Consumer Goods - P&G's likely toothpaste foray creates ripples; : Edelweiss PDF Link

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Colgate, which has dominated the Indian toothpaste market for many years, continues to grow well ahead of market. In the medium term, it might however face new competition from Procter & Gamble (P&G) that is likely to enter the toothpaste category in India (speculated for many years now) via its Oral-B (most likely) or Crest brands. P&G has done well in toothbrush segment and looks well placed to enter toothpaste as well. Colgate too seems to have increased its aggression by roping in a slew of brand ambassadors like Tennis star Mahesh Bhupathi, actor Rahul Bose and actress Anushka Sharma. Overall, we expect Colgate to largely maintain its market share (globally it has 3x market share of the next player and has outperformed competition in oral care in emerging markets like Brazil, Russia, China and Mexico; we expect P&G to gain share from players other than Colgate). Consequently, Colgate India’s ad spends could shoot up while pricing power could take a knock, leading to downside risk to earnings. Competition in the domestic market could however de-rate the Colgate stock if P&G enters. For the other two toothpaste players, HUL and Dabur, oral care is a smaller segment of overall business.

P&G’s aggression in toothbrush signals entry into toothpaste

Colgate has lost market share by ~300 basis points in the past two years (recently it has stabilized) in the toothbrush category to P&G’s Oral-B. This clearly shows the aggressive approach of P&G to gain more footholds in the country. The company also launched a promotional event, ‘The Oral-B Smile India Movement 2’, and Madhuri Dixit promoted the event as ‘the Chief Smile Officer’. It plans to invest INR10bn in manufacturing and distribution network across product line in the next two years and it has repeatedly said that it wants to increase focus on India. This, in our view, could be an indication to the possible entry into the toothpaste category through Oral-B.

Colgate fit to compete; been there, done that

Colgate’s strong distribution network, almost generic brand and huge customer acquisition initiatives provide high entry barriers to new entrants. The company is in the process of setting up a new toothpaste manufacturing facility in Gujarat; it has paid INR426mn towards the allotment of leasehold land and the estimated investment is INR2bn. The sensitive toothpaste segment has been growing at a very high rate (over a low base) and is likely to be a significant category of the total toothpaste market in the next three to five years. Also, the mouthwash category is doing well.

However Colgate likely to de-rate if P&G enters

We continue to like Colgate’s continued focus on innovation, market stronghold and building brand equity. However, if P&G enters toothpaste category, we believe Colgate could de-rate as ad spends could rise and price hike will be tough.

Consumer Goods - P&G’s likely toothpaste foray creates ripples; sector update

Regards,