Advertising As A Tool For Increasing Profitability Of Manufacturing Industries

Advertising is a prominent feature of modern business operations. One could encounter advertising messages, while watching TV, reading magazines, listening to the radio, surfing the internet or even simply working down the street, as advertising has a stimulating influence on purchasing behavior of the consumers. Empirical evidence has proven that advertising increases sales revenue of firms. Advertising provides a platform for firms to create awareness about their products or services and how consumers could make the best out of such products. This study evaluated the effectiveness of advertising expenses on the sales revenue and profitability of selected food and beverages firms in Nigeria. This study was based on secondary data collected for advertising expenditures, sales revenue and profit of food and beverages companies listed in the Nigerian Stock Exchange over the period of 2000 to 2012 from the annual report and accounts of the firms under study. Among the objectives of the study is to determine the extent to which advertising costs impact on the sales revenue and profitability of the selected food and beverages companies in Nigeria. Correlational and Ordinary Least Square regression analysis study designs were adopted for the study. The first hypothesis test showed that advertising expenses has no positive significant relationship with the sales revenue of the companies. Further, the second hypothesis test showed a positive significant relationship between advertising and the profitability of the firms. This study concluded that advertising is one of the most important medium of communication influencing the companies‟ performance in more than one ways. But its influential strategic importance could be suppressed by other factors which also try to receive equal attention at time of deciding any sales and profitability strategy. It is therefore recommended that not only advertising should be given adequate attention while formulating strategies relating to sales revenue and profitability promotion policy. Other factors which are important to increasing sales revenue and profitability such as sales promotion, personal selling, publicity etc which are crucial should be considered.

1.0 Introduction

1.1 Background to the Study

Advertising is one of the strategic devices for gaining acceptance for and monitoring a company"s performance in a competitive environment.

Advertising could however be according to mood, politics, and outlook and particularly according to one"s reaction t the last advertisement on has seen. To some, advertising could then be a good thing, or a bad thing. To some it could be useful, wasteful, boring, entertaining helpful, deceptive, silly, amusing, an instruction or a necessity. It all depends on which angle or perspective the same is viewed.

On the other hand identifies the sponsor of the message, the source of the idea it presents and thus makes two way communications possible.

Abade Akinteye and Wole Awolowo (2004) defined "Advertising as a method of delivering a sponsors message through an impersonal medium, approval, influencing attitudes and increasing sales.

Advertising as a persuasive move is primarily designed to convince the target audience of a certain product to change their attitude s towards a product to create a permanent awareness in the memory of an average consumer. Thus, without advertising, products and distributors would be unable to sell. Buyers would not know about and continue to remember products or services, and the commercial world would collapse if factory output is to be maintained profitably, advertising must be powerful and continuous.

According to Bel-Molokwu (2000) stated the word advertising is derived from the word "Advertere" to draw attention, he further planned that advertising is perhaps better from viewing it"s application what it do rather than what it is and how does it.

The institute of practitioners in advertising as quote by Defkins (1974) that "Advertising presents the most persuasive possible sending message to the right prospects for the product or services at the lowest possible cost. Advertising involves communication, economic, psychology, business, politics, law, in short, run humanities, creative arts and business discipline it is not surprising, therefore that different perspectives shape the way advertising is viewed.

Doghudje (1985), looking at it from the marketing point of view says "Advertising is a marketing tool whose sole aim is to build preferences for advertised brands and services". Advertising is not one activity but many it begins with the very first step of research to determine the problems and prospects of a given product or service, moves on to design actual writing and placement of the advertising message in the media to the last step of measuring the effectiveness of such a message.

1.2 Statement of the Problem

It is an established fact that advertising plays a very significant role in creating product or service awareness in the market place. David and James (1982) argued that advertising is one easy way to educate existing and prospective consumers about a product or service. Although it is common for people to relate the performance of a company with the priority it gives to advertising, people tend to forget that advertising budgets are a huge source of costs for the organization. In fact, the amount of resources committed by firms to advertising has steadily grown over the years because of the increased awareness and sophistication of consumers (Kotler, 2009).

Companies in Nigeria, particularly those in the manufacturing sector consider advertising as an inevitable tool for survival in highly competitive market. Empirical evidence has proven that most products in Nigeria have close substitutes that are either locally produced or imported. This implies that companies would have to rely heavily on advertising to create a brand and distinguish it from other products in the minds of consumers. Thus, advertising in Nigeria has become the gateway to survival and the acquisition of market share. However, the need for survival, the desire to control larger market share and the dream of creating brand loyalty in the minds of consumers have made successful manufacturing companies in Nigeria, like the manufacturing firms, to pay much attention to advertising programmes without recourse to the extent to which advertising has been able to commensurately improve their performance.

