CL - Colgate-Palmolive Company (CL) Evercore ISI 3rd Annual Consumer and Retail Conference (Transcript)
2023-06-13 10:10:26 ET
Colgate-Palmolive Company (CL)
Evercore ISI 3rd Annual Consumer and Retail Conference
June 13, 2023 08:00 AM ET
Company Participants
Mukul Deoras - President, Colgate-Asia Pacific
John Faucher - Chief Investor Relations Officer and M&A
Conference Call Participants
Robert Ottenstein - Evercore ISI
Presentation
Robert Ottenstein
Great. Good morning, good afternoon. It's Robert Ottenstein from Evercore ISI. We're delighted to be kicking off our conference with Colgate, which is one of our top picks. And want to welcome and thank Mukul Deoras coming -- calling in from Hong-Kong. Mukul is the President of Asia-Pacific for Colgate and with him John Faucher, Head of Investor Relations and M&A. A lot to cover, so we're going to go straight into it.
So, look, just to kind of start things off with a softball, maybe just can you give us a general overview of the health of the consumer in the Asia-Pacific region? And giving us also in that context a sense of which are the key countries that you're really focused on, so we get a sense of what are the key drivers of your business from a country perspective?
Question-and-Answer Session
A - Mukul Deoras
Well, thank you very much, Robert, and good morning. Good morning to everyone. So, talking about Asia-Pacific and we all know how big and diverse and important Asia-Pacific is to all consumer businesses, not just Colgate. But really there are -- for my region, there are really two centers of gravity. One is China and the other is India, that's very obvious. And then there are -- there is the Southeast Asian market, which is extremely important. And then there is the South Pacific which is the Australia and New Zealand market, which also is a very interesting, important and a very different market from the rest of the region.
Now if you ask me about the health of the business or the consumer sector in the region, I would say, it took some time to recover, but we are well on the path of recovery as a market. We remain cautiously optimistic on the trend and the recovery of consumption across the Asia-Pacific region. The recovery, of course, is very mixed. We see very strong growth in the Southeast Asian market. We see stable and good positive trends, better than pre-COVID times in the Australia and South Pacific markets and we also see the India trends are stabilizing in the recent past.
What is still not there is China. China is still seeing a very muted trend. As you remember, they came out of the lockdown in the last quarter of 2022 and quarter one was okay with a little bit of pent-up demand from quarter four spilling over into quarter one. But in quarter two, we will still see the demand pattern still not picking up to the level that we would have expected. Consumption is still down. Brick-and-mortar business in China is not yet there. Foot falls are back, but consumptions are not -- still not as much as they should be. E-commerce growth has also tapered down a little bit. So overall, China is mixed.
And I think the overall story on China is -- the economists keep talking about is, all the indicators are moving in the right direction. The consumer confidence is inched up little bit, not moved dramatically, but the mobility index has moved in the right direction and all the other indicators are saying that the second-half of 2023 is likely to be better than the first-half of 2023. So we remain cautiously optimistic, as I said that the second-half of China is going to be better. So, if you ask me what are the health, health is from average to good -- average in China, good everywhere else and improving. That's the bottom line.
Robert Ottenstein
Great. Great. So in that context, Colgate at CAGNY gave a terrific presentation in terms of how you've transformed the Oral Care business in China very methodically. Can you just kind of summarize the key steps that were taken in that transformation of the Oral Care business in China and to the extent possible kind of quantify any of the improvements?
Mukul Deoras
So, yes. I think we all feel very proud and satisfied with the change that we have driven in China. China, both in terms of sales, as well as market-share has shown year-on-year, quarter-on-quarter improvement for the last three years. And in fact, in terms of -- particularly in e-commerce, where our growth has been very rapid and, of course, from a small base, but we quadrupled our market-share in the last two years -- last three years. So it's been really, really very satisfying. And, in fact, in quarter one of 2023, Colgate brand became the brand leader on e-commerce in the market, which is very satisfying indeed.
But the transformation in China did not happen just on its own. I would say that there are four elements of this transformation. The first element of this transformation was creating a China for China Excellent Center. China needs something which is very specific, which is very clearly focused on China. So, in Shanghai, we created an innovation team, a data team and an e-commerce team, all focused on doing things for China. And during the period of lockdown, we actually went up from zero to almost 70 people and created this extremely strong team, which has driven our entire e-commerce business in China. Today, e-commerce is the primary growth driver for us and it's 45% of our business. That's saying a lot for our grocery brands. That's number one, which is creating something which is China for China.
