Colgate-Palmolive Company (CL)

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See all Bulls Reasons Bulls: Reasons To Buy Streamlining operations yielding higher margins 0% agree Streamlining operations yielding higher margins Since launching the 2004 Restructuring Program, Colgate-Palmolive has streamlined its operations: its gross margin is expected to expand to 60% by the year 2010. View or Edit Reason 0 votes 0% agree Colgate dominantes the market for toothpaste with 40% share 0% agree Colgate dominantes the market for toothpaste with 40% share Colgate dominantes the market for toothpaste with a 40% market share. A tighter focus on areas such as Oral Care has allowed the company to best rival Procter & Gamble. Additionally, Colgate enjoys brand loyalty and high-recognition which gives it a wide moat. View or Edit Reason 0 votes 0% agree Dominant presence in emerging markets 0% agree Dominant presence in emerging markets Colgate's dominant presence in emerging markets firmly locates it as a major beneficiary of rising rates of consumer product consumption in developing regions. View or Edit Reason 0 votes 0% agree See all Bears Reasons Bears: Reasons To Sell Nowhere to go but down internationally 0% agree Nowhere to go but down internationally Colgate's wide lead in emerging markets and its high operating profits leaves plenty of rooms for multinational (i.e. cash-rich Procter & Gamble) and local competitors which can quickly take marketshare. View or Edit Reason 0 votes 0% agree How many times can you can reinvent toothpaste? 0% agree How many times can you can reinvent toothpaste? Ultimately, there may be a limit to the amount of times that you can reinvent toothpaste. Colgate does not have the same product exposure as its competitors. The dominance of a few product types such as toothpaste makes it heavily dependent on rebranding and brand extensions. View or Edit Reason 0 votes 0% agree Over dependence on Latin America 0% agree Over dependence on Latin America Colgate is overly-dependent on Latin America which has been the company's prime growth engine in recent years, contributing 40% of organic growth. Maturing and increasingly saturated Latin American markets will hardly be able to keep pace with past growth. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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With commercial presence on six continents, Colgate-Palmolive (NYSE: CL) is one of the world's largest consumer products companies. Since its 1806 founding, Colgate has grown into a sprawling multinational corporation with a record $3.7 billion in net sales and $ 0.8 billion in operating profit for FY 2008 Q2.^[1] The company's flagship toothpaste product line serves billions worldwide and commands a staggering 40% world market share.

Colgate's major advantages are the strength of its brand and its strong, global presence: 82% of the company's Q2 FY 2008 revenues came from outside the United States, and about 40% came from rapidly growing emerging markets (Latin America represented Colgate's single largest source of revenue in 2007).^[2] Colgate's brand strength in foreign markets allows the company to command impressive market share and high profit margins. An example of this is Colgate's leading mouthwash market share of 40% in Brazil.^[3]

Colgate’s recent outperformance of its peers within the consumer products market is a testament to how management has positioned the company relative to its United States and global consumers. While consumer products companies in the United States have been hit hard by poor consumer spending domestically, Colgate has been steadily expanding its operations throughout Latin America, Africa, and Asia, maintaining quarter after quarter of positive sales growth in these regions.

[edit] Corporate Overview

Colgate-Palmolive traces its roots to 1806, when William Colgate first opened a starch, soap and candle factory in New York City, taking its current name for the first time in 1953. From these very humble beginnings, Colgate-Palmolive evolved into the world-class, multinational corporation it is today. Its operations by region are: North America, Latin America, Europe/South Pacific, and Greater Asia/Africa. The company divides its business into two product segments: Oral, Personal and Home Care, and Pet Nutrition.

[edit] Oral, Personal and Home Care

• Oral Care (40% of 2007 revenues): Colgate's most recognizeable products are in oral care, including Colgate-brand toothpaste, toothbrushes, mouth rinses and dental floss. Growth in this product line is highly dependent on rebranding and new product introduction.
  • Colgate also produces pharmaceutical products for dentists and other oral health specialists.
• Personal Care (23%): Colgate has recently tried to grow this segment through acquisitions, taking a controlling stake in organic goods company Tom's of Maine in 2006.
  • Primary brands: Irish Spring, Softsoap, Palmolive, Speed Stick, Lady Speed Stick, Crystal Clean, Team Spirit, Afta, Skin Bracer
• Home Care (24%): Ajax, Palmolive, Crystal White Octagon, and Dermassage dishwashing detergents/degreasers; Suavitel faric conditioners; Murphy and Ajax household cleaners.

