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Colgate: Total protection? - Views on News from Equitymaster
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Colgate: Total protection?
Jul 5, 2005

We all were witness to what happened when P&G shook the hegemony of the industry leader, HLL last year by slashing prices of its detergent products though its unlisted arm, P&G Home Products (PGHP). HLL bled profusely as it was forced to follow suit to remain a player in the game, which resulted in a margin hit. Recently some news report had indicated that P&G has now finally decided to foray into the oral care market in India by launching its flagship product ‘Crest’, which was rumored to be launched a couple of quarters back. Assuming it is launched again through PGHP and not the listed entity Procter & Gamble Health and Hygiene (PGHH), which is a focused two-product company (namely Vicks and Whisper) what will the scenario look like? Let us see who will be hit in this round of fire and what could be the implications?

Worldwide, Colgate and Crest are fighting for the pole position with Crest leading the race. However, in 1997, Colgate had dethroned the latter with the launch of Colgate Total. Crest fought back with the launch of Crest Whitestrips and regained the position five years later. Crest is one of the billion-dollar brands in the P&G stable and has helped the company become a market leader in all major oral care markets worldwide. Crest is currently the market leader in the US with over 33% share and worldwide sales in CY04 grew by more than 13% YoY.

Colgate-Palmolive, on the other hand, is a US$ 10.6 billion global company with presence in more than 200 countries. The company’s businesses include oral care, personal care, home care and pet nutrition. It has market leadership positions for key products, such as toothpaste, toothbrushes, bar and liquid soaps.

In India, Colgate is a synonym for toothpaste as the company has created a strong brand image and awareness in the minds of consumers over the past 50 years. In FY05, oral care accounted for 93% of revenues and 115% of PBIT, giving a perspective that oral care is the company’s bread and butter and if this business is hit, it is a major cause of concern.

Indian oral care scenario

The total oral care market in India is estimated at Rs 26 bn (90,000 tonnes per annum). The toothpaste segment can be divided into two broad categories – white’s, which account for 80% of the market, and gels that account for the remaining 20%. The toothpowder market is worth approximately Rs 5 bn, out of which around Rs 2.9 bn is white while the rest is coloured. Only 47% of the Indian population is estimated to use toothpaste, 23% use toothpowder, while the rest use neither. Per capita consumption is amongst the lowest in the world and stands at 107 gms per year. The same for Thailand is 262 gms, Mexico 376 gms and USA 518 gms. Penetration levels are around 70% in urban areas and 25% in rural markets.

Colgate has a 49% (65% in FY95) share while its closet rival HLL has a 34% share of the pie. HLL is relatively safer (personal products 23% of 1QCY05 revenues) as compared to Colgate since it has other business unlike Colgate who is focused only on oral care.

Thus, in our view, Colgate is likely to be the worst hit with the launch of Crest, forcing the major to rework its strategies. As can be seen from the table above, Colgate had been expanding margins by reducing its advertising expenditure, but now with the introduction of Crest, it cannot afford to do so and overall profitability is likely to be hit.

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