Number two was premiumization. I think it was extremely important for us that we take our portfolio and step it up dramatically. Of course, innovation was extremely important for that and the right marketing strategy is very important for that. And just to give you an example, our index -- our AS, average selling price index in e-commerce are more than doubled a bit in the last two years. And in fact, we've got some excellent examples of premiumization, but this was done through again innovation, superior product experience and, of course, very strong marketing programs.
The third element of our strategy was to optimize our brick-and-mortar go-to-market model Instead of spreading our resources thinly right across the country we focused our energy on regions that matters, so large cities and large format stores. This is where our strength was and we made sure that we concentrated our energies in this -- in those markets and that helped us stabilized and in fact grow our business in these retail environment. So that was important for us, because as we grew rapidly in e-commerce, we also need to balance a stability and small growth in our brick-and-mortar business as well.
And the fourth and very crucial element of our business strategy was reorganizing and re-engineering our teams, so creating the expertise inside the organization, creating the talent pipeline and getting the right kind of people both internally and externally to create the expertise that is required to drive this transformation was very important. So as you can see, it's a combination of organization design, it's a combination of innovation and it's a combination of go-to-market practices as well.
Robert Ottenstein
Are you able to kind of give us a sense now of what percentage of your business is in e-commerce? What percentage in brick-and-mortar and any metrics around market-share? Any --
Mukul Deoras
So we are -- we have grown market shares in e-commerce. And as I've said to you earlier, we have more than quadrupled our market share in the last three years. We became market leader with a double-digit just around 11% market-share in toothpaste in the quarter one of 2023. But more importantly, I think what you should remember is, from a situation where we were less than 10% of our business -- less than 5% of our business was e-commerce way back in 2018 to now we have 45% of our business is now e-commerce.
That's a huge change in the organization and a huge change in the shape and the feel of the organization because now we are 45% e-commerce, 55% brick-and-mortar. But what you -- we need to also understand is that, within the brick-and-mortar, there is also a very fine segment of [O2O] (ph) as it is called in China, which is also predominantly e-commerce driven.
Robert Ottenstein
Yes. One of the things that is a little bit unusual or tough for investors to get their heads around is your -- you've got a dual-brand strategy in China. So can you talk a little bit about how that works, how you manage the two brands to make sure that it's additive and not competing against each other and how that's -- how that interaction is working.
Mukul Deoras
We are very confident. In fact, we are -- strategically it is very important for us to have a dual-brand strategy. China is an extremely fragmented market. The largest brand in the market is 20% market -- around 20% market share. So, unlike other markets where you got two or three brands, which have 80% or 90% of the market, China is not like that. It's very fragmented. And I think you'll see it across multiple categories. Anecdotally, people say that there are more than 500 brands of toothpaste in China. I don't think anyone has really managed to count and put a final number to that.
But having said that, we are very confident about our dual-brand strategy. Let me start with Darlie. As you know, Darlie is a very large brand, but it has its strengths. And it is number two player right below Yunnan Baiyao which is the market-leader. Darlie has a huge distribution across the country. And in fact, it is a -- it is number one player in the smaller tier cities and in the lower-tier retail environments, like the mini markets or the groceries and the kiosk. It is the largest brand in that market. So it gives us the position of strength in that large part of that business.
Secondly, Darlie has got core strengths in the area of its benefit. It has -- it is really focused on freshness and whitening and it is a brand of social confidence. So, you see it's a very, very sharply defined, very clear brand and has a huge user base. And if you count up all the penetration in a year -- in a given year, more than 500 million people actually use Darlie at least once a year in China, which is like big.
On the other hand, Colgate is actually quite complementary to that. So while Darlie is strong in the lower -- is strong everywhere, but especially strong in the lower-tier, Colgate has its strengths in the upper tier cities and in the larger format stores. Colgate -- Darlie's freshness and whitening and social confidence, Colgate is about scientific credentials. Colgate is about anti-cavity, Colgate is about gum care, Colgate is about anti-aging, Colgate is about health, it's about oral health and it has presence across all of these segments.
