Should Colgate-Palmolive Focus on Volume?

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Colgate-Palmolive ( CL ) managed to grow sales slightly 1.5% last year to $15.5 billion on a 3% increase in volumes and a negative FX impact of 1.5% Colgate's Oral Care, Personal and Home Care product segments grew volumes by 4% at flat pricing.While other leading consumer names like Procter & Gamble ( PG ) and Unilever ( UL ) withdrew promotional pricing and actually raised prices on certain items due to rising commodity prices, Colgate decided to stand pat on pricing in an effort to drive volumes in 2010, a trend that is likely to continue in the future. Here we explore, how reasonable it is for Colgate-Palmolive to embark on a volume-driven growth strategy.

We value Colgate-Palmolive with a $88.80 Trefis price estimate of its stock , at about 9% premium to its current market price.

Does a Volume Driven Growth Make Sense?

  1. Growth to come from emerging economies in Asia:
    Colgate-Palmolive has a well diversified business with over 75% of its total sales coming from outside the U.S. This is particularly favorable in the current macroeconomic environment where the U.S. and Western have been growing at a slower pace than the rest of the world, and in particular rapidly growth economies in Asia such as China and India. However, given the significantly lower income levels in these economies, Colgate-Palmolive can only push products priced at lower price-points to match the local and regional brands.
  2. Increasing competition in the emerging economies:
    Colgate braves immense competition from the two leading players in the consumer goods industry, Procter & Gamble and Unilever , in all the product segments and geographies that it plays in. Both, Procter & Gamble and Unilever, have assumed a more aggressive stance and decided to significantly increase their presence in the emerging markets to take advantage of the economic growth in the developing nations. In addition, local players often compete on price and have well built distributions and supplier systems that require investment. As competition heats up in emerging markets, we expect more competitive pricing going forward. Hence, it might be reasonable for Colgate-Palmolive to focus on pushing volumes while maintaining prices.

We believe that Colgate-Palmolive can still maintain its market share by leveraging its established brand name and competing on price while still maintaining it relatively low media and advertising spending. How will this impact its financial

Financial Impact

  1. Shrinking operating margins:
    Rising commodity prices is a reality all manufacturers must accept. However, a volume-driven strategy restricts a manufacturer's ability to pass off the rise in costs to the consumers in the form of price increases. As Colgate absorbs much of the rise in costs, we expect some erosion in EBITDA margins.
  2. Changes in business operations and investments in capacity expansion:
    In the long term (2015 onwards), a volume driven strategy might warrant an investment in production capacity to meet the market demand. This capital expenditure is most often associated with changes in procurement of supplies and changes in the distribution network to realize operational efficiencies. The capital expenditure on business expansion is associated with overhead expenses incurred in restructuring programs, which will weigh on free cash flow.

See our full analysis for Colgate-Palmolive.



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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