Despite the fact that the advertising budget of the manufacturing sector had grown over the years to constitute a reasonable chunk of expenditure for the companies, little research attention has been paid to the effect of such advertising costs on the sales revenue and net profit of the firms in Nigeria. The study by Akanbi and Adeyeye (2011) which sought to establish the effect of advertising on the sales volume of Nigerian Bottling Company Plc utilizing composite data from the annual accounts and reports of the Company from 1999-2009. This particular study is unique and significant because it attempted to overcome the deficiencies of the previous studies by intending to rise up to the current realities by utilizing the data sought from Cadbury Nigeria Plc and Nestle Nigeria Plc both in manufacturing sector in Nigeria from 2000 to 2012.The previous studies used primary data which does not adequately capture relationships. Further, this study equally tried to establish stationarity test for the secondary data utilized for this study to avoid the results being spurious which the previous studies had failed to establish. This study therefore hopes to fill these gaps.

1.3 Research Questions

Following from the statement of the problem, the study seeks to find answers to the following basic questions:

To what extent does advertising costs affect the sales revenue of selected manufacturing firms in Nigeria?

To what extent does advertising costs affect the net profit of selected manufacturing firms in Nigeria?

1.4 Objectives of the Study

The main objective of the study is to determine the effect of advertising on the sales and profitability of the manufacturing ‟ firms in Nigeria.

The specific objectives of the study are to:

Determine the extent to which advertising costs affect the sales revenue of selected manufacturing firms in Nigeria.

Evaluate the effect of the advertising costs on the net profit of selected manufacturing firms in Nigeria.

1.5 Statement of Hypotheses

The hypotheses to be tested by the study; stated in the null form, are as follows:

H01: Advertising costs have no significant effect on the sales revenue of selected manufacturing firms in Nigeria.

H02: Advertising costs have no significant effect on the net profit of selected manufacturing firms in Nigeria.

1.6 Significance of the Study

The study expects to yield a number of desirable benefits, the most essential of which is contribution to existing knowledge. Specifically, the findings of the study would provide direction as to the effect of advertising costs or expenditures on the sales revenue and profit of manufacturing companies, especially those in the manufacturing sector. Thus, the study is expected to contribute to the not-so-well-developed body of knowledge regarding the association between advertising expenditures and the sales and profitability of manufacturing companies in Nigeria by empirically ascertaining the effect of such costs on the sales revenue and the net profit of selected manufacturing firms. Similarly, the study also hopes to expand the frontiers of knowledge in the area of conducting its analysis through the use of techniques that have been hitherto overlooked by previous researchers on the effect of advertising on the sales of companies in Nigeria.

The importance of the findings of the study to the managers of manufacturing firms in Nigeria, especially those in the manufacturing sector could not be quantified in that it would provide evidence with respect to the justification of managers‟ increased resource commitment to advertising in Nigeria over the years. The findings would equip managers with better insights on how to juxtapose the benefits of increase in advertising expenditure vis-à -vis sales revenue and net profit. Furthermore, the study was also expected to be of immense utility to shareholders whose primary goal is to maximize their wealth. The findings of the study would help shareholders in their bid to monitor managers and ensure that only costs that could ensure the maximization of shareholders‟ wealth were incurred by managers on behalf of shareholders.

The outcome of the study might also be of benefit to government and its agencies in the process of making decisions. For instance, the findings of the study could guide the Advertising Council of Nigeria to understand the burden that advertising might constitute to the long-run growth and survival of firms in Nigeria, its benefit notwithstanding.

1.7 Scope of the Study

This study is concerned with the effect of advertising on the sales revenue and net profit of the selected manufacturing companies in Nigeria. The study restricted itself to the food and beverages firms in Nigeria because of the revelations by Kingsley (2012) which explained that Euro Monitor International in its findings showed that the Nigerian food and beverages sector was ranked one of the best-performing segments of Nigeria‟s manufacturing industry. The findings further revealed that operating capacity was generally at a higher level in the sector than within the Nigerian manufacturing sector as a whole, and the sector had shown good returns in the Stock Exchange.

1.8 Limitation of the Study

One of the major limitations for this study is the transportation cost incurred by the researcher. The data for this study which were extracted from the annual reports and accounts of the companies under study were got at the Abuja and Kaduna stock Exchange libraries respectively. This entailed huge sum of money to execute and had delayed the completion of this research beyond the time frame set by the researcher.

Further, many number of firms under the manufacturing sector would have been studied, but unavailability of necessary data had been a source of stumbling block. The researcher had no any other available option to him than to restrict the scope of this study to the companies under study.

Finally, the findings from this study could not be generalized across other firms since the data collected for this study were limited to manufacturing firms in Nigeria.

1.9 Definition of Terms

The following terms were in view of their technical meanings:

1. Advertising:

It is any paid message presented through various media, such as television, radio, magazine, newspapers or billboards by an identified source.

2. Brand Equity:

It is the marketing effects and outcomes that accrue to a product with its brand name compared with those that would accrue if the same product did not have brand name. 3. Brand loyalty: It is referred to the strength of buyer‟s preference for particular goods or services usually resulting in repeat purchases.

4. Carryover:

It is the rate at which the effect of advertising expenditure wears out with the passage of time.

5. Expenses:

Expenses are the costs of resources used up or consumed by the activities of the business.

6. Strategy:

It means marketing actions by management to off-set actual or potential actions of competitors

7. Profitability:

It is defined as either accounting profits or economic profits. Accounting profits mean net income, while economic profits mean net worth.

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