Colgate-Palmolive May be Headed for Trouble in Its Biggest Market

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CL: Colgate Palmolive logo
CL
Colgate Palmolive

Global oral care leader Colgate-Palmolive (NYSE:CL) may be headed for trouble in its biggest geographical market by revenue share, Latin America. Heavy currency headwinds have forced the company to raise prices heavily in the region in the last few quarters. In turn, the price upticks may have driven customers away to cheaper alternatives, resulting in a steady contraction in volume growth. Colgate-Palmolive has been able to keep its volume growth in the black so far, but unless it finds a balance between price hikes and volume growth, that status quo may not hold for much longer.

Colgate-Palmolive reports geographical revenue share for its Oral, Personal and Home Care division only, and not for its Hill’s Pet Nutrition business. Hill’s Pet Nutrition is a secondary business for the company and accounted for just 14% of its total revenues in the second quarter of fiscal 2015. Therefore, for the purpose of this report, we have considered the geographical revenue distribution of the Oral, Personal and Home Care division only.

Our price estimate of $61 for Colgate-Palmolive is nearly the same as its current market price.

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See our complete analysis for Colgate-Palmolive here

Volume Growth in Latin America is on the Brink of Turning Negative

Colgate-Palmolive’s year on year volume growth in Latin America has fallen from 5% in fiscal 2013 to a mere 0.5% in the last quarter. Notably, the pace of volume growth declined in each quarter since the beginning of fiscal 2014, with the sole exception of the first quarter of fiscal 2014. In the graph below, we have mapped Colgate-Palmolive’s volume and pricing growth on the left axis. To facilitate comparison, the currency impact on revenue is mapped in absolute terms on the right axis.

CL's LatAm Revenue Growth

A closer look at the above graph reveals some interesting trends. Volume and pricing growth have an almost perfect inverse correlation. The correlation is even stronger when pricing and currency headwinds are compared. This suggests that Colgate-Palmolive may have been relying almost completely on price hikes to offset the substantial drag on revenues from adverse currency movements. To be fair, the company may not have many other options at its disposal considering the extent of currency fluctuations in Latin America. The combination of Venezuelan currency devaluation and the severe downturn in Brazil’s economy further exacerbated the situation for Colgate-Palmolive.

Nevertheless, a look at the tail end of the graph reveals that Colgate-Palmolive will have to pare back its price hikes if it hopes to keep Latin American volume growth in positive territory. But the macro situation in Latin America has not improved in the current quarter and currency headwinds are expected to sustain in the near term. Indeed, Brazil’s Real hit a two-decade low on 22nd September. [1] The company intends to continue raising prices over the rest of the current fiscal year, although it will attempt to balance pricing with volumetric growth. However, additional significant price upticks in Latin America are highly likely to push Colgate-Palmolive’s volume growth in the region into negative territory.

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Notes:
  1. Brazil’s Real Hits Two-Decade Low, The Wall Street Journal, September 23, 2015 []