A Tooth For Every Tooth

HERE'S an apparent contradiction that would be a classical case study for management students: How can a top brand be considered a black sheep by the stock markets? The sixth annual survey of India's top brands during 1996-97 conducted by A&M-ORG saw the fast-moving consumer goods giant, Colgate-Palmolive India, once again at the top, making up for its last year's defeat at the hands of Vicks. In five out of the last six years of the survey, Colgate has emerged at the head. Yet, the stockmarkets, considered the savviest barometer of a company's performance, don't seem to have a ring of confidence vis-a-vis Colgate's sparkle.

Once an investor favourite for consistently high dividends, the Rs 10 Colgate scrip is now languishing at Rs 177-Rs 180, a big fall from the last 52-week high of Rs 310. Recommending a "sell", T. Ghose, FMCG analyst at Natwest Securities, says: "Colgate's double-digit volume growth in the first half of fiscal 1998 was a flash in the pan. The result of high-trial purchases of its new toothpaste brand Fresh Stripes and leashed competitive pressure from Hindustan Lever (HLL), which had to deal with a trade boycott and production hiccups. Colgate also used this opportunity to increase its prices and shore up margins. But now the situation stands reversed. HLL's Pepsodent relaunch campaign has swiped significant marketshare. And Colgate's soap and shampoo brands have suffered because of intensifying brand warfare between HLL and Procter & Gamble (P&G). In shampoos, marketshares have fallen by one-third!"

To add to its woes, Colgate has suffered a fresh reverse in a legal battle with competitor HLL. The two of them control 97 per cent of the oral care market. The Monopolies & Restrictive Trade Practices Commission (MRTPC), in response to objections raised by HLL, has imposed an injunction on advertisements of the Colgate Double Protection toothpaste, launched in June 1998. Colgate had claimed that its brand was two-and-a-half times better than any ordinary toothpaste.

To support its complaints, HLL had carried out two scientific tests (one of them in an FDA-approved external laboratory). Examining material submitted by HLL and test reports from Colgate, the commission said: "We are of the prima facie view that the respondent is not justified in claiming two-and-a-half times superiority of its toothpaste over any ordinary toothpaste. Such claim can prima facie be said to be quite misleading." It also added: "...such sales promotion ... would drive most people to think that there is no other toothpaste which can beat Colgate with respect to its anti-bacterial and anti-microbial effect on their teeth. That would certainly affect sales of rival toothpaste products."

The first-half results for fiscal '98 mirror the bad times. Despite double-digit sales volume growth, net profit plunged 60 per cent to Rs 17.71 crore (Rs 43.72 crore in the previous year's first half) and gross profit was down by half to Rs 39.35 crore (Rs 79.75 crore). The earnings per share on an annu-alised basis works out to Rs 2.60 on the paid-up equity capital of Rs 135.99 crore.

Colgate executives would not speak to Outlook, but a press release issued by the company said: "The second-quarter results reflect a significant step-up in marketing investments to pursue the goal of enhancing oral care leadership and expanding the oral care market size." In the second quarter, sales went up by 12 per cent over the first but when compared with the previous second quarter, reflected an 11 per cent dip. And "the company increased its marketing investments by 22 per cent over the first quarter to its highest ever levels," the release added. At a recent shareholders' meeting, chairman S. Peter Dam admitted that Colgate Palmolive (India)'s near-term profit would be impacted by the substantial hike in total marketing investments and fresh investment in business building, infrastructure and supply-chain projects.

Colgate obviously is aware of the growing heat. In fact, the strategic launch of the Double Protection toothpaste was meant to block any further erosion in its market-share. ORG figures between March and August indicate that even as its flagship brand Colgate Dental Cream (August market share—41.8 per cent) continues to drop from favour, the company's overall market-share has remained steady. Individually, however, HLL's Pepsodent continues to make steady gain at the cost of smaller brands.

Says a company spokesperson: "Double Protection is gaining strong consumer acceptance and this has been followed up with the introduction of Colgate Total." But the Double Protection's gain—3.9 marketshare in August—may have come at the expense of Colgate Dental Cream, whose all-India marketshare has dropped in volume from 45.1 per cent in March '98 to 41.8 per cent. "Post-MRTPC injunction, will the magic of Double Protection work?" asks an analyst.

Analysts believe that had Colgate not launched Double Protection, the loss in Colgate Dental Cream's share would have been HLL's gain. Thanks to Double Protection, says Inquire Indian equity analyst Ayaz Motiwala, Colgate's adspend is up at 20 per cent of sales in the current first half, from 14 per cent last year. Colgate's ad-spend as on March 31, 1998, stood at Rs 148 crore, against Rs 104 crore last year.

