, MILO, NESCAFE,
NESTEA, LACTOGEN, CERELAC, NAN, NUTREN, MAGGI, NESTUM, KIT KAT &
POLO with an annual turn over of 14 bio LKR.

Nestle markets products from birth to death of a human being. Starting from infant
formula in Lactogen, Nan, Cerelac & Nestum, to growing up milk in Nespray 1+ , 3+ and milks
Nespray and Milkmaid. Nutritious drinks, Milo and Nestomalt are also part of the portfolio.
Nescafe is for a different taste segment and Hi calcium Nutren for the older generation.
Indulgence products, Ready to Drink (RTD) Milo, Nespray Milk shakes, Nescafe Ice and
Confectionary items Kit Kat & Polo are also part of the portfolio.
 The products marketed by the company are mostly mass market products and every Sri
Lankan, irrespective of their age, location or walk of life, is a potential customer. Most of the
products are market leaders in their respective categories except for a few. The strength of the
company is its Production, Marketing, Distribution and delivery to customers and consumers on
time. The company aims to create value that can be sustained over the long term by offering
people a wide variety of Quality products at affordable prices. The Nestle seal of guarantee is an
expression of this promise to the consumer. It has one of the best sales forces in the country who
are highly motivated and focused on achieving ambitious results/Objectives of the Company.

The company has a very close relationship with 10,000 milk farmers who supply the
majority of the milk required for production, across the length and breadth of the country. It
provides farmers with much needed technical support to increase productivity and supply quality
milk to the company. They in turn earn around 900 Mio. LKR per annum which gives a
tremendous boost to the local economy. The company also purchases around 60 Mio Coconuts
per annum and earns 2 Bio LKR as foreign exchange.

The Product
Nestomalt is a product of Nestle Lanka which is a malted food drink and considered as
the flagship brand of the company as it contributes to almost sixty five percent of the company
revenue. In this year it celebrates its fiftieth anniversary with a mega promotion for their
consumers. Viva and Horlicks are the main competitors for Nestomalt and both the products are
marketed by Glaxo Smithkline. In the year of 2003, Fontera Lanka launched Anchor Power Malt
as a competitive brand for Nestomalt. But, because of clever market strategies used by
Nestomalt, Anchor Power Malt is no more in the present market. Now, Nestomalt is the market
leader in malted drink category and enjoy the largest portion of the market share (Seventy four
percent). Earlier it was positioned as a drink for patients in consumer mind. Then it came up with
few new strategies and changed its position to “first cup for the day”, “Nestomalt for active life
style”, and the latest is “Keep on running” with Nestomalt.

Nestomalt was introduced to the Sri Lankan market in 1960.

 Analysis

Quarterly
Following data set (Table 1) of quarterly figures from the year 2005 to 2010 can be plotted on a
scatter diagram.
Table 1.
2005 2006 2007
t Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Xt 16,145 18,015 17,075 16,150 20,000 20,050 20,560 13,980 27,175 21,500 24,650 25,850
Yt 8,029 7,628 7,868 7,635 8,126 8,040 7,904 7,829 8,240 8,025 7,815 7,782
2008 2009 2010
t Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
Xt 20,490 34,100 31,040 10,105 21,645 33,445 27,605 20,445 25,450
Yt 8,353 7,492 7,966 7,495 8,403 8,010 8,054 7,783 8,395

Graph 1.Scatter diagram

 When we analyze Graph 1, four outliers can be identified. They are (20,490,8,353),
(34,100,7,492), (21,645,8,403), (25,450,8,395) and respectively figures of 2008Q1, 2008Q2,
2009Q1 and 2010Q1.According to Nestle in the first half of 2008,they have introduce GLOBE
system to the entire worldwide network to amalgamate worldwide transactions and purchases
and through this they have introduced three centralized negotiation centres for regional
transactions. Because of this they have to change themselves from the normal routine to
accommodate this. In the first quarter of both 2009 and 2010, consumer promotions were carried
out in the entire three months of the quarters. It is an exceptional situation compared to normal
behaviour. So we have taken out those four outliers from the data set in order to determine the
relationship between Sales and Advertising of Nestomalt.
Hypothesis can be formulated as,
Ho: β1=0, there is no relationship between Advertising and Sales ; Null Hypothesis
HA: β1≠0, there is a relationship between Advertising and Sales ; Alternative Hypothesis

