Here’s What Will Drive Colgate-Palmolive’s Oral Care Business in 2015

Colgate-Palmolive (NYSE: CL) is a leading consumer processed goods company that specializes in oral care products. Colgate-Palmolive also operates in the personal care, home care and pet nutrition segments, but oral care accounts for almost half of the company’s total revenues. Colgate-Palmolive currently has a market capitalization of $63 billion, placing it far behind rivals Procter & Gamble (NYSE: PG) and Unilever (NYSE: UL) in terms of market cap. Still, Colgate-Palmolive is the leader in most of the oral care sub-segments across the world, ^[1] which is testimony to the company’s dominance in the global oral care market.

Colgate-Palmolive does not provide guidance for its future financial results, so the company’s expectations from its flagship business segment are not clear. In this report, we will take a look at the key factors that may determine the path that Colgate-Palmolive’s oral care business takes in 2015.

We have a price estimate of $56 for Colgate-Palmolive, which is about 20% lower than its current market price.

See our complete analysis for Colgate-Palmolive here

Recap: Oral Care Performance in 2014

Colgate-Palmolive does not provide detailed financial information on its oral care segment separately, although it reported that the oral care segment accounted for 46% of its total revenues in 2014. ^[2] This puts Colgate-Palmolive’s revenues from the oral care business at $7.9 billion in 2014, which is a contraction of 0.8% compared to 2013. As per our estimates, the lower revenues resulted in a decline of 1% in Colgate-Palmolive’s market share in the global oral care market.

However, the decline in revenues is wholly attributed to currency headwinds, which dragged down revenues from the ‘Oral Care, Personal Care, and Home Care’ division by 6 percentage points in 2014. ^[2] Assuming the same extent of currency headwinds applied to the oral care segment also, it follows that the oral care segment achieved organic revenue growth of 5.2% in 2014. This is still notably lower than the 6.3% average revenue growth rate of Colgate-Palmolive’s oral care business between 2010 and 2013.

On the other hand, the global oral care market size is estimated to have expanded by 3.2% in 2014. ^[3] This implies that Colgate-Palmolive still beat the market growth rate despite a significant negative impact of adverse foreign currency movements and unfavorable macroeconomic conditions in most regions of the world.

Emerging Markets Hold the Key to Future Growth

In 2014, Latin America was the best performing market for Colgate-Palmolive in terms of revenue growth, followed by the Africa/Eurasia region. These regions are part of the emerging markets, which Colgate-Palmolive defines as Latin America, Asia (excluding Japan), Africa/Eurasia and Central Europe. ^[2] In North America, consumer spending has still not picked up to pre-2008 levels, while most of Europe is going through a fresh economic slump owing to widespread unemployment and macroeconomic problems in Greece.

On the other hand, even though a majority of the emerging markets are no longer growing at the breakneck pace of a few years ago, this is where the most potential lies. To illustrate, GDP of the developed markets is projected to expand by 2.4% in 2015, compared to the 5% acceleration expected in GDP of emerging markets. ^[1]

Colgate-Palmolive intends to capitalize upon its unparalleled distribution channel to expand its reach in rural areas, thereby improving its geographical presence on a micro level. This will be coupled with broader geographical expansion in untapped countries like Nigeria and Myanmar to drive revenue growth.

Shrewd Pricing Strategy to Protect Margins

Colgate-Palmolive’s astute pricing strategy was key to protecting its revenues and margins in 2014. In the developed markets, the company resorted to promotional pricing to drive volume growth. On the other hand, the company raised prices in emerging markets where it was facing adverse foreign currency movements in order to offset the impact of the same. This strategy allowed Colgate-Palmolive to contain the deceleration in revenues and margin erosion. Consequently, EBITDA margin of Colgate-Palmolive’s oral care business remained stable at 26.6% in 2014 despite commodity cost inflation from currency headwinds. (Read: Higher Volumes Help Colgate-Palmolive Beat Currency Troubles in Q4)

In the recently held Consumer Analyst Group of New York (CAGNY) Conference, Colgate-Palmolive stated that it will continue to resort to price hikes to counter currency headwinds in 2015. However, the company stressed that it will balance increased pricing with volume growth. Indiscriminate price hikes may force consumers may shun Colgate-Palmolive’s products in favor of lower priced substitutes, as seems to be happening with Procter & Gamble (Read: Falling Volumes Compound P&G’s Problems as Currency Headwinds Dampen Q2 Results).

Continuous Innovation to Retain and Expand Consumer Interest

Innovation has long been a hallmark of Colgate-Palmolive. Each year the company introduces a large number of new products and variants across the entire price band. Lately, Colgate-Palmolive has stressed the importance of introducing premium products with specific, unique advantages over their lower-priced counterparts. This strategy is in line with a recent study by Nielsen, which showed that demonstrating essential care benefits in newly launched oral hygiene products leads to a higher probability of success of that product. ^[4]

Accordingly, Colgate-Palmolive has a number of new products lined up for 2015, which aim at providing specific essential care benefits. For instance, the company is attempting to build a so-called “whitening mega brand”. Colgate-Palmolive claims that whitening is the second biggest toothpaste segment globally, next only to anti-cavity toothpaste. ((Colgate-Palmolive Presentation at the Consumer Analyst Group of New York Conference, Colgate-Palmolive Investor Relations, February 9, 2015))

The crucial aspect here is that Colgate-Palmolive has recognized the latest trend in innovation in consumer processed goods – providing specific advantages for a higher price. Accordingly, the company is building a portfolio of oral hygiene products around the teeth whitening sub-segment in order to retain existing customers as well as gain new ones.

We estimate that the above factors and strategies will help Colgate-Palmolive expand its revenues from the oral care business by nearly 5% in 2015. The aforementioned pricing strategy, along with the company-wide cost savings program, is expected to provide a nominal improvement of oral care EBITDA margin, which is projected to reach 26.9% in 2015.

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research

1. Colgate-Palmolive Presentation at the Consumer Analyst Group of New York Conference, Colgate-Palmolive Investor Relations, February 9, 2015 [↩] [↩]
2. Colgate-Palmolive 2014 10-K SEC Filing [↩] [↩] [↩]
3. Global Oral Hygiene Market 2014-2018, Research and Markets, October 23, 2014 [↩]
4. Say it with a smile, Nielsen, December 17, 2014 [↩]