So you see the complementarity of the portfolio that the two brands bring out. And as a result of that, we are able to stretch our reach across a much larger portfolio, much larger segment of consumers. And therefore, I think it is strategically important for us that we have this multi-brand strategy in China.
Robert Ottenstein
Great. So when we look at the Chinese beauty market for instance, huge move to premiumization and very discerning consumers who really want to understand the functional benefits. Can you talk about how the Chinese consumer is looking at oral care? What are the particular functional benefits that the Chinese consumer values the most? Is that different than the US or European consumer? And then maybe perhaps in that context, discuss your competitive dynamics with Yunnan Baiyao and why they've been so successful and what you can learn from that?
Mukul Deoras
So it's -- actually, there is a lot of similarity between the skin care market and the oral care market in China. And while -- when we say [indiscernible] skin care is so highly evolved and oral care is normally not that place, but not so in China. China is constantly seeking – Chinese consumers seek expertise, excellence and innovative solutions, doesn't matter what category they are in, and they're constantly willing to try. So, the desire to use, to seek out innovation and to try new products is absolutely the top and the best in the world, but they're also very demanding and at the same time, willing to pay as long as they can see perceivable, tangible superiority.
Let me give you an example, right? The kind of brands that work well in China is, of course, Yunnan Baiyao, which is a gum health brand. And of course, there are whitening brands, but even within whitening, there are specialized whitening like we have. Our number one ultra-premium -- most premium best seller in e-commerce is our premium whitening toothpaste, which is based on enzyme technology. And the difference between China and other markets is people seek out, understand and actually want to know about the product and the technology. So our enzyme-based technology sells at a price which is -- listen to this one, it sells at a price which is 6 times the average price on e-commerce. 6 times and it's our number one seller but it is 6 times index, 600 index compared to the average of the market in e-commerce. And it is 900 index -- 900 index compared to the product that is sold in brick-and-mortar -- on an average brick-and-mortar price.
Robert Ottenstein
Just to get us all up to speed, are we talking RMB100, RMB150, RMB200? What…
Mukul Deoras
Well, we're talking about around RMB90, RMB95 for one tube of toothpaste, between RMB90 and RMB100. That's the kind of price that we are talking about, which is -- I mean, our typical average price in a brick-and-mortar is about RMB10 and a typical RMB price -- e-commerce price is in the region of about RMB18 to RMB20. So we're talking about a huge premium against that.
Now, what drives this premiumization? People want to know ingredients and sophisticated benefits are extremely important. We have hyaluronic acid in our toothpaste. We have enzymes in our toothpaste. We now have just launched our pre-biotech toothpaste in the market. Similarly, Yunnan Baiyao, we all know has got a [indiscernible] ingredient in Yunnan Baiyao. So, all of these things are extremely important. Chinese consumers do not just want benefit, they are also very demanding of what is the technology that goes behind that benefit, and they are willing to actually spend the time, attention and money behind that technology. Now that has been the reason for success for brands like Yunnan Baiyao as well. And I think we have been able to also actually take this to a completely different level, if I may say so.
Robert Ottenstein
Great. That's awesome. So one of the other exciting things from CAGNY, you showed that, all right, you're clearly on the road to success in China, a lot of learnings, great momentum. Now you're starting to take those learnings to Southeast Asia. If I recall, there was a slide on Thailand and what you were doing there. Can you talk a little bit about how transferable is that success? And you mentioned early on that you had to have a China for China business and you needed a China Excellence Center. Do you need a Thailand Excellence Center? Or -- so how transferable is this? How scalable is this going forward in terms of the rest of the region?
Mukul Deoras
Yes. I think that's an interesting question. Obviously, China has the scale and therefore, you can do China for China. But the good news is that, China is actually the lead indicator for main markets. So in many senses, it is the window to the next generation of consumer evolution.
Now let me give four specific areas where China -- what we do in China can be taken beyond China. The first is obviously innovation. And there are thing that you innovate in China, and you can take it beyond China. So for example, we have a toothpaste called the Miracle Repair toothpaste, which is an amino acid base toothpaste. That amino acid toothpaste has now -- we have launched at a very, very premium price in a few other markets in Southeast Asia. Some of our really breakthrough tufting technology in toothbrushes, some of our devices like water flosser and even electric toothbrush, which was especially designed for China has now very successfully launched in some of the market around the region. So innovation is one thing that definitely travel outside China. But it's not just innovation.
