The cultural attributes of the enterprise in which you invest are among the most difficult characteristics to define in a corporation. Not only is the concept of a good culture inherently amorphous and subjective to different interpretations as to what constitutes a good culture, but it is also subject to the biases of “pop culture” and “winning”.
By pop culture, I mean that companies that offer unique and fluffy fringe benefits often receive favorable press coverage that is supposed to convince that the company is on the right track. Two years ago, a company was praised lavishly for letting employees pet puppies at work. Well, that doesn’t tell you thing about product development or even caliber of employee attracted (i.e. people who need to pet a puppy to get through the workday may be more emotionally fragile than the typical U.S. worker writ large).
And by winning, I mean that we tend to assume that corporations whose earnings have recently spiked or whose stock price has recently risen has a strong corporate culture (even though, like Valeant exploding 30% annually before the precipitous collapse, we now know there were cultural misdeeds lurking in the background and assuming that a strong culture is an inherent byproduct of strong investment results is an unfair assumption to make.
When I think about the topic of corporate cultures, I believe the distinctions between Colgate-Palmolive and Procter & Gamble are worth addressing. Both firms are blue-chip stocks with records of dividend payments dating back to the 1890s, and both firms are rightly held in the portfolios of those who choose to invest with a generational mindset.
And yet, the performance of Colgate-Palmolive has greatly eclipsed that of Procter & Gamble over most recent and long time periods. The biggest difference is that investors in Colgate-Palmolive (CL) stock have almost quintupled their investment over the past twenty years while investors in Procter & Gamble (PG) have not even doubled their returns. What is the basis for the discrepancy between these two iconic companies?
The answer, in part, is that Colgate-Palmolive has enabled a culture of experimentation for product/top-line growth whereas Procter & Gamble has tried to appease Wall Street’s earning estimates by cutting costs. Colgate-Palmolive which invests slightly more each year in capital spending, is in sharp contrast to Procter & Gamble’s capital spending cuts that began in earnest in 2012. While that is useful for maintaining the status quo with earnings, the consequence is that sales have declined by 0.5% annually over the past five years. Other than the introduction of Tide Pods in 2012, Procter & Gamble has not been particularly innovative.
Meanwhile, at Colgate-Palmolive, business-line failures such as the “Maniac” cosmetic line and Fresh Feliners (a cat dedorant) have been tolerated because they have been more than offset by the various dog-food formula innovations under the Hill’s brand (i.e. high-performance and diet brands that sell at extreme markups but pet owners woof down).
Earlier this year Procter & Gamble announced it is embarking on a two-stage cost-cutting program to eliminate approximately $1.1 billion in annual expenses.
Such a move is pound foolish. It is not a coincidence that Gillette had to cut its prices by an astounding 20% over the past year. The brand equity has declined because the company’s capital expenditures have declined and the marketing support. If you aren’t building a better mousestop nor are you conveying the fashionability of your mousetrap, brand decay is inevitable. When Gillette was an independent company, it would do things like become the exclusive sponsor of the World Series or certain college bowl games. Retreating from this advertising perch does have brand consequences.
Meanwhile, the Colgate-Palmolive brand is taking over the retail store aisle by constantly investing in new anti-cavity measures, marketing extensively, and, perhaps critically, establishing brand loyalty at a young age by airing advertisements on TV channels that are watched by children so that they will develop a sense that Colgate is the “point of reference” as they age and eventually enter the toothpaste market on their own.
So far, when Colgate-Palmolive has cut costs, the cost cuts have generally been focused on the distribution of the products, but not advertising or the development of future business lines, which are the lifeblood of the firm’s future growth.
As a result, I think Colgate-Palmolive shareholders are going to absolutely crush it over the coming 25-50 years. Unlike most blue-chips, Colgate has a long runway ahead of it because it is not quite as big as people think (Procter & Gamble is six times the size of Colgate-Palmolive). Since 1970, it has turned a $10,000 investment into approximately $4 million. It has a stable of brands that appear impervious to the Amazon effect. It is the most trusted name in toothpaste. Aside from the Venezuela currency devaluation effect on earnings, there have been no two-year periods in which Colgate failed to raise earnings in the past forty years. It is the “growthy” blue-chip that not only preserves wealth, but goes out there and creates it.