Colgate Palmolive Will Continue to Increase Its Market Share

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Oct 12, 2014

Colgate Palmolive (CL, Financial) can be considered an excellent long term investment. Even in an uncertain economic condition this stock can provide strong results and add to shareholder value. The company has been growing consistently over the years with organic sales growth of 6% since 2000.

If we look at the company’s historical gross margin has increased from 46.8% in 1993 to 58.8% in second quarter 2014. Operating margins have also shown a CAGR of 7.9% since 1993. Also, Colgate Palmolive’s after tax return on capital of 30.3% in 2Q14 are better than peer group and S&P 500. History also suggests that Colgate Palmolive has been providing better returns than peers over the years.

In addition to consistent results shareholder value creation has also been the priority and the company has been quite successful in providing better returns than peers. In the past 20 years the company has given 1145% as total returns as compared to S&P’s 484% and Peer group’s 750%. Thus, considering a very strong history of returns even during economic turmoil, Colgate Palmolive is definitely a stock to pick for every investor in order to diversify their portfolio.

In this article I will discuss how the company will continue to grow and create shareholder value for investors.

Colgate Palmolive has 40% market share in the toothpaste market, with toothbrush capturing 33% market share and mouth-wash capturing 17% of the market share. In order to meet customer’s needs, innovation of product plays a very important role.

Thus, Colgate Palmolive has been focussing on improving the efficacy of its product. One such innovative product of it’s widely spread technology centres is Colgate Maximum Cavity Protection plus Sugar Acid Neutralizer toothpaste. Research also shows that the use of sugar acid neutralizer reduces the early tooth decay by half with 20% fewer cavities than fluoride alone. Not only this, the company has also been offering products for customers with different requirements such as the Colgate Max White one Optic, Colgate Enamel Heath etc. Similar innovative products can be seen both in the toothbrush and mouthwash sector of the business as well.

Colgate Palmolive has several innovative centres operating over the globe. The centres aim at gathering local insights and hence developing concepts according to their category strategies. This helps them to make new products for the local and they consequently also make the idea global. In order to make their reach global the company has been investing in its digital media. More than 70% of the marketing is done through digital media and is operational in more than 52 countries over the world. Also, incorporation of technology enabled analytics helps Colgate to understand the requirements faster and deliver it to their customers before others.

In addition to meet competitive challenges, the company has increased its commercial investments over the years. The below graph depicts that there was practically no advertisement cost in 2002. However, total advertisement investments have been increasing over the years. In addition to an increased advertisement investments, a more strategic and steady launch of its new products has helped the company to gradually increase its market share. It is a combination of the facts that Colgate Palmolive has increased its toothpaste market share from 31% in 1994 to 44.4% at present.

Also, significant population growth, rising per capita income and increasing purchasing power in emerging countries like China, India, Russia and Brazil is expected to have tremendous impact on the company’s revenue.

According to the research, emerging markets is estimated to add $6.6 Billion to the company’s revenue by 2020, which is approximately 95% of the company’s total growth. Also, according to a report in 2013, around 700 million people are out of poverty in China and India. Thus, an emerging middle class and the rising per capita income in China and India alone are expected to have three fold effects on the company’s growth by 2020.

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Source: Investor Presentation

Conclusion

I strongly believe that a company like Colgate Palmolive with a solid history of performance and innovation will continue to satisfy its customers. Also, huge growth potential in emerging markets and ability to come up with innovative products based on their varying requirements will help Colgate Palmolive to continue increasing its market share and hence provide good returns to its investors.