The second thing that travels is actually marketing activations. So for example, the entire Dorian or TikTok platform, as we know elsewhere in the world, it’s called Dorian in China. The entire TikTok, how do you market in TikTok and how do you connect with consumers in TikTok? China is this leading indicator. And everything that we are learning in China, we're taking those learning across. So I think this is -- and China TikTok is huge which -- and not just in terms of consumer reach, in terms of business it is large and it is one of the fastest-growing e-commerce platform that we have now in China. So there's a huge learning and these learnings not just transferred to TikTok, they also transferred to Instagram and Reels as they are used elsewhere in the region.
The third is in the area of marketing technology, if I may use the word loosely. We in Colgate, we keep talking about there are four stages in which you can engage consumers. We call it ACPL, attention, consideration, purchase and loyalty. That is the consumer journey. The thinking all started in China. This was actually Alibaba’s led thinking, which created this concept of how do you generate the four-step process of engaging with the consumer, and that data-driven performance marketing actually is perfected in China, and therefore, there's a lot of learning that you can take beyond that into rest of the region.
And the last point that you can take beyond China is actually go-to-market. So the entire concept of not just e-commerce, but the online to offline integration that you see now in China, which is emerging at a very rapid pace, and it's integrating not just the e-commerce platforms, but the large format retailers as well as the last-mile delivery platforms, a very seamless integration of all these three. These are the business models that are evolving in China, and they have started evolving now in Southeast Asia as well. So there's a lot of learning that goes -- starts from China and goes beyond.
Robert Ottenstein
And then just in terms of Southeast Asia, so China, you turned the corner and are on a good path. In terms of Southeast Asia and what you're talking about, is this like early innings now, second, third inning? Or do you feel that you've got the right momentum and you've kind of translated the tools, it's just about execution now?
Mukul Deoras
I think it's more of the latter. I think we feel very confident at least in most of the Southeast Asia markets, I think there are still some job to be done in Thailand, and I'm sure in CAGNY we talked about that one as well. But there is -- and Thailand is just recovering from its economic challenges that it had during COVID. So that has held us back a little bit. But we are feeling very, very confident of the way in which we've been able to transfer learnings into Southeast Asia and the Southeast Asian market is moving in the right direction, I would say.
Robert Ottenstein
Great. Let's move on to India. Your other big market. This is a -- it's been a very challenging market at times, a lot of strong local competition. Can you kind of give us a sense of kind of compare and contrast the Indian market with the Chinese market, in terms of the market and the drivers and then go down to your particular business, where are you in terms of brick-and-mortar, e-commerce, driving premiumization, what the key drivers of our success are there? And are you gaining share there or still trying to keep up with the market?
Mukul Deoras
So the good news first, we have started -- our share trend is stable and in the recent periods it actually started inching up. So that's the good news.
The market, however, is not fully recovered. And there are two -- there are at least two parts to India. Maybe there are more, but certainly two, there is an urban India, and there is a rural India. And the urban India seems to have recovered, but rural India, which is at least 40%, 45% of the market and 60% of the population that is still seeing a very sluggish growth. Now there are a lot of reasons why this is happening. Real incomes have come down, general level of unemployment in rural India is very high. The impact of inflation on them is very high and so on. But there is confidence that the rural market, which is lagging will actually start getting better in the second half of the year, assuming all the other things like monsoon and so on are good.
But there is an optimism on the India growth story. So that's as far as market is concerned. But the Indian market is very different from the Chinese market, very, very different. India, first of all, the e-commerce contribution is 5%. I mean, we're not talking about 45% or 50%. The share of even modern format stores is less than 20% in India. So we're talking about 75%, 80% of the market still having -- selling through mom-and-pop stores. And the rural markets have been completely, completely different.
The second big difference is the per capita consumption in India is very low. And therefore, that is in itself strategically is a very big opportunity for us because if we have to -- if we don't drive per capita consumption in India, then it's not going to happen. As market leaders, we have to do everything that we can to drive the per capita consumption, and that remains our single biggest opportunity.
