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Get Four
|  | DECEMBER 8, 2004
By Pallavi Gogoi Colgate's Big Bid to Freshen Up Profits Investors are cheering plans to scrub detergent lines and refocus on oral care. Trouble is, rivals won't give ground without a fight Colgate-Palmolive (CL ) put a smile back on investors' faces on Dec. 7 with its announcement that it will wash its hands of the laundry business and focus on what it knows best: teeth. While the move was widely expected, it certainly brightened prospects for the outfit's stock. Investors have been starved for good news from Colgate since September, when it warned that it wouldn't meet earnings numbers for 2004 because of increased raw material and fuel costs -- the first such advisory in 10 years. Wall Street sent Colgate's stock up $3.64, to close at $49.94, on the latest announcement. Standard & Poor's upgraded Colgate shares to strong buy, raising its target price to $59 from $49 (see BW Online, "S&P Boosts Colgate to Strong Buy"). There was no euphoria, however, for the 4,400 employees who will be losing their jobs. New York-based Colgate announced it will shutter 26 factories worldwide as part of its four-year plan to boost sales and profits. It will likely look for buyers for its Fab and Ajax detergents brands. "We're moving to businesses that have higher margins," said Colgate CEO Reuben Mark in a conference call. "REAL RISKY." While it sounds like a great strategy to get out of low-margin businesses like soap suds, Colgate's gambit is fraught with challenges. The competition in oral-care products has become a global frenzy. "It's real risky to become narrowly focused on an area of more competition, raising the bar on the company if you will," says Michael Barr, consumer-products analyst at Victory Capital Management, which owns stock in rival Procter & Gamble (PG ). Barr has a point, given the lessons of the recent past. Despite being the worldwide leader in toothpaste, Colgate has been getting a run for its money of late from P&G. The Cincinnnati-based conglomerate has come on strong by introducing the most innovative products in oral care in the past few years, in the opinion of most analysts. In 2001, P&G nationally launched the Crest SpinBrush, the electric toothbrush that's now a $200 million business. P&G was also an innovator with the Whitestrip teeth-whitening system, which has since grabbed 70% of the market. Colgate is still playing catch up with its Simply White product and Motion toothbrush. It's no surprise, given that P&G spent $229 million on its toothpaste and tooth-whitening products in 2003, vs. $80 million by Colgate, according to New York ad tracker TNS Media Intelligence/CMR. GLOBAL REACH. Even in its trademark toothpaste products, Colgate's annual sales through Oct. 31 were up just 1.6%, to $339 million, vs. a 6% increase in sales of Crest toothpaste, according to the latest numbers from Chicago-based Information Resources, which tracks consumer-product sales at supermarkets and drugstores. "Colgate hasn't invested in technology enough to come up with innovative products," says Rick Bozelli, a merchandising manager for Pennsylvania grocery chain McCaffrey's Markets. At the same time, some analysts grumble that Colgate never ventured into product extensions of its household lines like Palmolive and Ajax, as P&G did with the Swiffer duster. But CEO Mark said in the conference call that he's not interested in expanding into categories where newcomers can undercut leaders on price. Indeed, P&G has had to come out with brand extensions for Swiffer to keep up with store brands' cheaper imitations. CEO Mark says he plans to hire marketers who can lay the groundwork for increasing sales in Asia, Europe, and Latin America. At the same time, he plans to increase spending on advertising and research and development for oral-care and personal-care lines like Speed Stick deodorant and the Hill's line of pet nutrition products, where Colgate will go head-to-head with P&G's Iams pet food. SLASHING COSTS. Colgate's annual ad budget of $1 billion is dwarfed by P&G's $5 billion. Still, under Mark Colgate has been a success story for almost a decade now, and investors may like the fact that it's slimming down by reducing the number of global suppliers and placing all purchasing functions within one organization. Colgate claims these moves will save as much as $300 million a year. It plans to take a $45 million charge in the fourth quarter of 2004. Some analysts worry about short-term inventory spikes, which may lead to sharp discounts in various locations when factories are being closed or merged. But despite these challenges, Mark is confident that the renewed focus on core products will help Colgate regain its footing as the leader in its key brands. Investors are definitely counting on him to keep them smiling.  Gogoi is a reporter for BusinessWeek Online in New York
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