Rising Competition To Weigh On Colgate-Palmolive’s Earnings In Tough EM Environment

by Trefis Team
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Trefis
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Colgate-Palmolive
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Colgate-Palmolive (NYSE:CL) is slated to release its Q3 2013 results on Thursday, October 24. The oral care giant with over 45% share of the global toothpaste market continued to build on its broad momentum in Q2 2013. Organic sales (net sales growth excluding the impact of foreign exchange, acquisitions and divestments) grew by over 5% y-o-y as volumes increased 4% and prices increased 1%.

Colgate-Palmolive’s strong growth in the recent quarters has come on the back of its strengthening position in emerging markets. However, many of these markets have witnessed currency devaluation, which has forced buyers to reduce consumption. The company has also been facing increased competition in many of these markets. We believe that Colgate-Palmolive will have to dole out some extra money on sales and marketing, in order to maintain its share in these markets. This will impact its EBITDA margins.

See our full analysis for Colgate-Palmolive

Emerging Market Sales Growth To Slow Due To Timid Demand

Colgate-Palmolive’s overall growth in Q2 2013 was largely backed by an 8.5% y-o-y organic sales increase in the emerging markets. Organic sales in Greater Asia/Africa were higher by 10% y-o-y as volumes grew 11% and prices declined by 1%. Latin America organic sales rose 7% annually on new product activity. India, Russia, Brazil, China and Turkey were the major contributors to the growth. (Read: Colgate-Palmolive Continues Taking Share In Emerging Markets)

Lately, most of these markets have been plagued with currency weaknesses. Year-to-date, the Indian Rupee (INR) has depreciated 13% relative to the euro (EUR), while the Brazilian Real (BRL) has depreciated by 10%. [1] This rapid currency depreciation has created inflationary pressures on buyers, who have reduced their consumption.

Last month, rival Unilever (NYSE:UL) announced that it is expecting lower underlying sales growth (sales growth from continuing operations excluding acquisitions, disposals and currency movements) in Q3 2013 compared to the first half of the year, due to the sluggish growth in emerging markets. [2] The company will be releasing its third quarter earnings on the same day as Colgate-Palmolive. Since the emerging markets are a strategic priority for Colgate-Palmolive and account for more than half of its revenue, we expect the company to experience similar effects of the slowdown.

Increasing Competition To Take A Toll On EBITDA Margins

Colgate-Palmolive derives over 40% of its revenues from oral care products. It is the market leader and well ahead of its competitors in many of the emerging markets. The company has a market share of about 72% in toothpastes in Brazil, the highest level in 15 years; while in Mexico and India its share stands at about 80% and 55% respectively. It is also the market leader in manual toothbrushes in every country across the Latin American region. [3]

Due to high growth rates in the emerging markets Colgate-Palmolive has been experiencing intense competition from big as well as local manufacturers. For instance, Procter & Gamble (NYSE:PG) recently forayed into India’s toothpaste market with the launch of its Oral-B Pro-Health toothpaste. [4] Meanwhile, Unilever (NYSE:UL) has been taking on the company by airing comparative advertisements on Indian television, claiming that its Pepsodent Germicheck toothpaste is 130% better than Colgate. [5] To support its products in the wake of rising competition, Colgate had to increase its advertising and promotional spend by 31% in India in the first half of 2013.

We believe that the company will have to take similar measures across its emerging markets in order to protect its share, which will weigh on the EBITDA margins.

We will update our $56 estimate for Colgate-Palmolive based on the upcoming quarterly results.

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Notes:
  1. www.oanda.com []
  2. Unilever on track to meet its 2013 priorities despite slower market growth in many emerging countries, Unilever Website, September 30, 2013 []
  3. Colgate-Palmolive Company (CL) Management Discusses Q2 2013 Results – Earnings Call Transcript, Seeking Alpha, July 25, 2013 []
  4. P&G enters Indian toothpaste market with Oral-B Pro-Health, The Economic Times, July 2, 2013 []
  5. Colgate suffers setback in ad war with HUL, The Indian Express, September 7, 2013 []
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