Colgate-Palmolive Pricing Spineometer: 3 of 5 Vertebrae

Colgate-Palmolive Company, a toothpaste and dish soap to pet food consumer product company, had a positive FY 2023. Revenue rose 8.3% to $19.5 billion and earnings before interest and taxes rose 37.7% to $4.0 billion million over last year.

A review of Colgate-Palmolive’s 4^th Quarter Earnings Call on 26 Jan 2024 and recent financial report provided insight regarding the importance of pricing on performance.

For anyone wondering if pricing is important to investors and chief executives, we have some clear facts for you.  Pricing was very much a key topic of the earnings call.  Over 48 times, management and analysts used words like “price”, “prices”, or “pricing” in their one-hour conversation, not to mention how often margin, foreign exchange, or inflationary issues arose.

Noel Wallace, CEO of Colgate-Palmolive, spoke directly to the importance of pricing on performance. “… our gross profit margin in the quarter was up 400 basis points year-over-year. For the quarter, pricing was a 280 basis point benefit to gross profit margin, while raw materials had a 180 basis point negative impact. Our funding-the-growth initiatives delivered a 300 basis point benefit to gross profit margin.” I suspect “funding the growth” means some form of productivity improvement that reduced variable cost, but I am unsure.  (Acronyms and management jargon are the bane of clarity which many people and companies suffer.)

Continuing, Noel Wallace remarked on Hill’s Pet Care offerings, “we’ve had roughly six quarters of aggressive pricing, seven quarters where we’ve had to take pricing to offset a lot of the inflation that we’ve seen in agricultural products.”

Great so far.  Pricing is clearly important to executives and investors at Colgate-Palmolive.  But how are they managing it?

Colgate-Palmolive management spoke about an increased brand advertising by 18% from the year prior.  When pushed regarding advertising versus promotions, management responded astutely with a clear delineation between advertising as a brand investment to support long-term growth and stability versus promotions as a short-term tool for addressing specific price challenges where list price increases were above the market’s willingness to pay and needed slight adjustments.

This type of nuanced response demonstrated a high understanding of pricing strategy.  Academic research and past precedence have demonstrated that brand advertising reduces price sensitivity and increases demand stability while price promotions increase price sensitivity are reduce demand stability.  While management may not know of this specific research, they know its implications and are indicating intentions to follow these best practices.

Examining the operations of Colgate-Palmolive indicates the pricing capability required to deliver on the goals of management and the needs of investors.

1. Based on industry benchmarks, we would expect to find 40 to 200 professionals engaged in pricing daily at Colgate-Palmolive. Reviewing the complexity of their operations, we strongly believe the appropriate benchmark would be at the upper end of this range.
2. Given 21 different major brands, each with a distinct target market and competitive positioning, there is a high level of offering complexity in managing prices at Colgate-Palmolive. (Brands include Colgate, Palmolive, elmex, Hello, Merido, Sorriso, Tom’s of Maine, eltaMD, Filorga, Irish Spring, PCA Skin, Protex, Sanex, Murhpy Oil soap, Softsoap, Speed Stick, Ajax, Axion, Fabuloso, Souplline, Suavitel, and Hill’s Pet Nutrition and many others.)
3. Colgate-Palmolive works across the globe. Each country and region enjoys a unique marketing environment, legislative issues, and competitive dynamics. The global reach and country-specific challenges layers in a second level of complexity. (20% in North America, 24% in Latin America, 14% in Europe, 14% in APAC, and 5% in Africa/Eurasia) 
4. Colgate-Palmolive global reach and status of providing necessity goods for healthy living adds another level of complexity. Unlike luxury goods companies, many ethicists would argue Colgate-Palmolive should not simply pull out of countries like Russia. (I cannot believe I have to say this but, please, imagine not having toothbrushes and toothpaste or soap to understand the necessity nature of Colgate-Palmolive’s offerings and its importance to peoples globally, regardless of the political stance of a given country.) We then add in the challenges of legally doing business with problematic regimes as another dimension of complexity in managing pricing at Colgate-Palmolive.
5. As if that wasn’t enough, Colgate-Palmolive also works in countries suffering from high and hyperinflation such as Turkiye and Argentina. This too adds to the challenge of managing prices responsibly.

Research into the investment by Colgate-Palmolive in pricing yielded challenging results.  As is common with consumer-packaged goods companies, pricing generally fell under the responsibility of Revenue Growth Management (RGM) titles.  Here, we identified individuals with seniority ranging from analyst and manager to director.  No VP role in and of itself. We also identified revenue growth managers located in many countries, mostly in North America, Europe, and Euroasia.  We expected to find them scattered across Latin America and elsewhere per Colgate-Palmolive’s revenue distribution.  In terms of responsibilities, RGM seemed to focus on analytics and commercial planning, not the larger strategic and economic issues.  The number of individuals identifying pricing or revenue growth management as their core responsibility fell 75% below the lowest industry benchmark.  Perhaps pricing is managed as an aspect of product management, marketing management, and financial planning and analysis rather than as the discipline that it is in and of itself.

Given the importance and capability of pricing at Colgate-Palmolive as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of March 2024.

Colgate-Palmolive Pricing Spineometer: 3 out of 5 Vertebrae. (Management knows the importance of pricing and revenue growth management and has taken some steps to develop this strategic capability but it has many opportunities to capture in this capacity.)

CL (Colgate-Palmolive Company) rose from 82.8 the day prior to their earnings call to 84.6 one week later. FY 23 revenue of $19.5 billion with a 20.5% operating margin and P/E ratio near 45.

For FY 2023, a 1% improvement in price would yield 4.9% improvement in operating profits holding all else constant at Colgate-Palmolive.