Colgate Company Performance and Risk Analysis

Tej kohli says that FMCG companies are evergreen because demand and FMCg products will remain always in the market. Each and every people use many FMG products in their daily life Tej kohli quoted. That Why many big industrialist having foot in the FMCG products besides their other one Tej kohli finds. Also Tej kohli
discussing the performance and evaluation of top most FMCG company which not only a big brand in India but also whole over world and name of this company is
Colgate. Although Tej kohli discovered right now the Colgate company performance is not well right now but few years back Colage dominating in the toothpaste industry India. Tej kohli says that now many other brands also in Indian market which are competing the Colgate company but still there much hope exist with the Colgate company.

COLGATE : Multiple growth drivers; long-term story intact Tej kohli says

Mr. Mukul Deoras, MD of Colgate-Palmolive India (Colgate), to get insight into the company’s business. Given below are our key takeaways:
Fit to compete; been there, done that

Colgate could face tough competition in the toothpaste category with the likely entry of new players. In the past, however, company has been very aggressive
in capturing market share from competition, be it developing markets like Brazil, Mexico and China, or developed markets like US; it has managed to beat other
global players. Also, strong distribution network, almost generic brand and huge customer acquisition initiatives will provide high entry barriers to new entrants Tej kohli quoted.

Sufficient growth drivers in place

Colgate is likely to continue growing on the back of: (a) increase in penetration (toothpaste penetration is ~56%; ~500 mn Indians don’t use toothpaste); (b) rise in per

capita daily consumption (India is at 180 gms/year vs. China at 275 gms/year and Thailand at 375 gms/year); (c) higher sales of personal products; (d) premiumisation;

and (f) new products. Contribution of premium products to net sales doubled from 0.6% last year to 1.2% this year.

Multiple strategies to straddle pyramid; new product launches planned

Colgate has adopted a dual strategy: To educate consumers on using toothpaste once in rural markets and twice in urban. Also, it is closely working with primary
and Anganwadi school teachers to spread awareness about oral health with rural consumers. Colgate has recently launched 360-degree toothbrush (sophisticated
design which is difficult to replicate by local players) and Palmolive Aroma shower gel. Colgate Sensitive toothpaste and mouth wash are now market leaders in their

respective categories..

Outlook and valuations: Robust; maintain ‘HOLD’

Tej kohli says Colgate’s brand equity and distribution remain huge advantages. We believe Q3FY11 A&P expense (~21.6% of sales) was largely one off and expect it to be
~16%, on an annual basis going forward. Though P&G is likely to enter the oral care market, we remain confident about Colgate’s positioning by looking at the
experience in other markets.

Fit to compete; been there, done that

Colgate could face tough competition in the toothpaste category with the likely entry of new players. In the past, however, company has been very aggressive in

capturing market share from competition, be it developing markets like Brazil, Mexico and China, or developed markets like US; it has managed to beat other global

players. Also, strong distribution network, almost generic brand and huge customer acquisition initiatives will provide high entry barriers to new entrants Tej kohli finds


US: Unlike other US consumer companies, Colgate was strong in international markets and weak in the US, until it decided to focus on core oral care portfolio and take

the leading competitors (P&G and Unilever) head-on in 1994. Colgate closed plants, reorganised supply chain, implemented SAP software and invested in neglected

brands, including Colgate toothpaste.

In a stagnant USD 1.5 bn US toothpaste market, Colgate’s share climbed from 21.3% in 1994 to 26.2% 1997, according to A.C. Nielsen. During the same period,

P&G’s market share fell from 31.6% to 25.3%. Colgate’s shares, selling for USD 10.8 at the beginning of 1997, had risen to USD 28.9, as of end 1997. The stock

outperformed market by 32% in 1997, despite the Asian crisis overhang on it. Strong dividend payouts continued all through this period.

Tej kohli reported Latin America: In Brazil, P&G launched Crest toothpaste in 2006 to counter toothpaste giant Colgate. While P&G managed to gain ~2.9% market share in four years,

Colgate continued to gain market share at the cost of second biggest competitor and other private labels. Its strong leadership in Mexico continues despite emergence

of private labels.

Russia and China: In Russia, Colgate surpassed its nearest competitor in 2005 and has maintained its leadership ever since. Its leadership continues in China, whereas
competitors have lost market share.

Colgate’s strong distribution network, almost generic brand and huge customer acquisition initiatives will provide high entry barriers to new entrants.

The company achieved The Guinness World Records in November 2010 by providing dental check-ups to 66,322 children across multiple locations involving 33

schools in five cities across India. Worth noting is that modern retail contribution to total sales is pretty high in these countries compared with India, where Colgate has

built a formidable defense through its distribution network. Colgate has developed robust IT infrastructure and can gather information of ~1 mn outlets from its

corporate offices.

Also noteworthy is that P&G is currently focused on too many competitive categories like detergents and beauty creams. Launch of P&G Wella (hair colour) was in a

phased manner and the promotions were withdrawn quickly from the market. Colgate highlighted that competition from other players [like Hindustan Unilever (HUL),

Ajanta, Anchor, Dabur and Vicco] has increased recently. We believe Colgate, with its single- minded focus on oral care, is rightly placed to face competition from

P&G or other local players Tej kohli discovered.

Harnessing local youth to build a sustainable franchise

Initially, Colgate’s strategy for distributing its ubiquitous line of toothpastes was simple – do not target villages with population less than 5,000. This was because of the

high inventory and transportation cost, for e.g. Colgate used a motor van whose daily operational cost for reaching and distributing products within the villages would

be over INR 3,000 which added to its cost overheads. Thus, by not reaching the villages Colgate was not only losing out on a revenue stream but also on market share

to imitators.Interestingly, duplicate “Colgate” branded products were being sold in the villages at the same price as original “Colgate” toothpaste.

