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Colgate: Oh What A Difference A Year Can Make


The Corporation

COLGATE: OH WHAT A DIFFERENCE A YEAR CAN MAKE

Costs are down, margins are up, and it's about to gobble up Mennen

Reuben Mark has always been an energetic sort, bounding around his office and waving his arms as he speaks. But lately, he has become even more active than usual. To stay trim, the 53-year-old chairman of Colgate-Palmolive Co. has taken up jogging near his suburban Connecticut home. He keeps an exercise bike near his office. He has even been known to drop down and do 50 quick push-ups on his beige office carpet.

Hard as he has been pushing himself, it's nothing compared with the way he has been driving his company. Over the past year, once stodgy Colgate has announced a major restructuring, raised $446 million in a public equity offering, started manufacturing toothpaste in China, and committed $900 million for a collection of acquisitions. The biggest: its $670 million takeover of Mennen Co., announced on Feb. 13. It is all part of Mark's 1990 plan to double net income to $640 million by 1995.

GLOBE-TROTTING. Before Mark's tenure began eight years ago, that goal would have seemed impossibly distant. Marketing everything from kosher hot dogs to golf equipment, Colgate chronically underperformed. About the only place it excelled was in international markets, where it made a name for itself before there was much competition. But Mark pared operations down to five core businesses and began cutting costs. He recruited former Corning Inc. executive Edward T. Fogarty to be Colgate U.S.'s president, who in turn embarked on a pricing strategy that has more than doubled domestic operating margins over the past three years (chart).

For now, international sales remain Colgate's strong suit. Its wide distribution -- in such markets as Australia, Latin America, the Far East, and more recently Eastern Europe -- has helped diminish direct competition with heavyweights Procter & Gamble Co. and Unilever. Last year, two-thirds of Colgate's $6.1 billion in sales and 64% of its profits came from overseas. Colgate toothpaste, No. 1 in the world for decades, has increased its share from less than 30% to 43% under Mark.

But there's no way Colgate can avoid its rivals in the U.S., where its toothpaste ranks No. 2 behind P&G's Crest brand. Despite personal-care and household-goods sales of more than $1 billion in the U.S., profits were squeezed by Colgate's oversized sales force and the costly trade promotions it relied on to boost its brands against bigger rivals.

All that began to change in 1989, when Colgate brought in Fogarty. Instead of propping up lagging brands, such as Ajax and Fab detergents, Fogarty cut deeply into the promotions given to retailers. Concurrently, he raised prices on stronger brands, such as toothpaste and dishwashing liquids.

FOLLOW THE LEADERS. As expected, volume and market share in detergents plunged. The combined share of Fab, Ajax, and other brands fell from around 10.5% to about 6.5%, but operating results in detergents started to climb into the black in 1990. Although Colgate remains badly outweighed by P&G and Unilever, which together control some 80% of the market, its detergent business now is profitable. Since 1988, total U.S. aftertax profits grew 184%, to about $90 million last year, on net margins of 7%. Says Fogarty: "We far outstripped what anyone thought we could do."

But if Mark is going to double Colgate's earnings by 1995, he will have to do a lot more than milk its aging brands. Some of the responsibility for growth will fall to Lois D. Juliber. The former head of Far East and Canada operations, Juliber recently became chief technological officer, overseeing research and development of new products.

That's a tough job. The company has had some winners overseas, notably in Latin American markets, but innovative new products for U.S. consumers have not been a Colgate hallmark. Last fall, the company began its first major new-product launch in the U.S. in five years with superconcentrated versions of Fab and Ajax detergents. Since then, Colgate has announced plans for a reformulated Palmolive soap, dishwashing liquid for sensitive hands, and a baking-soda toothpaste. Colgate promises to back these and existing products with a big U.S. ad splash -- estimated at $90 million this year, up 25% from 1991.

`GOLD MINE.' Problem is, most of these products are of the me-too variety and probably won't grab big market shares. The new detergents, for instance, follow P&G's lead into the market. The baking-soda toothpaste is a response to Arm & Hammer's wildly successful brand, which has grabbed about 8% of the U.S. toothpaste market since 1988. With that lackluster lineup, says Andrew S. Shore, an analyst at Prudential Securities Inc., "the company is going to have to live by the law of acquisitions over the next couple of years to promote growth."

The Mennen deal, set to close in April, looks to be an excellent move. Although the $515 million-a-year company was too small to thrive on its own, Mennen's deodorant products, such as Speed Stick, command a leading share in the $1.1 billion market. The company's 14.2% operating margins will help boost Colgate's overall domestic margins to about 10%. The fit also is near-perfect in Latin America. Mennen has a good presence in Chile and Venezuela, while Colgate is strong in Mexico and Brazil. Says David A. Metzler, president of Colgate's Latin America division: "Mennen is an absolute little gold mine."

Mark would like to dig up a few more nuggets, so long as they complement Colgate's five core groups -- the mouth, the body, the house, fabric, and pet food. A sturdy balance sheet will make purchases easier. Last year's equity offering pared debt from 50% to 36% of capital. Since Colgate basically swapped shares for Mennen, the debt level won't be affected. Excluding a $243 million charge last September, when Mark cut about 8% of the work force, Colgate's worldwide operating profits for the year came to $622.6 million. That's a gain of 11.8% from 1990. Wall Street's reaction? Colgate shares have climbed some 28% in the past year, to about 46, compared with a 22% gain for the Standard & Poor's 500-stock index.

Colgate's chief vows to keep trimming costs. "Enough is never enough," Mark says. Given what he has accomplished so far, analysts such as Bonita Austin of Shearson Lehman Brothers Inc. give Colgate a good chance of reaching its 1995 earnings goals. By then, the energetic chairman may even be fit enough to run a marathon.By Bruce Hager in New York


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