Why Colgate Beats P&G in Oral Care

by Trefis Team
-6.31%
Downside
69.59
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65.20
Trefis
CL
Colgate-Palmolive
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Colgate Palmolive (NYSE: CL) and Procter & Gamble (NYSE: PG) are the largest players in the oral care business globally. Colgate is the world leader in oral care with a 33% market share, followed by P&G’s Crest and Oral-B brands, which together command  20% of the market.

We expect Colgate’s oral care business to generate $25.5 billion in annual revenue by the end of the Trefis forecast period, contributing more than 44% to our $ 90.77 estimate for Colgate Palmolive’s stock price. By contrast, we expect P&G’s Oral Care division to generate $16.5 billion in annual revenue, contributing 6% to our $83.81 estimate for Procter & Gamble’s stock.

We believe that Colgate’s oral care business has more revenue growth potential than P&G’s.  Differentiating factors include Colgate’s unmatched brand recognition, deeper product range and broader market penetration. Our analysis follows below.

Colgate’s market share growing faster

  • Colgate Palmolive increased its oral care market share from 26% in 2005 to 33% in 2009. We forecast a further increase to about 38% by 2016, the end of our forecast period.
  • Procter & Gamble’s share has been flat since 2006, when it jumped from 15% to 20% due to the acquisition of Oral-B. We expect P&G’s share  to rise to 21% by the end of our forecast period.
  • EBITDA margins for both companies are comparable at around 30% as of year-end 2009.

Colgate’s advantages

  • Brand Equity
    • The Colgate brand is synonymous with oral care. P&G is predominantly associated with household care products, mainly detergents. Colgate’s unmatched brand recognition helps  it attract oral care consumers, who often don’t differentiate products based on features and benefits.
    • Oral Care is Colgate’s major business division and hence commands a greater proportion of its media and advertising budget. P&G’s media spending, though markedly higher than Colgate’s due to its much larger size, is skewed towards the laundry, hair care and male grooming (Gillette) segments.
  • More Products
    • Compared to P&G, Colgate offers a much larger assortment of oral care products in a wide price range.  This allows consumers to trade up and down gradually depending on macroeconomic conditions without impacting Colgate’s sales volume.
    • Colgate larger market share allows it to dilute fixed costs over larger volumes and offer more competitively priced products. P&G’s sales volumes are also significant, which helps explain why the two companies currently post comparable EBITDA margins in oral care.
  • More Geographies
    • Both Colgate and P&G are global players in personal and home care products. But Colgate sells oral care products in every global market. P&G has been far more selective about launching oral care products in emerging markets. For example, P&G has not yet launched Crest toothpaste in India, a gigantic market with the world’s second fastest-growing economy after China.
  • Portfolio Effect
    • Colgate sells a full range of oral care products, including toothpaste, toothbrushes and other specialty care items. This creates a portfolio effect that permits advertising scale economies and enables cross promotions and discounts on combo packs of toothpaste and toothbrushes. P&G initially only had Crest toothpaste and later acquired Oral-B in 2006.
    • By nature, toothpaste enjoys more product differentiation than toothbrushes. Consumers can easily distinguish between toothpaste brands and tend to prefer certain brands over others.  Toothpaste is therefore crucial to a sound oral care portfolio. Because Crest has limited presence in emerging markets, P&G faces a greater threat from local and regional competitors than Colgate.

You can see the complete $ 85.30Trefis Price estimate for Colgate Palmolive’s stock here.

You can see the complete $83.81 Trefis Price estimate for Procter & Gamble’s stock here.

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