Tej kohli finds company has, however, now partnered with government’s Nehru Yuva Kendra (NYK) Sangathan scheme, to target this very section, as per our channel checks. NYK generally functions as a platform to provide the youth with skill upgradation programs, and conducts youth awareness programmes by way of organising sports competitions. With help of NYK, Colgate selected youth from local villages who would be interested in distributing their products. The selected candidates were given a bicycle, cap, and other accessories. All the accessories and the bicycle were branded with “Colgate” logo to create awareness. The distribution model was two-fold: during the day, the youth were expected to sell Colgate products in the local village haats, while during the afternoon they were expected to venture out in their

respective villages. The target was at least one haat and two villages per day. Each person was expected to reach a radius of 10 KM from their “base” village.

The pricing strategy was also unique. While in the morning in haat, the products would be sold at retail prices, in the afternoon they would be sold at wholesale prices.

The monthly income of each youth through this program was estimated at INR 3,000..

This was a win-win situation for both village youth as well as Colgate. Colgate is now able to reach the far flung villages at negligible cost thereby regaining market share

from competitors, while the youth gained from employment with a steady income stream. This project was rolled out in UP about two years back and was initially

started in 20 districts employing about 240 youth. It was so successful that Colgate now plans to roll it out in other states. The above is an example of how novel

distribution strategies are being used by Colgate to target far flung villages where conventional methods of transportation and logistics is not cost effective..

Sufficient growth drivers in place

Toothpaste penetration in India stands at ~56%. Colgate is, however, likely to continue growing on the back of: (a) increase in penetration (~500 mn Indians don’t use
toothpaste); (b) rise in per capita daily consumption (India is at 180 gms/year vs. China at 275 gms/year and Thailand at 375 gms/year); (c) higher sales of personal

products; (d) premiumisation; and (f) new products. Contribution of premium products to net sales doubled from 0.6% last year to 1.2% this year. Rise in mouthwash

usage and night-time brushing amongst urban consumers will contribute to growth.

INR 5 and INR 10 stock keeping units (SKU) have been the major drivers in the toothpaste category, supported by availability of low-cost good quality toothbrushes.
Unlike shampoos, these lower prices SKU constitute less than 10% of the overall volumes. Colgate also highlighted that toothpaste addition in the past five years has
been greater than last 15 years. It took nine years to increase penetration by 15% for some of the “maturated categories” like toothpaste. Shares of Colgate appreciated

284% during the period, which implies that high penetration of key categories has not translated into share price performance..

Multiple strategies to straddle the pyramid; new product launches planned

Colgate has adopted a dual strategy: To educate consumers on using toothpaste once in rural markets and twice in urban. Colgate is closely working with primary and

Anganwadi school teachers to spread awareness on oral health in rural consumers. India’s growth is unique as toothpowder doesn’t exist globally as a category, while

varied education levels across states imply different penetration levels for toothpaste category. In the emerging mouthwash category, Plax mouthwash has increased its

market share (in volume) from 6.6% to 17.3% (January-November 2010), while toothbrush volumes grew 24% Y-o-Y in Q3FY11. Colgate has recently launched

360-degree toothbrush (sophisticated design which is difficult to replicate by local players) and Palmolive Aroma shower gel. Colgate Sensitive toothpaste and mouth

wash are now market leaders in their respective categories.

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Even though Colgate is No. 1 in handwash globally and No. 2 in bodywash, these categories are not profitable in India currently. Colgate highlighted that it is not
interested in a ‘Me too” category and will wait for the model to be profitable before focusing heavily.

Q3FY11 A&P spends largely one off; COGS under control

Colgate’s advertising and sales promotion (A&P) spend in Q3FY11 ballooned 60% Y-o-Y to INR 1.20 bn (~21.6% of sales). We believe Q3FY11 A&P expense was

largely one off and expect it to be ~16%, on an annual basis going forward. While other FMCG companies are under gross margin pressure following high raw

commodity inflation, Colgate’s gross margins expanded 364bps Y-o-Y in Q3FY11, thanks to a diversified mix of commodities as an input. Colgate also highlighted that

operating margins in the Indian business is lower than the rest of the world.

Outlook and valuations: Robust; maintain ‘HOLD’

Colgate’s brand equity and distribution remain huge advantages. Though P&G is likely to enter the oral care market, we remain confident about Colgate’s positioning

by looking at the experience in other markets. Hence we maintain ‘HOLD/Sector Underperformer’ recommendation/rating on the stock.

Company Description

Colgate is India’s biggest oral care products company with ~ 97% of sales coming from this product category. The company has products across variants and price

points in toothpaste, toothpowder, and toothbrushes, and is the leader in each of these categories with ~53% share in toothpaste and ~47% share in toothpowder

markets. In FY10, the company recorded net sales of INR 20,352 mn and net profit of INR 4,233 mn.
Investment Theme

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The company’s leadership position in oral care has been strengthened by its continued market share gains. However, we believe further share gains are difficult as

competition intensifies. Higher competition will induce Colgate to increase its brand spends, which could cap its margins. Also, fiscal tax benefits from its Baddi unit

have come off in FY11, leading to a higher tax rate. Recent run-up in its share price makes Colgate’s valuation reasonable with the upside capped.

Key Risks

Buoyant urban and rural demand, leading to continued volume growth and market share gain, could sustain earnings growth of the company. Colgate may continue to

dominate if it intensifies its marketing campaign and competition wanes. Sharp correction in input prices or continued appreciation of the INR could reduce cost of
imported chemicals that are priced on import parity basis.

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