Global sales of oral care products stood at over $30 billion in 2012 and is expected to grow at a pace of more than 3% per year in the near future.  As with most categories of consumer products, this growth is being led by emerging economies with increasing levels of disposable income and rising awareness of oral hygiene being the key drivers. This is excellent news for oral care giant Colgate-Palmolive’s (NYSE:CL) investors.
The company is the leading name in oral care products in most emerging markets with a leading market share in countries such as India and Brazil. Colgate’s 2012 performance certainly reflects tremendous growth seen recently in developing economies. Regions such as South America, Asia and Africa saw organic sales rise in the double digits compared to a net decline in sales in the European region. To further delight investors, the company also increased its lead in key markets such as China and India.
While 2012 has been a very positive year for Colgate, we believe the going will get much tougher for the company in 2013. There are primarily two reasons behind this – increasing competition and flagging economic growth leading to low consumer confidence in emerging economies.
With demand stagnating in developed economies, consumer goods companies are increasingly shifting their focus on key emerging economies. In India, for example, Colgate-Palmolive’s supremacy is being increasingly challenged by Unilever (NYSE:UL) and GlaxoSmithKline (NYSE:GSK) who have stepped up their game with new products and increased advertising. Procter & Gamble (NYSE:PG) is also lining up to launch its own line of toothpastes in the country under the Oral-B banner. Meanwhile, the market is also being attacked by local competitors who are playing primarily on competitive pricing and adapting their products to local tastes and preferences. The situation is much the same in other key countries such as Brazil and China.
The increasing competition is coming in at a time when emerging markets are also beginning to feel the pinch of the global economic slowdown. Consumer confidence is dipping slowly in regions such as India and China, leading to a steady decline in overall spending. In China, for example, China’s Bankcard Consumer Confidence Index (BCCI) was down by 0.5 points in January 2013 compared to the previous year.  In India, manufacturers of consumer goods were forced to slash prices to stimulate demand in January this year. This is the first time in six quarters the country has seen a slashing down of prices in consumer goods. ((“Consumer goods firms cut prices, offer discounts after 18 months“, LiveMint, February 2013))
Despite the challenges that 2013 is likely to bring, we remain optimistic about Colgate’s ability to increase its market share in emerging markets oral care in the near future. This is primarily because of three reasons:
A. Colgate’s Expansive Footprint In Emerging Economies: Colgate has a very long history of operations in markets like Brazil and India. This has helped it establish a very wide distribution network in these countries. Because retail distribution in these countries is highly fragmented and dominated by standalone stores, it will take a lot of time for new entrants to rival Colgate in sheer reach. Most of the new entrants will focus their strategy around easy-to-access urban centers, but a substantial amount of untapped growth still lies in rural regions, which are harder to access. Colgate has identified this as a key strength and is working actively to further expand its rural footprint. In India, for example, the company is fine-tuning its distribution model to increase its direct reach and will double its coverage of rural areas in the next three years. 
B. Portfolio Expansion: In order to complement growth in its distribution network, Colgate is also actively pursuing expansion of its product portfolio in emerging economies. This is true for both India and China where volume growth was led by newly introduced products such as Colgate Total, Colgate Max Fresh and Colgate Sensitive. Most of these products, however, were in the premium-priced category. As the company expands deeper into rural markets, we expect it to also focus on expanding its portfolio in the low-priced segments to appeal to more cost-conscious consumers. Another way the company can progress is by repackaging its products in smaller quantities to make it accessible to price-conscious consumers. This approach has worked well in emerging economies for companies such as Unilever.
C. Increased Advertising: In order to keep up with its aggressive competitors, Colgate has also been pumping in resources into marketing and advertising. Colgate’s total ad spend has steadily increased by mid-single digits over the past three years. Much of this has been directed directly towards emerging economies. In India, for example, the company’s ad spend increased from 10% of revenues in 2011 to 12% in 2013.
We have a $105 estimate for Colgate’s share, which is 10% below the market price.Notes:
- “Global Oral Hygiene – MarketLine“ [↩]
- “China’s bankcard consumer confidence drops in February“, Xinhuanet, March 2013 [↩]
- “Volume growth concerns hit Colgate-Palmolive’s shares“, LiveMint, February 2013 [↩]