Colgate-Palmolive (NYSE:CL), which leads the oral care market, seems focused on market share expansion, even if it means lower prices and contracted margins. The company’s oral care market share grew from 25% in 2010 to 26% in 2011, as it toned down its plans of raising prices in a high cost environment. Colgate also expects much of its future growth to be volume-driven, particularly in the emerging markets, and any attempts to absorb cost pressures through higher pricing may be constrained by price competition, leading to a downward pressure on its margins. Colgate competes with other leading personal care companies such as Procter & Gamble (NYSE:PG), Unilever (NYSE:UL) and Kimberly-Clark (NYSE:KMB). Its core oral care business generates half of the company’s stock value.
Maintains Lead in Oral Care Category
Colgate’s Oral Care division occupies more than a quarter of the global oral market and generates half of Colgate-Palmolive’s stock value. Geographically, Oral Care is a significant part of the company’s business in Greater Asia/Africa, comprising approximately 73% of sales in that region for 2011. We estimate that Colgate’s Global Market Share of Oral Care increased from 22% in 2007 to 25% in 2010 and 26% in 2011, as Colgate’s revenues from oral care increased faster than the global market size for oral care products. Going forward, we expect Colgate’s market share of oral care to continue to improve to 27% over the Trefis forecast period.
Colgate’s Unique Selling Points
1. Invests Significant Resources to Increase Brand Equity
Colgate invests a large chunk of its resources in consistently increasing brand equity and has undertaken several initiatives to enhance its brand image among consumers and oral health care professionals. This helps its oral care brands expand their market share and outsell other competing brands. It also partners with dental care professionals to provide oral health education, free samples and dental screenings to children and their families to promote the use of oral care products.
2. Strong Retail Presence
Apart from having a well-organized retail presence in North America and Europe, Colgate also enjoys an elaborate distribution network thanks to its longstanding presence in the emerging markets of Asia and Africa. This enables it to sell products in remote locations in these geographies and draw volumes from local players. It has leveraged its partnerships with neighborhood stores and supermarkets to enhance awareness, distribute trial packs and get better in-store displays.
3. Product Portfolio Economizes Advertising, Helps Cross-Selling
Regular product innovation and launch of premium-priced products have helped Colgate expand its sales while defending its market share from lower-priced private labels. Colgate also stands to gain higher market share than other global players in Asia and Africa because it offers an entire portfolio of oral care products (toothpastes, toothbrushes, mouthwashes, etc). Having an entire portfolio economizes branding and advertising efforts for the brand, along with greater scope for cross-selling.
We currently forecast Colgate’s Oral Care market share to exceed 27% over our forecast period. However, there could be a 5% downside if its market share declines to the 2008-09 levels of 24% over the next few years due to stiff pricing competition.
Colgate has been seeing stiff competition from P&G in the European market and from lower-priced private labels and local products in the emerging markets. High competition at various price points also makes it difficult for Colgate to increase pricing despite growing input costs.
Volume Driven Growth Could Put Pressure On The Margins
The company’s Oral Care’s EBITDA Margin increased from 24.5% in 2008 to 29% in 2009 driven by higher pricing and cost-saving initiatives, but declined to 28% in 2010 because of higher advertising spend and input commodity costs. The margins recovered to 28.4% in 2011 owing to lower SG&A costs despite higher input commodity costs that lowered gross margins by 1.70%.
Since much of Colgate’s future growth is expected to be volume-driven, any attempts to absorb cost pressures through higher pricing may be constrained by price competition especially in the emerging markets, leading to a downward pressure on margins. We currently expect the margins to decline gradually to 28% by the end of the Trefis forecast period.
However, there could be a 5% downside to the Trefis price estimate if it declines to 26% over the same period due to input cost pressures, high commodity inflation and higher advertising costs, leaving little room for higher pricing due to fierce competition.
We value Colgate-Palmolive with a $98 Trefis price estimate of its stock, almost in line with the current market price.