Colgate Palmolive’s Q4’16 Review: Focus On R&D And Marketing To Revive Volume Growth

by Trefis Team
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The leader in Oral Care, Colgate Palmolive (NYSE:CL) released its Q4’16 and full year earnings on January 27th. The company’s annual sales on a currency adjusted basis (i.e., organic) increased by 4%, led by strong pricing and mild volume growth throughout the world, except Europe. However, the fourth quarter resulted in bleak organic growth of 1.5% which was only led by pricing as the volumes declined, especially in important markets like India, where the sales were hit by demonetization. The net sales in both Q4 and full year declined by 4.5% and 5.0%, respectively, due to currency headwinds and Venezuelan deconsolidation. Overall, the decrease in volumes is a worrying factor for Colgate as its competitors Unilever and P&G are likely to toughen the competition in the future with recent innovations in their oral care products.

The bottom line was supported by strong cost savings from ‘funding the growth’ initiative and Colgate was able to cross the 60% mark for the full year adjusted gross margins. Another important factor in gross margin growth was higher pricing, as Colgate, like its competitors, has been coming up with premium oral care products, especially toothpastes. Apart from that, fabric care division too has seen some new detergent releases in 2016. Higher gross margins led to a lower single digit growth in the fourth quarter EPS, but annual EPS remained unchanged because of higher SG&A expenses as a percentage of revenues.

Going forward, the company has guided for a lower single digit growth in net sales for 2017. The key factors which will drive Colgate’s performance in 2017 are investments in R&D along with focus on marketing and advertising.

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 See our complete analysis for Colgate-Palmolive

Amidst Rising Competition, Colgate To Rely On Higher R&D and Marketing Investments

  • With Unilever’s oral care market share steadily increasing since 2012 to reach 5% in 2016 [1], and P&G coming up with new innovations in Oral-B and Crest, Colgate faces a threat of volume stagnation in its primary market, which it is planning to overcome by investing in R&D.
  • Colgate’s R&D spending as a percent of revenues has increased marginally, from 1.57% in 2011 to 1.71% in 2015 (2016’s 10-K is yet to be released). The company has guided for further innovations to be launched in 2017. Therefore Colgate’s R&D spending is likely to increase further in 2017.
  • Apart from this, the company has reaffirmed that all its innovations in 2017 will be backed up by strong marketing and advertising activities. Colgate has been active with the in-store marketing which includes unique attention grabbing banners and specialized counters for its products.
  • Now that Colgate is operating at considerably high gross margins of over 60% with success in ‘funding-the-growth’ cost savings initiative, it can afford to fuel its R&D and advertising further in the coming quarters.

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Notes:
  1. Unilever’s oral care market share worldwide, Statista []
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