FMCG
Page 7
As it had done often in the past, the developed markets strategy primarily depended on innovation and cost reduction and the innovation pipeline was now unrecognisable. From the limp efforts of the 1970s, it now accounted for fully 40% of the year’s sales from lines five or less years old, an impressive number by any standards. New products such as Colgate Max Fresh and Colgate Simply White were complimented by new formats of existing brands. Mennen was extended from stick format to roll-on and aerosol, vindicated by the insight that a significant number of consumers were loyal firstly to the format and only then to the brand. Until now, format alone had kept Mennen out of two-thirds of the global underarm deodorant market.
Despite a record year and the fact that gross margins had increased by 18% over the previous twenty years to a record high of 55.1%, the largest ever cost-reduction programme was announced: true Colgate style. The plan was to move to a truly global supply chain with fewer, bigger, better global and regional manufacturing facilities, business support functions centralised at regional level, and beefed up sales and marketing teams in the individual markets. Over the four-year change program, one third of the factories and 12% of the employees would go.
2005
Volume growth increased sales by nearly $1billion, with all divisions performing well and record global market shares in both toothpaste and toothbrushes. But the big news was America, with a volume growth of 6.5% after three years in the doldrums. New products like Ajax Ruby Red Grapefruits, Palmolive Oxy Plus washing-up liquid, Irish Spring MicroClean soap, Softsoap Kitchen Fresh Hands and Softsoap Shea Butter liquid soap exemplified Colgate’s skill in extending brands through both line extensions and across categories. Colgate Total, Colgate Luminous and Colgate Max Fresh produced further market share gains.
There is no doubt the company had been progressively sharpening its marketing capabilities and increasing its resources. The innovation pipeline had produced a string of relevant new products and sales teams were doing equally well getting more and more product variants onto the grocery shelves, dominating displays with a sea of bright red branding. Colgate realised that as many as 60% of consumers were making their choices within the store, so it established a wide range of offerings dominating the displays, a feature that classically exploited impulse buying. Scratch and sniff panels on new toothpaste variants and in-store television commercials at Wal-Mart were a further two responses to the need to make the sale at the store level.
Colgate also put great emphasis on building relationships with, and seeking insights from, both dental and veterinarian professionals, the common corporate skill-set linking the oral care and pet care businesses. As well as sending dedicated professional sales teams to visit dentists’ and vets’ offices to explain the new product science, the expert feedback helped with the development of further initiatives. As an example, a company-organised network of dental hygienists helped refine advertising for the Colgate 360 manual toothbrush. In support, global advertising spend increased by 12% to a record high of almost $1.2 million, a 33% increase in only three years.
With the sale of their North American and South East Asian detergent brands, the move away from detergents continued in both developed and developing markets, which meant goodbye even to long-standing and sustaining brands as Fab and Cold Power. Simultaneously, and on the track of lower costs yet, procurement teams were established in both India and China and plans were finalised to replace five European factories with just one gigantic operation in Poland.
2006
Once again, the Colgate machine was humming. A 7% volume sales increase added almost another $1 billion to the top line, with every division performing well. In good years, strategies always sound cohesive and compelling. Colgate’s were no different. They embodied:
· Tight focus on the consumer
· Increased marketing spending
· New ways of communicating
· Building consumption in emerging markets
· A steady stream of innovation
Whilst the first three should be generic to any decent packaged goods business, what was really driving Colgate was the latter two. Excluding Hill’s, 80% of sales were now coming from outside North America. Building consumption in emerging markets was a two-stage process. In newly emerging markets such as India and China, it meant reaching the millions of small outlets whose small purchases for the majority of retail sales and Colgate products were now available in 5 million such outlets across the two markets. With that established, the next step is trading the consumer up. Sales in Latin America grew 15% in the year to top $3 billion, driven by a 10% increase in volume, on top of a 16% growth the previous year and with sales growing in every single market. The primary drivers were the company’s premium brands: Colgate Total, Colgate Sensitive, Colgate Max Fresh, Colgate 360 toothbrush, Palmolive Nutri-milk and Lady Speedstick.
