New Delhi: Colgate-Palmolive (India) Ltd, one of the country’s largest consumer product firms, has decided to significantly reduce the number of stock keeping units, or SKUs, it sells in an effort?to?trim?operating?costs.
Colgate’s move comes even as companies across businesses work to cut costs in the wake of soaring inflation that’s expected to crimp demand, and rising commodity and raw material prices. These have reduced the profitability of manufacturers who cannot pass on costs to consumers for fear of losing them altogether.
Colgate’s act of reducing SKUs—each pack size of each product is one; so if Colgate Dental Cream is available in six different pack sizes, each is an SKU—is a first in recent times for a consumer products firm in the country.
On 17 July, during his speech at the company’s annual general meeting, Colgate-Palmolive India chairman Justin Skala told shareholders that the company was initiating a series of steps to rein in rising costs, and become more efficient. “The company is becoming more efficient by reducing the number of SKUs. A team has been formed to reduce SKUs by 15%, and the management is confident this target will be achieved by the team well before the deadline,” Skala said in his speech, without spelling out a deadline for the completion of this exercise.
Colgate-Palmolive did not respond to a detailed questionnaire sent to it, and the company doesn’t disclose the number of SKUs in its portfolio. While an executive, who did not want to be named, at one of India’s largest retail chains put the number at between 150 and 200, another person aware of this number, who also did not want to be identified, said it was definitely more than 200.
Besides reducing the number of SKUs, Colgate-Palmolive is also expanding its toothpaste production capacity at its unit located in Baddi in Himachal Pradesh which is eligible for several fiscal concessions that the state gives to manufacturers.
“The increased production from Baddi unit will help the company generate savings which will be available for growth-building activities,” Skala said in his speech.
The firm has also proposed the merger of its two toothpaste factories in Goa in order to “significantly improve the operational efficiency and facilitate optimum deployment of resources”, according to Skala.
Colgate-Palmolive, which sells toothpastes, toothbrushes and tooth powders under the Colgate brand, and a range of personal care products such as shower gels, hand washes, and shaving creams under the Palmolive brand, grew net profit 18% to Rs71.9 crore in the quarter ended June 2008 over the same period in 2007. Net sales increased 16% to Rs407.6 crore in the period.
Colgate is the market leader in the toothpaste category with at least a 40% share, which, however, has remained stagnant between 2006 and 2008 even as the category grew 14% year-on-year to Rs2,263 crore in the same period, according to data from market research firm AC Nielsen. In terms of volume, Colgate’s share has declined from 38% in 2005-06 to 37% in 2006-07 and 36.9% in 2007-08, Nielsen data shows.
Two people close to the developments at Colgate-Palmolive said the cost-reduction drive is largely aimed at the toothpaste category, which also contributes the most to the firm’s revenue. “Colgate-Palmolive gets around 150-200 SKUs of toothpastes packaged by Mumbai-based packaging firm Essel Propack, and the company has been informed to stop the packaging of some units,” one of the two people said. The two did not want to be named.
The executive at the retail chain said Colgate’s 300g pack of its basic offering, Colgate Dental Cream, was the firm’s best-selling SKU. Most of the other SKUs, he added, “do not sell well”.
Packaging costs typically constitute between 10% and 15% of the retail price of a product.
“In the current scenario, where inflation and rising raw material prices are putting pressure on margins, most of the FMCG (fast moving consumer goods or consumer products) companies are exploring different ways of cost cutting. Reducing the number of SKUs could help in reducing packaging expenses,” said Anand Shah, an analyst at Mumbai-based brokerage Angel Broking Ltd.
A senior official at Essel Propack, who did not want to be named, declined comment on Colgate, but said: “There is a fixed cost on every SKU but, at the same time, all the SKUs do not sell well.”