[edit] Pet Nutrition

Colgate's Hill's Pet Nutrition makes specialty pet nutrition products for dogs and cats. Hill's pet products are marketed primarily under two brand names: Science Diet, a wide array of over-the-counter products for everyday use, and Prescription Diet, therapeutic products sold to help malnourished pets threatened by disease. In FY 2007, Pet Nutrition accounted for 13% of sales.

[edit] Product Sales by Region

Colgate also divides its operations into the following regions:

[edit] North America

North America is Colgate-Palmolive's oldest geographic region and one of its most mature markets. Growth has slown noticeably in recent years, though it hasn't stopped: fiscal 2007 saw a North American revenue increase of 5% (total North Am. revenue was $2.7B).^[4] To maintain steady growth in this market, Colgate has employs three principle strategies:

• Continual rebranding--Colgate can convince customers to spend more and growing company sales by releasing new twists on under established brands. Examples: Colgate Luminous Mint Twist toothpaste, Softsoap Brand Pure Cashmere moisturizing body wash, Irish Spring MoistureBlast bar soap
• Growth through external acquisition: Acquistions like the Tom's of Maine deal (2006) can help Colgate tap into hot new markets that Colgate itself has little or no expertise in. In Tom's case, it was the rapidly expanding organic personal care products market. Tom's of Maine contributed 0.5% to North American sales growth in 2007.^[5]
• Cost cutting: a restructing announced several years has been steadily expanding operating margins and hopes to achieve an operating margin of 60% by 2010.

[edit] Latin America

Latin America represents Colgate's single largest geographical region by sales and has been the prime propeller of the company's growth over the past decade. In all, Latin America represented 42% of Colgate's sales in emerging markets, with 50% of revenue coming from Mexico alone. Net sales in Latin America grew an impressive 15% in 2007 to $3.5 billion.^[6] Strong growth in countries such as Brazil, Colombia and Argentina were driven by core brands such as Colgate Total and Sensitive toothpastes and Lady Speed Stick Double Defense deodorants. In addition to increases in sales volumes, Colgate's Latin American segment benefited from the declining dollar and a positive impact of foreign exchange. Despite the strong performance of this region in the recent past, analysts now fear that Colgate may be approaching a point of saturation in its Latin American region--if so, a noticeable slowdown in sales growth may be in the company's future.

[edit] Europe/South Pacific

At the beginning of 2006, Colgate modified its geographic report structure to "address evolving markets and more closely align countries with similar consumer needs and retail trade structures." As part of this move, Eastern European countries and Russia were transfered to the "Asia" region, while operations in the Srouth Pacific and Australia were transfered to the Europe/South Pacific region. The Europe/South Pacfic segment represents another of Colgate-Palmolive's more mature, slow-growing markets. In 2007, net sales grew to $3.4 billion representing a 14.5% increase from the year earlier.^[7] Again, growth in this more mature market was driven primarily by rebranding and introducing new products such as Colgate Time Control, Colgate Max Fresh and Colgate Sensitive Multi-Protection toothpastes. Colgate also used its acquisition strategy to grow sales with its acquisition of GABA, a Swiss toothpaste maker, in 2003.

[edit] Greater Asia/Africa

As previously mentioned, in 2006, Eastern European countries and Russia were grouped into the Greater Asia/Africa region because they are more closely aligned with the growing emerging markets found in places like the Philippines, Vietnam and India. In FY 2006, net sales in Greater Asia/Africa increased by 5.5% to just over $2B. The company experiences particularly strong sales growth in Malaysia, Thailand, Vietnam, India and the Gulf States. These geographical regions also benefited from a decline in the value of the dollar. This segment includes several rapidly growing emerging markets and will likely be a driver of the company's sales growth.