Clearly, trading-up depended on a steady stream of innovation, which the company was now delivering regularly and across three platforms. Firstly, at the local level, a Global Innovation Fund that allocated resources to selected projects any company employee could submit, 73 of which were selected in 2006. Secondly, innovation projected for the market within three years was sourced from nine category innovation centres located globally but close to the relevant action. The innovation centres’ results were evaluated by the company’s Global Big Hits process, which were built to identify the best strategic opportunities based on:
· Size of opportunity
· Most incremental potential to reach new consumers
· Which are truly new to the market
· Potential for global expansion
Thirdly, ground-breaking innovation expected to hit the market in 3-5 years would be developed at two new long-term innovation centres, one for oral care and one for Hill’s Pet Nutrition. No less important than the processes was the funding, which was garnered from the energetic, constant and aggressive cost-cutting Colgate never failed to conduct. And the new product, once in market, would have its consumer and trade spend tightly managed by the Colgate Business Planning process which set out and evaluated goals both by product and by customer, 18 months ahead of time.
Colgate’s willingness, in the years preceding 2006, to divest itself of lower-margin operations with fights on their hands for higher margin, less competitive arenas continued. It sold the Latin American and Canadian bleach brands Javex, Agua Jane and Nevex and acquired in their place Tom’s of Maine, a natural toothpaste business that sold through health and speciality stores.
2007
Business as usual? The top line gained another $1billion, up 7%. Toothpaste, manual toothbrushes, mouth rinse, bar soaps, shower gels and even lowly fabric conditioners made new global market shares records. In a year when many companies’ profits were pushed down by raw materials and energy costs, Colgate, ahead of the game by cutting costs well before the financial crisis struck, was reporting a record margin of 57.3%. With costs under control, there were no raids on the advertising budget to shore up the net margin. That too had increased by 17% to $1.5 billion, another record. The only worry on the horizon was that nearly half of 2007’s 12.5% total sales increase had come from positive foreign exchange movements. They, of course, can go down as well as up.
And the innovation pipeline was squeezing out toothpaste. Colgate Total Advanced Clean and Colgate Max Fresh BURST were driving sales and margins, with Colgate Total now accounting for 20% of company toothpaste sales. In body care, breakthrough moisturising technology had been incorporated into the Palmolive and Softsoap ranges, and the Hill’s range also benefited from new variants of the Prescription Diet and Science Diet ranges. Body Cleansing became a third new long-term centre of innovation and the company continued to pursue the outside collaboration that had produced the Colgate 360 manual toothbrush with the new Colgate 360 Sonic Power battery toothbrush.
One of the strengths of the Colgate strategy was its fundamentally multi-faceted nature. In addition to blockbus
ter new products, no opportunity was too small for the company to exploit. Colgate’s close contacts with in-store pharmacies revealed that diabetics – frequent visitors – are voracious gatherers of information about their illness. Colgate launched a pharmacy-based information campaign about Colgate Total’s ability to fight gingivitis, a prevalent problem for diabetics. And supporting all Colgate’s oral-care activities was Bright Smiles, Bright Futures, a 17 year-long campaign which had not only provided health information and samples to over 500 million children in 80 countries, but, brought into stores as in the Carrefour relationship, rolled it out in ten countries during the year. Colgate’s grip on the dental professionals, pharmacists and young minds alike gave, and give it still, a clear and tangible strategic advantage.
