Clorox Company (CLX)

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The Clorox Company (NYSE: CLX) is a manufacturer of cleaning products, bleaches, water filters and food products. It's flagship product, Clorox, has become synonymous with bleach, and its other brands such as Pine-Sol and Kingsford are also widely known; according to the company 93 of its brands are the No 1. or No 2. in market share in their respective markets.

Clorox is working on expanding its presence to both Canada and Latin America. Despite its attempts to become a more global company, Clorox is still heavily dependent on the slower growing North American market for the vast majority of its sales.^[1]

Clorox's operating margins are vulnerable to increases in commodities prices. Plastic resin costs account for an average of 6% of Clorox's cost of goods.^[2] Continued consolidation among consumer packaged goods companies has made it difficult for Clorox to pass on price increases to consumers. The company said it is spending more to promote products through in-store promotions and advertising to drive sales as the world economy recovers.

Company Overview

Clorox is best known for its production of its namesake bleach but also manufactures laundry additives, cleaning items, water-filtration systems and food products. Clorox's products are sold in over 100 countries under two operating segments: North America and International.

• North America (80% of revenue, 85.2% of operating income^[1]): Offerings include laundry products, home-care cleaning products, water-filtration systems, professional and auto-care products sold in the US, as well as all products sold in Canada. Revenue from the United States itself account for 80.4% of sales. ^[3]
• International (19.7% of revenue, 17.3% of operating income^[1]): The International segment includes all products sold outside of the US and Canada. A wide range of products from the North America segments and a few additional items such as brooms, candles, air fresheners, fabric refreshers and insecticides are offered under various brands internationally. Sales of liquid bleach continue to drive revenue in the international segment, generating 26% of net sales in 2008.^[1]

Products

• Laundry products such as liquid bleaches, laundry stain removers, and both dry and liquid color-safe bleaches are sold under the Clorox and Clorox 2 brands.
  • Home-care cleaning products such as disinfecting and sanitizing sprays, wipes, toilet-bowl cleaners, dilutable and spray glass surface cleaners, carpet cleaners, reusable cleaning cloths, drain openers, steel-wool soap pads, scrubber sponges, mildew removers, soap-scum removers, bathroom cleaners, floor mopping systems, toilet cleaning tools, daily shower cleaners and pre-moistened towelettes are primarily sold under the Clorox, Formula 409, Liquid-Plummer, Pine-Sol, Tilex and S.O.S brands. Additionally, the company has made several acquisitions, such as Burt's Bees, in order to stay amid shifting consumer preferences.^[4]
  • Water filtration systems are sold under the Brita brand.
  • Auto-care products such as protectants, cleaners and wipes, tire- and wheel-care products, washes, waxes and automotive fuel and oil additives, are sold under the Armor All and STP brands. In September 2010, the company announced it would sell this unit to private equity firm Avista Capital Partners for $780 million in cash.^[5]
  • Professional products are sold to the institutional, janitorial, healthcare and food-service markets under some of the same brands listed above.

Customers

Most of Clorox's products are advertised and sold in the United States to wholesalers, retail stores, and grocery stores.^[6] The company also sells janitorial, healthcare, and food-service versions of its products through distributors. Outside the United States, Clorox sells products through licensees and third-party distributors.^[6] Walmart Stores Inc. accounts for about 26% of Clorox's net sales, primarily within the North America segment.^[1]

Centennial Strategy

In May 2007, Clorox announced its 'Centennial Strategy' to guide it through its 100-year-old anniversary in 2013. The strategy aims to accelerate sales by growing existing brands through innovation and expanding into surrounding product categories. The company also aims to enter new sales channels and grow its business in developing markets. As part of the Centennial Strategy, Clorox acquired Burt Bee's Inc. in November 2007, a manufacturer of natural personal care products.^[7]

Trends and Forces

Dependence on saturated North America

With foreign sales accounting for only 20% of total revenue in 2009, Clorox is highly dependent on the domestic US household and personal product market.^[3] This limited international exposure is a source of concern for the company in the long run, since spending on Household and Personal Products (HPP) is growing slowly in North America. One particular market segment Clorox started to target are Hispanic customer a huge growing segment of the consumer packaged goods market.^[8] According to a Clorox study, more than 70% of Hispanic grill owners own a charcoal grill, that almost 70% of the Hispanic population grills year-round, and that the most important concern for Hispanics is for charcoal to last longer for social gatherings.^[9] In turn, the company has introduced Kingsford charcoal briquets (with technology that lights faster and burns longer). A new advertising campaign targeted Hispanic markets kicked off in March 2008 titled "Let the Barbecue Go On!"^[9]

Sensitivity to commodities prices

Rising oil, plastic resin, and other input prices has dragged growth in fiscal 2009. Clorox uses plastic resins in a variety of products, especially in its trash bags, accounting for 6% of the company's total cost of goods.^[2] In response, Clorox has raised prices, exited the low-margin private-label trash bag manufacturing business, adjusted volume expectations, and focused on promoting higher-margin products.