And the third, a real opportunity for us is to make sure that we premiumize our business. Now India is not a premiumizing -- in our category has not premiumized as rapidly as China has. So keeping our core vibrant, but at the same time, premiumizing our portfolio continues -- particularly in urban market, continues to be a big challenge for us and a big opportunity for us. So the good news is, we have a very clearly articulated strategy. We need to try per capita consumption. We need to keep the core of our business, which [before] (ph) we have 80% penetration in that country. We need to get the core always stable and healthy. And then we need to premiumize through innovation. So our whitening business is doing well. We will be -- we have some other exciting opportunities on therapeutic businesses that we have, just about recently launched PerioGard in India. So -- and so on. So I think there's an opportunity for us to premiumize, but I think the biggest opportunity there is to drive the per capita consumption.
It's another fact that a large, large part of our business is actually the small unit pack, INR10 pack. It is like -- INR10 is like what $0.10, $0.12 pack in India. And it's the primary pack for consumption. So getting more people to use and more -- use them more frequently is our biggest strategy. I think we do have very clear plans for that.
Robert Ottenstein
Right. So a couple of follow-ups on that. Number one, what -- how would you quantify the per cap consumption of toothpaste in China? I don't know if it's like how many times a week or a day people brush their teeth on average versus what it is in India? Whatever metric is most useful in terms of comparing China and India.
Mukul Deoras
So if you look at urban India, the per capita consumption is about 200 grams per capita per annum. I'm approximating that. Obviously, there are variations here. China is probably close to 300 grams. We're talking about at least a 50% more consumption in China, and that is primarily because people don't brush frequently enough, they don’t brush twice a day in India. And most of the time the clean brushing is 1.5 times a day, but actually maybe only 1.2 to 1.3. That’s one difference.
The second big difference is that the -- while the penetration, which means, used at least once a year in rural India, it's upwards of 90%, which means everyone uses toothpaste at least once a year, but the frequency of usage is not very high, and there are people who use it only once a week or twice a week and not every single day, because there are other methods of cleaning that are available and freely available. So the per capita consumption in terms of grams is actually close to 100, 125 grams. So it's got at least one-third of, let's say, what China is.
So you're talking about a significant opportunity in rural India to drive the frequency of consumption much higher. So we're talking about 1:2:3. That's the kind of a consumption level that you have, 1 in rural India, 2 in urban India and 3 in China. So you see the scale of opportunity and you -- with that kind of population base that will always be an evergreen business opportunity.
Robert Ottenstein
So rural India would be like 100 grams a year?
Mukul Deoras
Yes. I would say 100, 200, 300, let's say, that is the kind of index that you can use for now -- as an indicator. But yes, it is 1:2:3 between rural India, urban India and China.
Robert Ottenstein
And then just really quickly, where are you in India on the traditional [indiscernible]
Mukul Deoras
So we have -- we have a very good entry in that called Vedshakti, which has met its -- the success that we had wanted it to, but the segment has stabilized. It has flattened out. And I think it has reached its -- probably reached its max potential. And I think it is important for us to make sure that while we play with the right kind of inputs in that segment where we just don't focus only on that segment because that's only about 20% of the market, 80% of the market is not ayurvedic. So we need to make sure that we balance our resources and efforts between the two ends of the market.
Robert Ottenstein
Terrific. I want to turn it over to John now and move over to the U.S. So John, the scanner data, what we see, what investors see in terms of volumes hasn't been wonderful. I don't think it was great again today, although I haven't had a chance to go into a lot of detail. Can you put that in perspective? How should investors take that scanner data, understanding that it's not the whole market, understanding that the comps can be bumpy? What is the message investors should take from the scanner data? And are there points here that you're worried about? And if not, why?
John Faucher
No. I mean worried is a strong term. What I would say is, so the last few weeks have been a little bit softer, and you're seeing that reflected in the market share. We have taken significant pricing to look to offset costs and rebuild the advertising, and that's the plan. Sometimes in order to get the pricing reflected on the shelf, you do see a temporary reduction in promotions. And I think we're seeing the impact of that on the volumes. And -- so I think as the advertising spending rolls through and as competitors take more pricing, and we think that's what we're seeing is more pricing is rolling through. I think we'll see improved volume performance and better shares. So obviously an issue we need to do better on that.