Lets assume the best fit line as, Yt = β0 +β1 Xt

Where,
Xt; Advertising expenses in '000
Yt; Sales volume in Metric Tons
Table 2.
t Xt Yt xt=X t - X avg yt=Y t - Y avg xt*yt xt^2 yt^2
2005 Q1 16,145 8,029 (5,254) 133 -699,919 27,608,843 17,744
Q2 18,015 7,628 (3,384) (268) 906,326 11,454,243 71,714
Q3 17,075 7,868 (4,324) (28) 120,193 18,700,537 773
Q4 16,150 7,635 (5,249) (261) 1,371,640 27,556,324 68,275
2006 Q1 20,000 8,126 (1,399) 230 -322,153 1,958,353 52,995
Q2 20,050 8,040 (1,349) 144 -194,593 1,820,912 20,795
Q3 20,560 7,904 (839) 8 -6,888 704,612 67
Q4 13,980 7,829 (7,419) (67) 495,573 55,047,671 4,461
2007 Q1 27,175 8,240 5,776 344 1,987,991 33,357,419 118,478
Q2 21,500 8,025 101 129 12,997 10,118 16,694
Q3 24,650 7,815 3,251 (81) -262,628 10,566,324 6,528
Q4 25,850 7,782 4,451 (114) -506,451 19,807,736 12,949
2008 Q3 31,040 7,966 9,641 70 676,826 92,940,942 4,929
Q4 10,105 7,495 (11,294) (401) 4,526,734 127,563,737 160,636
2009 Q2 33,445 8,010 12,046 114 1,375,677 145,096,196 13,043
Q3 27,605 8,054 6,206 158 981,761 38,509,325 25,029
Q4 20,445 7,783 (954) (113) 107,652 910,902 12,723

Total 363,790 134,229 0 0 10,570,738 613,614,194 607,832

Ave 21,399 7,896
β1: gradient/slope=( Xt *Yt)/(Xt^2)=0.017
β 0: intercept =(Avg Yt - (β1*Avg Xt))=7,527

Therefore the best fit line, Yt = 7527 + 0.017 Xt

As the Gradient is POSITIVE, the relationship exist between two variables is POSITIVE.

Graph 2.

Standard Error (Std.err) =[(∑ ℮t^2)/((n-k) (∑ Xt ^2))]^ 1/2

Degree of freedom (n-k) = 17 - 2 ( variables)= 15
Table 3.
Xt Yt Yn = B0+B1Xt et = Yt - Yn et^2 Yn - Yt Avg (Yn - Y avg)^2
16,145 8,029 7,805 224 50,052 (91) 8,193
18,015 7,628 7,837 (209) 43,886 (58) 3,399
17,075 7,868 7,821 47 2,181 (74) 5,550
16,150 7,635 7,805 (171) 29,194 (90) 8,178
20,000 8,126 7,872 254 64,675 (24) 581
20,050 8,040 7,873 167 28,040 (23) 540
20,560 7,904 7,881 23 514 (14) 209
13,980 7,829 7,768 61 3,723 (128) 16,336
27,175 8,240 7,995 245 59,883 99 9,899
21,500 8,025 7,898 127 16,249 2 3
24,650 7,815 7,952 (137) 18,712 56 3,136
25,850 7,782 7,972 (190) 36,277 77 5,878
31,040 7,966 8,062 (96) 9,192 166 27,582
10,105 7,495 7,701 (206) 42,529 (195) 37,857
33,445 8,010 8,103 (93) 8,706 208 43,060
27,605 8,054 8,003 51 2,632 107 11,428
20,445 7,783 7,879 (96) 9,284 (16) 270
425,729 (0) 182,102

Therefore, Std.err = 0.007

t ratio (β1 /std .err) = 2.533
Degree of freedom at 15 with 5% level of confidence, critical t value= 2.131
Where, p (-2.131 ≤ t ≤ 2.131)
t ratio is outside the above range therefore the null hypothesis is rejected. That means
there is a statistically significant relationship between sales volume and advertising cost.
TSS = ESS+RSS
Where,
TSS = 607,832
ESS = 182,102
RSS = 425,729
 Lets consider the Coefficient of determination (R^2) to see how well the line fits the
scatter plot.
R ^ 2 (ESS/TSS) = 0.299
This means that 30% of the total variation in the Sales volumes is explained by the
Advertising spends. So regression line is not much fit to the data.

The degree of association between advertisement expenditure and sales is represented by

coefficient of correlation. Denoted by r,
r ((R^2)^ ½) = 0.55
This means that there is a weak association or correlation between Sales and Advertising
spend. In other words, Advertising spends and Sales volumes vary together 55% of the time.

Summary
According to the above facts and figures Nestomalt have to increase their advertising
spends annually in order to remain as the market leader in the malted food drink category. Also it
helps to prevent new entrants to the market indirectly. And also as the leader in the category
always Nestomalt should come up with new strategies to grow the category and win the majority
percentage of that growth. Viva is an aggressive player in the category in terms of spends in
advertising but always follows Nestomalt strategies.

In late 2002 before Powermalt launched, household penetration of malt food category
was around 25%.After its launch and due to high advertising spends in the category in 2003,
household penetration grown by double digits increasing it up to 36% within on year. Currently
household penetration is about 49% and Nestomalt is the market leader with 73% share.

Nestomalt is enjoying super normal profits, premium pricing opportunity and indirect
monopoly situation because Viva and Horlicks are paying a government tax as powder is
imported for them (Nestomalt is locally produced). There are examples for well established
brands to loose their position because of withdrawing advertising due to prevailing position in
the category/market. Maliban biscuit is a classic example for that as Munchee (CBL) gain market
leader position from them because of their aggressive advertising strategy. Now Munche is
enjoying about 65% share of the biscuit category where Maliban has only around 25% share.

Considering all these factors, even though analysis reveals a weak relationship between
advertising spends and sales volumes, it is strongly advised to Nestles to increase spends on
advertising on far with market conditions, in effective ways, for Nestomalt to maintain their
status/position and further increase the potential household penetration for the category.

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