Is Colgate-Palmolive Guilty of Price Gouging?

Let’s try to have a serious discussion about the issue of alleged corporate price gouging.

It is dangerous to discuss political topics. However, since I have been following these companies for 40+ years, I feel uniquely qualified to give an opinion.

One of our political parties has citied corporate price gouging as one of the major causes of inflation. Let’s investigate this issue. Is Ms. Lina Khan (FTC Chairperson) correct?

Before I begin let me briefly explain my confusing political beliefs. I am a believer in conservative/libertarian economic principles, but I have voted a straight Democratic ticket since 1992. I learned economics from Milton Friedman, George Gilder, Dr. Ron Paul, Jack Kemp, Dr. Art Laffer, Bob Bartley, Lew Lehrman, and the Austrian School. I have voted for Democrats because the Libertarian in me believes women have certain absolute rights. I was going to vote for Bobby Kennedy Jr this year, but now I am perplexed. I would not hire Donald Trump to manage a convenience store, much less run a country. I do believe Mr. Trump has raised some interesting economic issues, and I think Mr. Vance has said some reasonable things about economics. Let’s investigate the Democrats charge of price gouging.

Why did I choose Colgate-Palmolive - CL ?

I think CL has the largest market share of the publicly traded packaged goods companies. They have about 55% share of the domestic toothpaste business. Other “potential monopolists” in the grocery store I considered were Kimberly-Clark, Coca-Cola, McCormack, Mondelez, Diageo, Pepsi, General Mills, Kraft Heinz, Campbell’s Soup, Hershey’s, Clorox, Proctor & Gamble, and Conagra. Reasonable people could disagree about which of these has been the most abusive. CL has the benefit of being is basically the same business for the last 30+ years, without huge acquisitions.

The monopoly power of Apple, Google, Microsoft, and Facebook is a subject for another day.

Why did I not choose Tyson’s - TSN ?

If you think Tyson is a potential monopolist, then you are not willing to have a serious discussion about corporate power. Way too many Democrats cite the high price of beef as their main culprit when discussing price gouging. Anybody that has followed the meat processing industry for 40+ knows that discussing TSN as a potential monopoly is laughable. Could any monopoly trade at 1.2x book value? Right now TSN has negative EBITDA in beef processing. They must be the worst monopolists in recorded history.

Why not look at a big group of companies, like the S&P 500?

Trying to measure the profitability of a large group is very difficult because industrial cyclicals and energy stocks can have highly variable earnings patterns. The dramatic increase in the technology weighting of any index also causes problems. The economy wide data reported by the Fed also has plenty of “fuzzy” numbers. I think a company by company approach is best.

Let’s return to CL, because they just might be a monopoly. First, let’s be very clear, any company we choose will be difficult to analyze. Why will CL be difficult?

1. CL has 45% of their sales in developing markets, where their market shares are considerably lower.

2. CL has 40% of their sales in personal care (Softsoap, etc.), pet food (Hill’s) and home care (Ajax), where CL has competitive market shares.

3. Significant stock repurchases have distorted the Equity number on the balance sheet so calculating Return on Equity is basically impossible. All we can do is compare margins, even though some return on capital would be a better measure of profitability.

Has CL become more profitable over time?

That depends of the time period you choose.

CL’s last 12 month gross margin is 60%, and operating margin is 22%, in 2010 gross margin was 59% and operating margin was 24%, however in 1994 gross margin was just 52%, and operating margin was just 14%, and in 1980 gross margin was 36%, and operating margin was 8%.

CL’s current profitability is very similar to 2010, but almost twice as high as it was in 1994.

Just for fun lets look at Kimberly Clark, Pepsi, McCormick, Hershey, and Proctor & Gamble, the biggest grocery store monopolists.

Margins — current. // —2010 —// 1994

Colgate - 60%, 22% //59%,24% // 52%, 14%

Kimberly- 36%,15% // 33%,14% // 38%, 11%

Pepsi - 54%, 15% // 54%, 14% // 38%, 11%

McCorm. 38%, 15% // 42%, 15% // 40%, 12%

Hershey. - 46%, 25% // 42%, 17% // 45%, 13%

Procter-G. 51%, 24% // 51%, 19% // 46%, 12%

The pattern is pretty consistent, current profitability is similar to 2010, but corporate profitability is 50% to 100% higher than 1994.

The Democrats are wrong about current price gouging, but they are indeed correct that companies are much more profitable than they were 30 years ago.

What should we do with this information?

I guess we could demand that Colgate Palmolive, Kimberly Clark, Pepsi, and the rest of the alleged outlaws cut their prices by 20%. I am not sure that is constitutional, or even fair.

Some of the increase in profitability is because these companies are more efficiently managed, and return more capital to shareholder through dividends and buybacks. They do not make as many silly acquisitions as they did in the 1970’s and 1980’s.

Some of the increase in profitability is because these companies have such dominant market shares they can control prices.

Good luck trying measure which factor is more important.

What can the Democrats and Ms. Kahn do to prevent this slow moving, long-term, corporate exploitation?

Yes, they can use anti-trust measures to prevent further mergers, but do we really want to breakup “Big Toothpaste”, “Big Tissue Paper” and “Big Soda and Chips”.

Here is my idea.

I do not have the precise numbers, but the number of publicly traded companies has declined by 50% over the past 30 years. Private equity has gobbled up nearly all of them, and in the process the “disappeared companies” become leveraged up competitors who follow the prices of the market leaders. They seldom, if ever, try to gain share.

In order to compete with Colgate, Kimberly, and Pepsi we need vibrant, healthy, and well financed, smaller competitors, that trade in the public markets.

Who is going to own these stocks? Everybody just buys bleeping index funds, or ETF’s that mirror some index, the hedge funds just follow all the money flowing into index funds.

There are very few real capitalists left. The number of investors that can analyze individual companies has declined significantly. Who should we blame?

It is easy to blame the regulators, the courts, the unseen oligarchs, Congress, any of the usual bogeymen. This does no good.

Let’s blame ourselves. The financial industry has done a miserable job in training new analysts. The fat cats that manage the so called non-profit CFA Institute should shoulder much of the blame. Over the years their curriculum has been watered down. Despite all the change in our industry, there is no required continuing education for CFA’s. We all have a tremendous amount of information at our fingertips, but nobody knows how to use it anymore.

We need more analysts, portfolio managers, and even marketing people, to invest in small and mid-cap stocks. Without them there will no real competitors for Colgate, Kimberly, and Pepsi.

Ms. Khan are you listening?

If you got to the end of this long rant, go have a beverage, but not from one of the monopolists.