SAYS Ghose: "Even in fiscal '97, Colgate's efforts to match HLL's mediaspend resulted in a 52 per cent hike in adspend but only a 16 per cent sales growth. It lowered the operating margin by 2.5 per cent, and profit after tax rose only by 1.6 per cent." But things went against Colgate very soon. In August-September 1997, with the successful relaunch for Pepsodent. Despite the controversial "102 per cent" campaign, Pepsodent bruised Colgate Dental Cream's marketshare. In some centres, the drop was as much as 8 per cent.

Over the long term, the company has identified oral care, household care and toilet soaps as its areas of focus. Currently Colgate is the leader in oral care in India, with a 53 per cent share in toothpaste, a 60 per cent share in toothpowder and a 58 per cent share in toothbrushes. But the leadership is under threat from HLL.

Colgate's foray into toilet soaps has not been very successful—its marketshare is only 1.5 per cent. It has entered the household care segment with Axion, a dish-washing paste. Colgate believes Axion has been quite successful so far, and would consider extending the brand to other forms—dish washing powder, bar and liquid. Says S. Shah, analyst with SBC Warburg Dillon Read Asia: "Our discussion with Colgate indicated that the company is unlikely to increase its presence significantly in other product categories—hair care (Halo and Palmolive Optima shampoo), men's toiletries (Palmolive shaving cream, Palmolive shaving brushes) and skin care (Charmis skin cream). Since hair care and skin care are the most rapidly growing segments, this may not be the best strategy."

 Over the next three years, the company has lined up capital expansion plans of about Rs 75 crore. Remarks Shah: "Colgate is up against a strong competitor in its areas of focus, which would mean that the company would need to push its products through effective advertising as well as efficient distribution. In-house manufacture of dicalcium phosphate will likely result in marginal cost saving. The company's wholly-owned subsidiary in Nepal is unlikely to generate significant returns in the next two-three years. At estimated price-earnings ratios of 39 in fiscal '98 and 35.9 in fiscal '99, we reiterate a Sell on the stock." Adds G. Narain of Socgen-Crosby Securities: "Colgate's 65 per cent marketshare, already down 4 per cent over the last two years, is further threatened by not only HLL's aggressive push backed by its brand leveraging strength but, also the possible entry of other global players—P&G (Crest toothpaste) and SmithKline (Aquafresh toothpaste—toothbrush already launched)."

 Increasingly, marketing consultants and investment analysts are worried if Colgate is geared to survive in the ensuing battle. Says Raj Grewal, a Mumbai-based marketing consultant: "Worldwide Colgate is known for its product innovation and effective implementation. HLL has stolen a march over them in product innovation." Grewal also raises questions about the high turnover of the company's marketing executives. "In the last decade, several key marketing wizards have left Colgate. For a market-driven company, this reflects sadly on their teamwork," he says. Ninu Khanna, who had left Colgate to join P&G, was brought back only to leave again a year later. Conrad Saldhana (now with Bennett and Coleman), Sanjiv Chowdhury (Citibank), Anjana Grewal (with Global Trust Bank), are the other prominent deserters.

Says Samsika Marketing Consultants MD Jagdeep Kapoor: "Colgate has to become more aggressive. It should reposition Colgate Dental Cream by identifying why consumers are moving away from it, as it is the star brand. A star brand cannot be protected by pawns." Adds an ex-Colgate employee: "It's indeed a pity that Colgate appears to be losing its grip. During the stewardship of P.K. Ghosh, Colgate had one of the best monitoring mechanisms and the tightest chain possible right from production to the last retail store. Obviously, the company has failed to take cognis-ance of the new challenges in oral care."

Mumbai-based Probity Research & Services Pvt Ltd goes one step further by rating Colgate's management quality at C (on a scale of A to E). It sums up: "Management control is by Colgate-Palmolive USA, the global leader in oral care. The parent company regards Indian operations as a cash cow rather than a growth opportunity, as reflected in the high dividend and royalty payments. No fresh investment has been made in the past several years. The Indian subsidiary, unlike the global company, has been unable to build up critical mass in other product segments. Toilet soap capacity remains under-utilised even after seven years of efforts. Management has not been innovative in launching new products and has been slow in responding to competition, resulting in erosion in marketshare."

 Does that mean Colgate has effectively relinquished the growth baton to HLL? That's the question many of its shareholders are now likely to ask.