Colgate Palmolive’s Q3 Results: Company Likely To Rely On Advertising And Premium Products Going Forward

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Global leader in Oral Care, Colgate Palmolive (NYSE:CL) released its Q3’16 earnings on October 27th. The company reported a decline of 3.5% and 4% in net sales and volumes, respectively, owing to weak macro factors and currency effects. However, organic sales and organic volumes managed to show a 4.5% and 1.5% growth, respectively, in lieu of gains in market share around the world. The two key takeaways from Colgate’s Q3 earnings are that the company increased its focus on advertising to gain market share, and that it is likely to continue to shift its gears towards the premium product segments to support its growing margins. We believe these two factors could lift the company’s performance once the overall global economic situation improves.

See our complete analysis for Colgate-Palmolive

Quick Review Of Q3’16 Earnings

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Increase In Advertisement Signals Focus On Gaining Market Share

In a tough economic environment with low consumer demand, gaining market share is the most important aspect in supporting the topline growth, and advertisement plays a key role in it. The cost savings from Colgate’s ‘funding-the-growth’ initiative were used up for supporting its advertising and marketing operations. In Q3’16, Colgate increased its advertisement expenses by 3%, to $339 million, which is about 8.7% of its total revenues. The marketing was ramped up in all regions, and it helped the company to gain market share in its primary product line, i.e. toothpaste. Sequentially, Colgate’s global market share of toothpaste is up 0.2% year to date, to 44%. Going forward, better marketing and customer outreach can help Colgate protect itself in emerging markets, where customers tend to turn towards cheaper alternatives provided by the local players.

Premium Products Likely To Help In The Times Of Low Volumes

There were some innovations seen in the premium products of toothpaste, hair oil, shower gels and dish care liquids from Sanex and Palmolive. This helped Colgate perform relatively better in North America and Europe, where buying capacity for these products is higher than in the emerging markets. In fact, there was a volume increase in premium products reported from Europe. The 1.3% increase in the gross margins of Colgate signals the success of this move.  This strategy has also been successfully followed by P&G (NYSE:PG), which managed to outperform market expectations in its recent Q1’17 (See: Procter & Gamble’s Q1 Results Indicate A Revival Of The Giant) earnings. Continued innovation supported by widespread advertising can help Colgate to  transfer its existing customer base towards higher priced products in the emerging markets too.

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