Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Grocery Wars

Can Colgate-Palmolive Survive?

I ask can Colgate-Palmolive survive, because the consumer products trade is a rough business that is getting tougher. For instance, Coresight predicts over 12,000 brick and mortar stores could close in the United States in 2019.

This retail apocalypse could hit Colgate Palmolive (NYSE: CL) hard because it disproportionately affects traditional discounters. For example, Dollar Tree (NASDAQ: DLTR) could close 190 Family Dollar stores completely.

Colgate Palmolive products like Ultrabright toothpaste and Speed Stick deodorant fill Family Dollar’s shelves. Yet, owner Dollar Tree will turn 200 Family Dollar stores into Dollar Tree locations; and close another 190 Family Dollar locations, a Business Insider article claims.

Will the Retail Apocalypse kill Colgate Palmolive?

Dollar Tree is killing off Family Dollar because it is a drag on the company’s business, Business Insider speculates.

The mess at a Colorado Family Dollar

Family Dollar is a traditional variety store that sells a wide variety of basic consumer goods to a middle and working class clientele. Additionally, Family Dollar serves a heavily rural and small town clientele.

Dollar Tree is a more specialized and urban chain that sells everything for $1. Interestingly, Dollar Tree’s sales grew by 3.2% in 2018 while Family Dollar’s sales grew by 1.4%.

How Amazon is Killing Colgate Palmolive

An obvious reason for the sluggish sales at Family Dollar is Amazon (NASDAQ: AMZN) which is now rural America’s favorite retailer. Notably, whenever I go to rural post offices, I see lots of people picking up Amazon boxes.

People that do most of their shopping on Amazon have little incentive to go to Family Dollar. In addition, Amazon now sells many of the basic consumer goods that Family Dollar specializes, including toothpaste and toiletries.

A major threat to Family Dollar, and Colgate Palmolive, is Amazon Prime which gives consumers free shipping on all their basic needs for $12 a month. Statista estimates there were 103 million US Amazon Prime subscribers in March 2019 up from 95 million in June 2018.

Moreover, Statista estimates the average Prime Member spends $1,400 on Amazon each year. Thanks to Amazon Prime, Americans are more used to shopping online. In addition, Walmart (NYSE: WMT), offers free shipping and often better prices than Amazon.

Is Colgate Palmolive Making Money?

Colgate Palmolive is a good barometer for American retail because it owns many historic consumer brands. Iconic Colgate products include Palmolive dish soap, Speed Stick, Murphy’s Oil Soap, Ajax, Ultrabright toothpaste, and Colgate toothpaste.

Yet Colgate Palmolive’s revenue growth rate fell by 2.95% in the quarter ending on 31 March 2019. Significantly, that was the third straight quarter revenue growth fell. In detail, Colgate’s revenue growth shrank by 2.08% in the last three months of 2018, and 3.25% in the quarter that ended on 30 September 2019.

Colgate Palmolive’s Revenues are shrinking

Importantly, Colgate Palmolive’s revenues fell between March 2018 and March 2019. Specifically, the revenues were $4.002 billion on 31 March 2018 and $3.844 billion a year later.

Colgate-Palmolive is still making money because it reported a quarterly operating income of $879 million, a quarterly gross profit of $2.287 billion, and a quarterly net income of $560 million on 31 March 2019.

The company is making money less, because the operating income fell from $983 million, the net income fell from $634 million, and the gross profit fell from $2.408 billion in a year. Therefore, the retail apocalypse is hurting Colgate Palmolive’s business, and it is getting worse.

As result, Colgate generates little cash. For instance, the company reported an operating cash flow of $605 million and a free cash flow of $534 for the quarter ending on 31 March 2019. Those numbers were similar to the $616 million operating cash flow and the $498 free cash flow a year earlier.

Colgate Palmolive’s ability to accumulate cash is small. It had $843 million in cash and equivalents on March 31, 2019, down from $851 million a year earlier.

Will Colgate Palmolive Survive?

These limited resources call Colgate Palmolive’s survival into question. The company has little cash at a time it needs to develop new distribution channels to replace dying retailers.

Amazon, in particular, has little incentive to carry or promote Colgate Palmolive products. Thus, Colgate Palmolive will need a heavy marketing or discounting push to get its products before Amazon shoppers.

Interestingly, that push will need to use nontraditional or digital media because old media are dying. America’s largest broadcast television network, CBS had just 2.98 million viewers on 18 July 2019, Deadline estimates.

Moreover, CBS’s viewership for the entire 2018-2019 TV season was 8.9 million. Notably, I estimate the total 2018-2019 viewership for all five of America’s broadcast networks at 28.4 million.

The Amazon Prime subscriber base is almost Four Times the Size of Network TV Viewership

Thus, network TV’s viewership is nearly one fourth the size of Amazon Prime’s American subscriber base. By my estimate, less than one in 10 Americans is watching network TV, yet nearly one in three Americans subscribes to Prime.

To elaborate, Worldometers estimated the US population at 329.093 million in July 2019, and Statista estimates there were 103 million Amazon subscriptions in March 2019. Meanwhile, all five major US broadcast networks attracted 28.4 million viewers for the 2018-2019 Season.

As a result, less than one in 10 Americans, see TV advertisements for products like Colgate and Palmolive. Yet companies like Colgate-Palmolive base their brand marketing model on network TV.  Under those circumstances, Colgate Palmolive needs to cut TV advertising and invest in Amazon ads.

A new study from the United Kingdom indicates that even fewer people will watch TV as the Baby Boomers (those between 55 and 75) die off. Interestingly, Britons between 16 and 24 watch just two minutes of TV news a day regulator Ofcom estimates, The Guardian reports. In contrast, Britons over 65 watch 33 minutes of TV news a day.

I think this study and the ratings show young people are not watching TV. Therefore, Colgate Palmolive needs to spend its advertising dollars elsewhere.

What is Colgate Palmolive’s Future?

Amazon Prime’s success shows us what Colgate Palmolive’s future could be. I think the only way Colgate Palmolive can survive is to sell its brands through Amazon and its competitors.

For instance, Colgate could sell some of its brands exclusively through Amazon Prime. Or create special sizes, varieties, or special versions of its products only for Prime customers.

An obvious marketing strategy is to distribute free samples of Colgate Palmolive products to Prime members. A free of tube  Colgate, or a Speed Stick, in every Amazon order, for instance. Other marketing channels include Amazon Essentials and Dash.

Dash offers buttons and apps that let customers order products at the push of a button. Many Procter & Gamble (NYSE: PG) products like Tide already appear on Dash. Strategically, customers can easily access Dash through Alexa. In the future, I think Dash buttons could appear in video games, Prime Video, or even in books on Kindle.

However, only time will tell if customers will interrupt Fortnite play; or the latest The Boys episode, to reorder Ajax. Yet companies like Colgate Palmolive desperately need new ways to reach customers, particularly young people.

Is Colgate Palmolive a Value Investment?

I think Mr. Market overpriced Colgate Palmolive (NYSE: CL) at $72.15 on 26 July 2019 despite 55 years of dividend growth. To explain, the limited cash and small revenues do not justify that price.

However, CL will pay a decent dividend of 43₵ on 15 August 2019. In addition, that dividend grew from 42₵ to 43₵ on 15 May 2019. Overall, gave Colgate-Palmolive a dividend yield of 2.38%, an annualized payout of $1.72 and a payout ratio of 57% on 26 July 2019.

In the final analysis, Colgate Palmolive is a good dividend stock that I advise investors to stay away from. I advise against owning Colgate Palmolive; because I do not see how this company can make money in a radically changing retail environment, unless it dramatically changes its business model.