We did talk about the fact on the first quarter call that we are seeing better trends in unmeasured channels, that continues to be the case. But I think you'll see better performance on the scanner data again, as we get a little bit more benefit from innovation, more competitors following. And then the plan, of course, is to rebuild gross margins so we can spend more money on advertising.
Robert Ottenstein
So do you expect second half of the year, calendar year to have significantly better trends in the scanner based on what you see?
John Faucher
I would say better, yes. I mean, significantly better, that's the difficult term to put in place. Again, we think our performance, particularly from a market share standpoint should be better as we go out the next couple of months, and we see some of this pricing behavior normalize.
Robert Ottenstein
Got it. One of the big stories that's been a little bit tough for investors to model and fully appreciate is kind of what's going on with the Hill's infrastructure, the acquisition, the impact on margins, the transition out of the private label into Hill's, the impact of that on your volume in the business. So can you just kind of run through that a little bit, maybe the kind of the three key points that we should be thinking about in terms of the Hill's margin progression, both the impact of the acquisition as well as ag commodities and pricing.
John Faucher
Sure. So I'll take that last part, which is the ag commodities and pricing. So what we talked about with Hill's and why Hill's raw material costs are peaking, let's say, later than the raw material cost in the balance of the Home, Personal and Oral Care businesses. So a lot of what's driving the Hill's cost inflation is related to agricultural costs, particularly proteins, things like hydrolyzed chicken livers, which have been impacted by avian flu, right? So as we saw that big increase in egg prices, chicken prices, what have you, that was also playing itself into Hill's cost structure. So we see that still being an impact from an inflation standpoint.
Now, if you take a look at egg prices, you'll see that they have come back down. So we're optimistic that we're probably going to see, again, a later peak on that, but hopefully, we have seen the peak, either now or sometime shortly in the future. So we expect less cost inflation for Hill's, but again, more cost inflation this year than on the balance of the business. And so, that's the first piece on the cost side.
If you take a look at our pet food capacity acquisition, okay? What we said was, the impact of the acquisition we made in September, what we call Red Collar, okay? That was going to have a 90 basis point impact on total company gross margin for the fourth quarter. So when we made the deal, that's what we guided to. And that was the impact of private label volume, which is obviously coming through at a very low margin.
In the shorter to medium term, we are transitioning some of that private label volume out, okay? So what we said was, that impact, which was 90 basis points to total company gross margin, would go down slowly over the next couple of quarters, let's say, 10 basis points per quarter. It was similar in Q1 to Q4. Q2, again, let's say, 10 basis points lower, so 90 to 80 something like that. And then again, in Q3, and then we lap, it's in the base once we get to Q4, so no year-over-year impact.
Now over the next several years, as we transition more of the private label volume out and more of the Hill's volume in, you should see, again, over the next couple of years, that 90 basis points or 70, 80 basis points impact that is embedded in the business that should transition out. So it becomes a natural tailwind to total -- to Hill's and therefore, total company gross margins over time.
Robert Ottenstein
Got it. And then just to wrap things up, last couple of minutes, when we came to visit you and went through your R&D facility, I think everybody walked away super impressed by the technology behind the Plaque Pro release. And I think everybody went out and bought some because it really looks spectacular, at least in terms of the numbers you gave us. How is that rollout going? And what -- are you happy with how that's coming out now?
John Faucher
Yes. So the technology on that, as you said, is great. It's one of my favorite products. And so, I think the mouth feels good, the flavor is good. The technology is amazing. What we are seeing is the advertising is beginning to kick in on that. The promotion is there. The way this works as you build up the distribution. And so what we're seeing is accelerating trends behind that, still relatively small from a market share standpoint, which you can pull up in the Nielsen, but we're actually really excited by the momentum, and we would expect that to continue to gain momentum over the balance of the year.
Robert Ottenstein
Terrific. Well, that's a great place to end off. Really appreciate it, John, Mukul. Thank you so much.
John Faucher
Thanks, Robert.
Mukul Deoras
Thank you very much, Robert.
Robert Ottenstein
Thank you.
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Colgate-Palmolive Company (CL) Evercore ISI 3rd Annual Consumer and Retail Conference (Transcript)