2008
With an 11% increase in the top line to a new high of $15.3 billion it seemed the global crisis had passed Colgate by. However, while growth before 2007 had been driven almost entirely by volume, that now playing less and less of a part. Of the 11% sales increase, only 4% came from volume. Positive foreign exchange movements delivered half as much, whilst a whopping 5.5% came simply from price increases. In the meantime, costs were increasing, consumer spending was down and Colgate’s twin track approach of affordability and trading up could easily be threatened by over-zealous pricing. In Latin America, for example, net selling prices increased by 9.5% in the year, hardly recession-friendly. In the Europe/South Pacific region, prices rose by 5.5% as volume scarcely moved. Hill’s prices rose even more, by a full 10.5%. While everyone loves their pets, high-end pet foods are likely to suffer when belts are being tightened.
Ever-reliable, however, the innovation process continued to deliver more winners, some quite extraordinary: Suavitel Magic Moments, for example, a fabric conditioner that was taking Latin America and Europe by storm. Hardly surprising. Its patented technology provided touch-activated fragrance for months after washing. Yet the company continued to reorganise. Dedicated teams of research and development staff focused on each stage of every process: conducting early research; energetically researching innovation inside and outside the company and marrying nascent technology to consumer needs. Colgate also formed an alliance with The Forsyth Institute, the world’s leading oral care scientific research organisation and increased the size of the professional sales force that called on dentists’. It also began to seek out academics and other key opinion formers who could issue informed support for the company’s products and activities.
2009
It was in 2009 that both and net sales volume increase hit the buffers. Perhaps continued price rises, this year by 6%, had finally had an impact. Nor can adverse currency movements have helped: flat sales, flat volume, and the 6% price rise meant a gross profit margin increase of 2.5%. But that was still a new high: 58.8%. But now, the biggest problem was Hill’s Pet Nutrition, at 14% the smallest of the company’s five divisions. Here, unit volume actually declined by 7.5%, almost certainly due to the previous year’s price increases in response to similar increases in commodity costs. And the rest of the business achieved only 2% growth. Prices were up by an average of 5.5% whilst advertising was down by7%. The heady days of 7% a year suddenly seemed long gone.
But there were occasional highlights. Colgate Wisp, a new portable mini-toothbrush, with a breath-freshening bead for use without water, was targeted at busy young adults and launched via social media and on-campus sampling. It took 5% of the disposable toothbrush market in a year, adding almost the same percentage to the company’s total toothbrush share. Colgate Total Enamel Strength, Colgate Sensitive Enamel Protect and Colgate Max White with Mini White Strips made useful progress across several markets. Once again, the company’s strategy of endless segmentation with carefully targeted offerings was paying dividends. In Latin America, Colgate’s share of the soap bar market, helped by the launch of Palmolive Nutri-Milk, reached a new high of 28%, on top of the company’s dominance in oral care. But that 3% volume growth in Latin America came hand-in-hand with prices hikes of 13.5%. How sustainable could that be in the company’s biggest region?
2010
Net sales up by a little over 1%; successful innovation; stock on the shelves: price increase roll-backs in selective markets: things were beginning to look a little more sustainable. But in which markets? Greater Asia/Africa increased its sales increased by $350 million, driven by a very impressive 10% increase in volume, primarily in China, Thailand, Philippines, Malaysia, Turkey, Russia and India, where Colgate’s share of the rapidly growing toothpaste market reached a record 51.5%. It was just as well. 50% of total sales now came from emerging markets, now vital for the company at a time when the developed markets seemed to be in a never-ending slump.
North America, however, was a marginal exception. Sales volume grew by 3.5% on the back of a 2.5% decrease in prices and the success of another slew of oral care innovations: Colgate Triple Action, Colgate Extra Clean and a re-launched Colgate Total. But the Hill’s problem did not go away. Volume declined further by 2, despite price reductions. Worst hit were U.S., Russia, Japan, France and Germany, prompting more price reductions and decreases in pack size, although leavened by innovations such as Hill’s Science Diet VetEssentails in Europe and Hill’s Science Diet Weight Loss System in the U.S., where, not unlike their owners, 45% of dogs were obese. Other factors kicked in too: the benefits of the restructuring programme begun in 2004 and a second three-year programme, which now brought down worldwide formula costs by 32% and SKUs by 23%. The gross margin rose to 59.1%.
