It comes as no surprise that
) continues to be outspent in media and advertising by other big
players such as Procter & Gamble (
) and now also the increasingly aggressive GlaxoSmithKline (
Despite this, Colgate-Palmolive has managed to maintain and even
gain market share in the past, which is no small feat given that
for consumer products, advertising is a crucial business driver and
constitutes a healthy share of operating costs. What does catch our
attention though is, unlike before, there has been significant drop
in Colgate's market shares across all major products
segments-toothpastes and toothbrushes, deodorants, dish soaps, body
washes and pet foods.
While this does fuel speculations of an impending rise in media
spending to match the competition, we're not totally convinced that
this would happen and even if it does, that it would have the
impact that's expected out of it. Here's our take on it…
If Colgate-Palmolive were to ramp up advertising and
Colgate spends close to 11% of its Sales on Advertising, which
is in line with its peers globally. Why then this hue and cry over
media under-spend? To begin with, media spending is thinly spread
over 200 markets across the globe leaving the US with
disproportionately low ad-spend relative to competitors, which is
spread over several categories ranging from oral care to pet food.
Colgate gets outspent in each of these category.
In Deodorants & Body Washes, which as per our estimates
constitute close to 25% of Colgate's stock value, Colgate spent a
total of $9 million on Softsoap, Irish Spring and Speedstick while
P&G spent over $82 million (over 9X) on Old Spice and Secret.
Compare this with Unilever, which spent $148 million on Dove alone
and close to $267 million on Axe and Degree.
Even in Oral Care, which is the leading product segment within
Colgate contributing over 44% of its stock value as per our
estimates, Colgate's advertising was exceeded by over 35% by
P&G's Crest toothpaste. P&G, which competes with Colgate in
all product segments exceeds Colgate's advertising spending by over
cannot be ruled out, but would simply increasing
advertising be the solution
While increasing advertising is bound to have a positive impact
on sales would the incremental sales match up to the increase in
expenses incurred on media and advertising?
P&G for instance has long dominated the personal care
industry in terms of advertising and competing with the likes of
P&G solely on advertising would unnecessarily strain the
operating margins. Also, competing on advertising spending in not a
one-time cost but if Colgate chooses to play on this turf, it would
need to sustain the heightened level of media and advertising
spends in the future. Notwithstanding, the current gap that exists
in advertising levels between Colgate-Palmolive and others is too
wide to be bridged easily in the short-term.
If however Colgate were to scale up advertising to arrest the
drop in market shares in Oral Care and Shampoos, Soaps &
Deodorants segments, the two largest products segments within
Colgate Palmolive, we would expect the profit margins (EBITDA
margins) to decline sharply in the short term to historical lows of
close under 25% and to remain flat thereafter, leading to a
potential 20% downside to our current Trefis price estimate of
While, media and advertising can be reasonably assumed to be
significant causes for a drop in Colgate Palmolive's market shares,
we believe simply ramping up the advertising spending doesn't
provide the solution.
See our full estimates for Colgate-Palmolive