Colgate Can Target Oral Care to Counter Competitor Growth

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Bob McDonald, the chief executive at Procter & Gamble ( PG ) recently discussed strategic measures being undertaken to accelerate sales growth. Since Procter & Gamble is one of Colgate-Palmolive's ( CL ) largest competitors, the commentary got us thinking, how could Colgate respond to P&G's game plan?

We remain bullish on Colgate, with a price estimate of $85.26 (roughly 7% ahead of market price). Colgate primarily competes with Procter & Gamble and Unilever ( UL ) in the oral care market.

Procter & Gamble's Growth Plan

While Procter & Gamble continues to impress with its strategic plan to recover from the recessionary 2008-09, we don't quite dismiss Colgate's potential to respond favorably to the slow pace of macroeconomic recovery as well.

So, what exactly is P&G doing right?

To realize its goal of acquiring one billion additional consumers by 2014-15, it comes as no surprise that P&G is focusing on the two most populous nations in the world - China and India.

Prepared for an ongoing period of uncertainty, P&G has set out on a relative performance goal - to grow one-to-two percent points faster than global market growth, of which 0.5%-1% is expected to come from market share gains in existing product categories, while the remaining 0.5%-1% shall be drawn from 'white space' growth i.e. launching more product categories in more countries and launching product extensions of established brands.

Colgate Could Counter with Emphasis on Oral Care Segment

We estimate that oral care constitutes over 44% of Colgate-Palmolive's stock value. While Colgate also makes shampoos, soaps, deodorants, and fabric conditioners, it is first and foremost a leading oral care brand with a nearly one-third share of the $18 billion global oral care market. We believe that an emphasis on the oral care business, through new product launches and increased marketing spend, could be one way for Colgate to counter P&G's growth plans.

Why Oral Care?

The primary reason for Colgate's strong market position is its presence in a variety of geographic regions, particularly emerging markets like Latin America and Asia. Higher market share coupled with substantial brand recognition and brand loyalty helps Colgate reach a larger number of consumers and shields its market position from competing brands (such as Procter & Gamble's Crest and Oral-B) as well as low cost private labels.

However, P&G's advertising spend far outpaces that of Colgate in this business segment. Although oral care is the leading product segment within Colgate, its advertising has been exceeded by over 35% by P&G's Crest toothpaste.

We've previously commented that a broad-based increase in Colgate's advertising spend would unnecessarily strain operating margins, as Colgate would need to maintain the heightened expenses to bridge the gap between itself and P&G (See Should Colgate-Palmolive Ramp Up Advertising ). However, should Colgate target a single product segment (like oral care) in allocating additional advertising spend, it could generate upside with more moderate downside impact on profit margins.

Oral Care Market Share Upside

We currently estimate Colgate's market share in the oral care will rise from just over 33% in 2009 to 35% by 2012 ultimately closing in on 38% by 2017. However, if Colgate were to target growth in its oral care business through added marketing spend, we could reasonably expect to see upside beyond our market share estimates. The catch, however, would again be the company's ability to mitigate profit margin downside.

To highlight Colgate's sensitivity to oral care market share, we estimate that should the company reach 37% market share by 2012 and 40% by the end of our forecast period (still reasonable expectations), it would generate nearly 5% upside to our price estimate. This is a notable positive given that our estimate already stands about 7% ahead of market price. However, we note that this particular scenario assumes no corresponding downside to profit margins within Colgate's oral care segment.

Could Colgate sustain these potential added costs to its oral care segment? Let us know your thoughts by providing feedback in the comment box below.

See our full company breakdown and estimates for key drivers to Colgate-Palmolive's stock value in the display below.

You can see our full analysis of Colgate-Palmolive here



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: CL , PG , UL

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