Colgate loses grip as market share in toothpaste segment down 52%

Often, when there is stress in key sectors of the economy, the fast-moving consumer goods (FMCG) space is considered a safe bet.

Even though it is no different this time for the segment, Colgate’s situation is just the opposite. This is because of the continuous erosion in its market share in the toothpaste segment, where it is the leader. Barring a couple of quarters (September 2018 to March 2019), the company’s market share in the toothpaste segment (on a quarterly basis) has been on a continuous decline in the last four years (see graph).

From about 58 per cent in the June 2015 quarter, the market share is down to 52.1 per cent in the June 2019 quarter, a decline of about 600 basis points.
 
In fact, after being able to maintain market share in the toothpaste segment around the 52.4 per cent level continuously for 2-3 quarters, the Street was hoping to see a recovery from the June 2019 quarter.
 
However, market share again fell by 30 basis points in the June 2019 quarter to 52.1 per cent sequentially, making investors jittery about Colgate’s earnings visibility.
 
While analysts at Philip Capital recently downgraded the stock from neutral to sell (main reason being market share loss), analysts at JP Morgan believe that an improvement in volume growth and market share trends would be key for the stock’s performance.

Increased demand for ayurvedic or herbal products of Baba Ramdev’s Patanjali and Dabur led to the slide for Colgate.
 
While Dabur could regain its market share by actively pushing its herbal portfolio, Colgate, being a market leader in oral care and focused more on non-herbal products (around 85 per cent of revenues), will have to somewhat struggle to see a revival in its share.
 
Though Colgate, too, has started pushing its natural or herbal portfolio (Swarna Vedshakti) aggressively, analysts at Philip Capital believe market share recovery is going to be difficult and Colgate will have to raise advertising and promotional spends even to retain its current market share.
 
Even the company, in its FY19 annual report, highlighted the fact that it has experienced heightened competitive activity, particularly within the naturals segment.
 
The company did not respond to queries on its strategy. But its annual report, which highlighted sustainable profitable business growth with brand building activities and a sharp focus on innovation, supported a strong advertising investment.
 
No doubt, Colgate has witnessed traction in its herbal toothpaste market share from 6.8 per cent in calendar year 2017 (CY17) to 8.1 per cent in CY18.
 
What could make the task of regaining market share more challenging is the slowdown in overall consumption which has also impacted most FMCG players as reflected in their slower volume growth in recent quarters.
 
According to analysts at JP Morgan, the immediate priority for new chief executive officer (CEO) Ram Raghavan would be to accelerate Colgate’s current drive for market share gains in the toothpaste category.
 
This is to support revenue growth rates against the backdrop of slowing consumption demand. Analysts have trimmed the company’s FY20 and FY21 earnings estimates by 2 per cent each.
 
Current stock valuations of Colgate also indicate investor skepticism on market share recovery.
 
The stock currently is trading at 36 times its FY21 estimated earnings which is at a 10-23 per cent discount to its peers such as Dabur and Hindustan Unilever.
 
Overall, near-term market share trend would be the key trigger for the stock.