2011
The business was in slightly better shape, posting a 4% volume increase, adding another $1.2 billion to the top line sales to a record $16.7 billion, driven not least by the realisation that cost increases could not permanently be answered simply by price hikes. So, to maintain if not improve competitiveness, Colgate held its prices, even at the cost of 1.5% haircut on the gross margin.
But what 2011 really did reveal was the differing set of challenges in the two halves of Colgate’s business: developed and developing markets. In North America, the absolute necessity to promote through price pushed prices down by 3%, but improved volume by 2%. In Europe, the same 3% reduction fared even worse: a 1% increase. The 2010 attention Hill’s halted its decline overall; volume was lost in the developed markets of the U.S. and Japan, but counterbalanced by growth in Russia, South Africa and Brazil.
In contrast, the rest of the world looked rosier. The emerging markets, with their large populations and low but rapidly rising core product penetration and consumption, maintained robust GDP growth, which accounted for over half of Colgate’s total sales, and powered all the 2011 growth. Sales in Latin America rose by 12%, if more by price increases than by volume. Greater Asia/Africa scored 9.5%, mostly through volume. The two regions added $800 million in sales, as the rest of the company could only cite favourable currency movements as its saviour.
The developed markets’ challenge was not a new one, however. The same problems a generation earlier, low GDP growth, flat all-round performance, downward pressure on prices and retailers scrambling to keep their shoppers, all this had prompted a scattergun acquisition spree. So, in June 2011, Colgate purchased the Sanex personal care business from Unilever for $940 million. Unilever had acquired the skin health targeted premium shower gel and deodorant brand as part of its Sara Lee acquisition in 2009 but had been ordered to sell under the European antitrust legislation. As part of the deal, Colgate sold their Columbian detergent brands to Unilever.
What is Their DNA?
Except for the tempestuous conglomerate interlude, the Colgate-Palmolive company has generally been a tightly focused company with few upheavals in structure, direction or management style. With the benefits of this firm base, it has evolved highly distinctive way of doing things, much of it highly effective, of which the three most significant are the company’s strength in emerging markets, its relationships with the professionals in its product fields and its ability to control co
st.
Emerging Markets.
For a company located in and managed from the USA, Colgate’s geographic spread is astounding. Over 50% of total sales come from emerging markets, a figure that increases every year. Even more valuable is a brand strength and brand leadership in the 21st century’s fastest growing economies. Colgate-Palmolive has been established in Latin America for 75 years, in Greater Asia for over 50 years, where it has built up dominant market positions. In 2011, in a consumer brand equity survey published by The Economic Times of India, Colgate was ranked as the Most Trusted Brand in the country, not just in toothpaste but also across all product categories. That’s an American brand more trusted than home-grown stalwarts such as Britannia Industries, Marico Industries, Tata Beverages and long-term Indian subsidiaries of other globals like Hindustan Unilever and Cadbury India.
Colgate is certainly a virtuoso practitioner of establishing global brands and exploiting global sourcing. It long ago saw and acted on the benefits of changing global products according to local preferences, as it in China with Colgate Plax Fresh Tea mouthwash. Distribution did not stick to expat-friendly big cities but reached out to millions of independent retailers which now account for a staggering one quarter of the company’s global sales. Wholesalers are assiduously courted not just with visits and incentives but also with customised, small scale packaging; in China the company offers cases of a mixed dozen products. Colgate employees often spend up to a week in small neighbourhood stores themselves, immersing themselves in the local retailers’ world, seeing at first-hand how the storekeeper – his customers’ most important product advisor – influences his shoppers buying choices. Such embedding in day-to-day marketplace life gives Colgate-Palmolive a decisive competitive strength in these all-important emerging markets. It is the very antithesis of the stereotypical American company: barging in, ignoring local culture, blindly insisting on doing things the American way.