Date: 11th July 2000
Colgate-Palmolive India Ltd - Toothaches are rising.. and the ring of confidence is missing!
Current market price - Rs187
BSE Sensex - 4898                

Remember the model's teeth in the advertisement for Colgate toothpaste. As the children laugh at their teacher for her teeth being of a color other than white, she has a distasteful look on her face. Investors may be pardoned if they have the same look about them whenever the Colgate stock is mentioned. The name Colgate reminds you of just one thing - toothpaste. It is a very strong brand marketed by the world leader in oral care. And yet, the company has lost almost 10% in market share in the last four years. Just goes to prove that leadership can never be taken for granted. Getting market share may not be easy, but maintaining it is even more difficult. And complacency can kill you. That's what happened to Colgate in India. The company was the numero uno for several decades. And it took its status for granted. And the competition decided to just trash it.

What is the Business?
Colgate-Palmolive India, popularly known as Colgate has gone through, perhaps, its worst ever phase in the last three years in India. From a pride of position, it lost marketshare and from a darling of investors of yesteryears it became a slow-duck for today's market. Though a leader in oral care, it also has a small presence in toilet soaps, skin care and household surface cleaning. Despite the strong brand, Colgate's complacency has seen the emergence of fierce competition from HLL (Close Up and Pepsodent) as well as SmithKline Consumer (Aquafresh). It has now begun getting its act together to face the challenge head on. But the toothpaste business is getting to be increasingly competitive with HLL launching Aim aimed at the lower end of the segment, where the main growth is expected to come from. Besides the clout enjoyed by HLL, the smart inroads made by SmithKline and fierce competition from smaller players like Anchor, Balsara and others is also making life miserable for Colgate and the financials are baring the truth.

Who is the Management?
Somewhere between the first two World Wars, Colgate was established as a subsidiary of Colgate Palmolive USA. After an IPO in 1978, the parent diluted its stake to 40% to comply with FERA. This was reinforced to 51% in 1993 by issue of shares at a premium of Rs10 to the parent, a substantial discount to market price. This was something entirely unexpected from a MNC and created quite a brouhaha. Although shareholders have been adequately rewarded, lack of vision on the management's side has resulted in the company becoming a victim of a narrow product profile. And the overall management quality has also left a lot to be desired.

Whither Cash flows?
The toothpaste market and by extension the entire oral care range comprising toothpowder, toothbrush and mouth rinse, besides the former (which constitute almost 85% of Colgate's product profile) continues to face pressure, with promotion schemes continuing to be the main driver. A slight slowdown in growth is also expected, as the price increases, post-budget, will now begin to have an impact. HLL's Aim, priced at a 40% discount to Colgate products, however is yet to have an impact. While it is still too early to write the latter's epitaph, the converse also holds true that Aim is aiming to do exactly that. Margin expansion is also likely to be subdued, as marketing expenses remain high while higher commodity prices will neutralize some of the efficiency gains. We believe that improvement in margins in the last year have come more from cost cutting measures rather than any solid growth in topline. Besides, Colgate has been unable to achieve critical mass in areas other than oral care. This has proved to be its undoing in more ways than one. This makes the company's earnings highly vulnerable, as a dent in the core business, is enough to shake up its very foundation. We believe that the company will be unable to reward shareholders in the future as it has in the past. RIP.

Why should I Sell?
In areas other than oral care, it seems highly likely that Colgate will be able to build up strong enough brands to negate the slipping marketshare in its core area. The onslaught from HLL is unlikely to abate, before the company realizes its dream of becoming the market leader in oral care in India. And the smaller players have also realized that building up strong brands in niche markets may be helpful for them rather than take the giant head-on. And who knows, if Mr. Deep Pockets (aka HLL) gets really fired up, it may just buy the smaller regional brand from its petty cash. A cut in the advertising and marketing budget is akin to committing suicide for any FMCG major. To contain its slide, Colgate is seen to be doing this. At a time when its competitors are upping the ante with major investments in promotions, this could spell T-R-O-U-B-L-E for Colgate. Thus, the new song in the market could well be, "Sell, Sell, Sell Colgate" all the way.

Where can I go Wrong?
Colgate has been trying to check market share erosion in toothpaste with a spate of new launches and re-launches in the last one year. The response to all of these has been good. It has also increased toothbrush market share by 3% in the last few months, recording a 23% volume growth. Colgate's strong brand equity is reaffirmed with the brand reoccupying the slot of the top brand across all categories again in the annual survey conducted by IMRB. Colgate has been at the top position, in seven out of eight years in which the A&M-IMRB brand survey has been conducted. Also one cannot forget that even today a vast majority of the Indian rural population (70%) knows not toothpaste, but only Colgate. They ask for 'Colgate' when they want toothpaste. With a 50% market share, synonymous with the category itself, in a market where a lot of consumers are to become users yet, the brand cannot be expected to just fade away like that! But can you hear the strains of "Sayonara, Sayonara" in the distance?

Murali Iyer

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