[edit] Trends & Forces

[edit] Restructuring

At the end of 2004, Colgate-Palmolive unveiled a four-year restructuring and business-building program meant to allow the company to compete more efficiently on a global scale while cutting unnecessary operating costs to boost margins. As part of the program, Colgate has closed warehouse facilities, centralized purchasing and other supply functions, reallocated resources to high-growth emerging markets, and now plans to reduce workforce by 12%. Overall, Colgate predicts that the restructuring program will cost between $750 and $900M, but the projected annual cost savings of $250 to $300M may make the expenditure worth it.

[edit] Emerging Markets

Emerging markets across the globe present strong growth opportunities for Colgate-Palmolive. As populations grow wealthier in emerging markets like BRIC (Brazil, Russia, India and China), consumers are becoming ever more sophicated shoppers. Colgate Palmolive's strong international presence means that it is much more highly exposed to emerging markets than its competitors. Generally, this exposure benefits Colgate--emerging markets can grow at three to four times the rate of developed markets such as the US, Western Europe and Japan, which means more profit opportunities and sales growth for Colgate. Despite these favorable conditions, however, there are dangers that arise with high dependence (see below, Latin America).

[edit] Latin America: Market Saturation?

One challenge that has arisen with Colgate's rapid expansion in Latin America is the company's overdependence on growth in that region. Currently, Latin America accounts for 47% of the company's total emerging markets exposure. Due to fast growth in the region, Latin America alone has contributed to 40% of Colgate's organic growth over the past few years. Because of this high dependence on Latin American growth, the company is highly vulnerable to Latin American economic slowdown and market saturation. This is particularly true of Mexico, which accounts for 52% of the company's sales in Latin America.

The US Dollar has fallen consistently vs. the Euro

[edit] Foreign Currency and the Dollar

Another trend affecting Colgate-Palmolive is the relative strength of the dollar. Although the company is based in the US, Colgate-Palmolive derives more than two thirds of its profits from outside United States. Because of this, the company is very sensitive to the strength of the dollar. Over the past few years, the dollar been consistently weakening. As foreign currencies strengthen relative to the dollar, goods sold in foreign markets are suddenly worth more dollars back in the US, boosting earnings. If the dollar continues to weaken, it will continue to have a positive effect on Colgate-Palmolive's earnings.

Colgate has broad exposure to foreign currencies and actively hedges a large portion of these to avoid wide swings in earnings from currency fluctations. Although this heding limits the potential upside of a weakening dollar, it also insulates the company from drastic upswings in the dollar's strength.

[edit] Comparison to Competitors

Colgate has a strong position relative to its competitors, which include consumer product companies Procter & Gamble Company (PG), Avon Products (AVP), Kimberly-Clark (KMB), and Clorox.

Colgate has several advantages over its competitors:

• Emerging market exposure: Colgate has a much higher exposure to high-growth emerging markets than its competitors, especially in Latin America.
• Product focus: Colgate has a tighter focus on particular products like toothpaste, the core of Colgate-Palmolive's portfolio and accounting for 29% of total sales. This focus has allowed Colgate to capitalize on a lack of focus at companies like Procter and Gamble, allowing Colgate to maintain something of a stranglehold on oral care.

These formidble advantages can sometimes also be drawbacks, however. Colgate's high emerging markets exposure and its dominant position in some of these markets make it particularly susceptible to the entrance of multinational or local competitors which can quickly gobble up market share, for instance, and its product focus diverts funds that could otherwise be used for expansion across a broader spectrum of consumer or other products.

[edit] References

1. ↑ Colgate-Palmolive FY 2008 Q2 10-Q, July 29th, 2008
2. ↑ Colgate-Palmolive FY 2008 10-Q, page 17 [1]
3. ↑ CL Q1 FY 2008 Earnings Release [2]
4. ↑ Colgate-Palmolive FY 2007 10-K, page 20 [3]
5. ↑ Colgate-Palmolive FY 2007 10-K, page 20 [4]
6. ↑ Colgate-Palmolive FY 2007 10-K, page 20 [5]
7. ↑ Colgate-Palmolive FY 2007 10-K, page 21 [6]