ABSTRACT
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 profit maximization 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.
CHAPTER ONE
INTRODUCTION
1.1 Background to the
study
The role of sales
promotion in the form of advertising in promoting product and service awareness
among consumers cannot be overstressed. Advertisement provides a platform for
firms to create awareness about their products or services and how consumers can
make the best out of such products. Olusegun (2006) opined that all
advertisement must be honest and follow ethical standards and must not be
perceived by the target consumer as lie; otherwise it can batter the image of a
company and hinder it from building successful brands. Thus, for advertising to
be effective, it must have an appeal, attract attention, command interest,
inspire conviction and must provoke interest (Frank, 2005). In the same vein,
Okeji (2008) posited that a good advert message should not be boring but rather
reflect the lifecycle of the product. He concluded that advertising must be
exposed in the right medium as this will enable organization to reach the right
people with the right message.
A number of studies such as Herbert
(1982), Nigel (1994), Gladson and Chinedu (2005) and Meshach (2007) have shown
that advertising is a major competitive tool in establishing position in the
market place. Companies use advertising not only to market and promote their
products but to among other things wade-off competitors, improve their brands
and create a vintage-point for their products in the presence of anticipated
users, buyers or clientele. Persons, organizations, groups, government agencies
and different sectors of many economies employ advertising to marshal messages
to target public. This is because a well-crafted advertisement program can be a
cost-effective way to disseminate messages and build brand preferences.
As is the trend globally, companies
in Nigeria also rely on sales promotion to get their existing and prospective
consumers informed about their products and services. Among all the tools of
sales promotion in Nigeria, advertising has grown over the years to become the
most prominent and easily understandable to firms and the general public
(Haruna, 2005). It is therefore not surprising that resources committed to
advertisement by firms in Nigeria have grown astronomically over the years.
Studies by Akanbi and Adeyeye (2011) have posited that in Nigeria, advertising
is more prominent among manufacturing firms, especially those in the food and
beverages sector as awareness regarding their products can reach the consumers
more rapidly through this channel. They also argued further that the companies
listed under food and beverages sector stand distinct as a model for the use of
advertisement to rapidly reach out to consumers. This can be substantiated by
the revelations made by Kingsley (2012) who explained that Euro Monitor
International in its recent 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 have shown good returns in the
Stock Exchange.
Analysts such as Kingsley and Paul
(2009) have argued that even though the use of advertisement as a promotional
tool is common among manufacturing firms in Nigeria like food and beverages
firms committing huge sums of money into advertising companies do not
automatically translate to better performance indices for the organizations. It
has been argued that advertising, even when very extensive, does not lead
automatically to purchase because it is the culmination of a whole sequence of
events (Abiodun, 2011).
The foregoing has shown clearly
that advertising does not take place without the organization incurring some
costs to that effect. Hence, many are of the belief that the desirability or
otherwise of advertisement by firms in Nigeria could also be established when
it is related in the context of sales and the profits that advertising
companies realize at the end. Against this backdrop of controversy, it became
very pertinent to investigate the extent to which the advertising costs of
manufacturing firms in Nigeria affect their sales revenue and profits.
Consequently, this study was conducted with the intent of establishing the
extent to which the advertising costs of the food and beverages firms affect
their profit maximizations.
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 food and beverages 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 food and beverages 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 profit
maximization 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 food and
beverages 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:
1.
To what extent does advertising
costs affect profit maximization of selected food and beverages firms in
Nigeria?
2.
To what extent does advertising
costs affect the net profit of selected food and beverages firms in Nigeria?
1.4 Objectives of the
Study
The main objective of the study is
to determine the effect of advertising on the profit maximization of the food
and beverages‟ firms in Nigeria. The specific objectives of the
study are
to:
1.
Determine the extent to which
advertising costs affect the profit maximization of selected food and beverages
firms in Nigeria.
2.
Evaluate the effect of the
advertising costs on the net profit of selected food and beverages 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 profit maximization of selected food andbeverages firms in Nigeria.
H02:
Advertising
costs have no significant effect on the net profit of selected food and beverages 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 profit maximization of
manufacturing companies, especially those in the food and beverages 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 profit maximization and the net
profit of selected food and beverages 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.
Despite the fact that the
advertising budget of the food and beverages companies had grown over the years
to constitute a reasonable chunk of expenditure for the food and beverages
sector in Nigeria, little research attention has been paid to the effect of
such advertising costs on the profit maximization of the companies in Nigeria.
The study by Akanbi and Adeyeye (2011) which sought to establish the effect of
advertising on the profit maximization of the 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 selected
food and beverages sector in Nigeria from 2000 to 2012. Further, this study
equally tried to establish stationarity test for the data utilized for this
study to avoid the results being spurious of which the previous studies failed
to establish.
The importance of the findings of the
study to the managers of manufacturing firms in Nigeria, especially those in
the food and beverages 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 profit maximization. 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 profit maximization of the selected food and
beverages 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.
A period of thirteen years was
adopted for the study ranging from 2000-2012, both years inclusive. The choice
of the period has implications for the study because it is the period within
which manufacturing companies in Nigeria especially food and beverages firms in
Nigeria attached increasing importance to advertising programmes. Thus, by implication,
the period was chosen because manufacturing companies witnessed increasing
importance of
advertising budgets during the period.
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 food and beverages 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 food and beverages firms in Nigeria.
1.9 Definition of Terms
The
following terms were in view of their technical meanings:
1.9.1
Advertising: It is any paid message presented
through various media, such as television,radio, magazine, newspapers or
billboards by an identified source.
1.9.2 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.
1.9.3 Brand
loyalty: It is referred to the strength of buyer‟s
preference for particular goods or services usually resulting in repeat purchases.
1.9.4 Carryover: It is the rate at which the effect of advertising expenditure wears
out with
the
passage of time.
1.9.5 Expenses: Expenses are the costs of resources used up or consumed by the
activities of
the business.
1.9.6 Strategy: It means marketing actions by management to off-set actual or
potential actions of
competitors
1.9.7
Profitability: It is defined as either
accounting profits or economic profits. Accounting profits mean net
income, while economic profits mean net worth.