Clorox also depends on a number of agricultural commodities. For example, prices of soybean oil for salad dressing and corn starch for charcoal briquettes and prices of energy sources and raw materials such as chlor-alkali (an important input in bleach) contribute to Clorox's vulnerable manufacturing expenses. Any increase in the prices of these materials will clearly hurt Clorox's margins.

Rise of Private Labels

In the past decade, Clorox has faced stiff competition from private label brands or "store brands" of large retailers such as Wal-Mart, Target, and supermarket chains. Private label products often sell at lower price points and earn higher margins because the retailers can control the cost of their production. For example, Wal-Mart offers 5,500 products through its "Great Value" brand, which has increasingly sold as consumers feel the recession squeeze on their disposable income.^[10] From 2003 to 2008, sales of Target's private label products rose an average of 15% annually. ^[10]

Large retailers are close to the consumers, have the point of sale data on consumer behavior and are in better position to understand consumer behavior. These strengths contribute to better private label product development, which directly compete with Clorox products. Retailers also promote their own brands as they earn higher margins on them. ^[10]

Supermarket Consolidation Risk

Retail consolidation has a high impact on product pricing. In 2009, Clorox’s top five largest customers accounted for 43% of its revenue^[1], with Wal-Mart Stores (WMT) alone accounting for 27% of the company's sales.^[11] As supermarkets consolidate, a smaller number of firms account for larger percents of Clorox’s total sales, making each of them more important to Clorox’s bottom line. This gives retailers the power to negotiate for lower prices. In addition, changes in the strategies of the company's largest customers such as shelf space simplification or a reduction in the number of brands they carry may harm Clorox's sales.

Foreign Exchange Rate Fluctuation

A decrease in the relative value of the dollar would hurt Clorox's bottom line. Although a falling dollar drives exports which adds to the international segment's revenues, the cost of foreign inputs (commodities that go into Clorox products) sold in foreign currencies would increase with the falling dollar. 19.6% of Clorox's sales are from outside the United States,^[3] so a depreciating dollar would drive growth in roughly one-fifth of the company's business. On the other hand, a depreciating dollar also feeds into higher input prices, which has been the larger problem for Clorox's management team.^[12] Between July and December 2008, the dollar regained nearly all its losses again foreign currencies, and has been fluctuating since then.^[13] Although Clorox uses some financial instruments to hedge against foreign currency volatility risks, it is not fully protected and favorable impacts to profit margins from exchange rates are likely unsustainable. ^[14]

Competition

Clorox is a relatively small firm compared to its giant competitors Colgate-Palmolive Company (CL), Procter & Gamble Company (PG), and Kimberly-Clark (KMB), with revenues $13 billion and higher. Competition in the Household and Personal Products is exceptionally stiff. Yet Clorox maintains its domination of the bleach category with 65% U.S market share under its highly recognized Clorox Brand.^[15]

The household and personal product market is growing much faster in emerging markets outside of North America. Most of Clorox's competitors have penetrated the global market, gaining a valuable head start in capturing global market shares. With little presence markets beyond the United States, Clorox is the least exposed of the big industry players to high-growth emerging markets.

Clorox competes with many small private brands. Clorox's closes private-brand competitors have a close #2 position in trash bags and other categories. But because private labels don't put as strong an emphasis on innovation and new product creation, they are far less burdened by the costs of new product development (and when a new product does make it big, these private companies can ride along on Clorox's coattails to produce knockoffs that cleverly sidestep the patents). Private companies also get an added advantage in the event of a commodities costs decrease: while large firms like Clorox must stick to hedge-like long term purchasing contracts, private labels can usually purchase at the current market price, reaping the benefits of a temporary downswing in raw materials costs.

Clorox also competes with Kraft Foods (KFT), Unilever NV (UN), and Reckitt Benckiser across a number of specialty group business segments, including trash bags, salad dressing, charcoal, and STP autocare products.

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4 1.5} CLX 2008 10-K, Note 22, page 59
2. ↑ ^{2.0 2.1} BusinessWeek, "Why Clorox Isn't Really Shining"
3. ↑ ^{3.0 3.1 3.2} CLX 2008 10-K, Note 22 "Segment Reporting," page 60
4. ↑ Cheap Stocks: The Clorox Company.
5. ↑ AP "Analyst cuts Clorox estimates after auto unit sale"
6. ↑ ^{6.0 6.1} CLX 2008 10-K, Item 1 "Business," page 6
7. ↑ CLX 2008 10-K, Item 1 "Business," page 4
8. ↑ CLX Annual Report 2008, page 12
9. ↑ ^{9.0 9.1} CLX Annual Report 2008, page 13
10. ↑ ^{10.0 10.1 10.2} Reuters, "US Consumer Companies, Retailers Revisit Cheap Brands"
11. ↑ 2009 CLX 10-K, page 6
12. ↑ Morningstar Analyst Report, CLX, 31 Oct 2008
13. ↑ Federal Reserve Bank of St. Louis
14. ↑ CLX 2008 10-K, Item 1 "Business," page 14
15. ↑ Clorox Co. 2009 CAGNY Presentation