The detergent market worldwide has seen greater consolidation in recent years, with many leading brands concentrated in the hands of a diminishing number of companies. By selling its detergent brands, Colgate is set to make a timely exit from a market in which high raw material costs and continual price competition are driving the need for large-scale production and greater efficiencies.
The deal will give Procter & Gamble (P&G) the Fab, Trojan, Dynamo, and Paic brands, marketed in Thailand, Malaysia, Singapore and Hong Kong. It follows similar sales by Colgate of its laundry detergent brands last year it sold Fab and Dynamo in North America to Phoenix Brands LLC, and back in 2003 sold a variety of Western European detergent brands, also to P&G.
Such sales form part of Colgate's strategy to sideline and eventually eliminate the low-margin portions of the business and concentrate its efforts and resources on more profitable, faster-growing products within oral hygiene, pet nutrition, personal care and other home care markets.
The company accredited an increase in gross margin of 10 basis points in 2004 to the ongoing shift away from detergents, and the more dynamic elements of its business, mentioned above, have seen impressive growth. Equally, while the detergent market still promises massive rewards to successful companies, consolidation represents the most effective way to gain efficiencies in terms of raw material costs and product distribution.
This is what Procter & Gamble is aiming for with the detergents acquisition. The company already has reasonable sales in the Asia-Pacific region, but the addition of Colgate's brands should help Procter & Gamble increase channels of distribution, expand its consumer base, and engage in more large-scale production. This will help the company compete more effectively with market leaders like Kao and Unilever by giving it greater influence over both suppliers and distributors.
Only the largest, most committed companies can prosper in the detergent market due to low margins of return and the need for economies of scale. As such, Colgate's decision to exit the market to focus on its higher-margin personal care brands makes strategic sense. Procter & Gamble, meanwhile, should look to expand its brand ownership wherever possible to build upon its dominance of the US detergents market and its strong position in the European market.