Back in January, Wyeth introduced its “Project Impact” effort. The company wants to cut 10% of its jobs over the next three years to reflect the loss of Protonix, one of its bestsellers, which went generic. Most of the cuts are in sales and marketing.
The company told investors recently it would create up to $1.5 billion in savings by doing this. So, six months later, are the cuts reflected in the company’s bottom line?
Not really. I looked at Wyeth’s financial statements and asked two questions: How many dollars does Wyeth earn in revenue and gross profit per dollar it spends on marketing (i.e. SG&A)? And is that ratio growing or declining?
It turns out that Wyeth is pretty much back where it started in the 3rd quarter of 2007, earning $3.24 in revenue and $2.33 in gross profit for every dollar it throws at sales reps and TV ads.
You can see the progress on this Excel chart (below), which shows that the productivity of Wyeth’s marketing dollars are currently in decline.
What does Wyeth have to say about this? In its 2Q 2008 conference call, CFO Greg Norden told investors:
We are on track to achieve approximately a 6% reduction in overall headcount by the end of the year and continued to expect ultimate headcount reduction to approximately 10%. We anticipate overall cost reductions from Project Impact to yield annual savings of between $1 billion and $1.5 billion to be realized over the next several years … SG&A growth for the second quarter was 3% versus the prior year and down 1% excluding the effects of foreign exchange.
That sounds wonderful, doesn’t it? (Unless you’ve been laid off, of course.) But the real explanation of how Wyeth has managed to cut all those jobs without seeing any effect on its margins came in its press release:
The 2008 second quarter and first half charges included expenses of $155.2 million and $340.8 million, respectively, primarily for severance and other employee-related costs associated with a reduction in workforce of approximately 6%, many of whom were selling and marketing personnel who supported Protonix. The 2008 first half productivity initiatives expenses were offset, in part, by a $104.7 million gain on the sale of a manufacturing facility in Japan in the 2008 first quarter. The 2007 second quarter and first half included productivity initiatives expenses of $49.8 million and $92.4 million, respectively, primarily related to manufacturing site network consolidation initiatives.
So there you have it, Wyeth’s money-saving drive has somehow managed to cost enough money to wipe out the gains it was hoping for. These are one-time charges, of course, and so shareholders can assume that in future quarters those efficiencies will start kicking in, and showing up in the form of extra net income and possibly even free cashflow … Any day now.
For other examples of companies that have somehow not gotten their marketing expenses under control, see my previous chapters on: