Bob McDonald, the chief executive at Procter & Gamble (
) recently discussed strategic measures being undertaken to
accelerate sales growth. Since Procter & Gamble is one of
) 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
) 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
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
Colgate Could Counter with Emphasis on Oral Care
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
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.
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