+

Colgate-Palmolive in
Mexico (Group 1)
July 2016

+
Introduction

The case outlines the challenges Colgate-Mexico faced in

operating in a hyperinflationary environment

Colgate-Palmolive operates in the global FMCG industry. Its

products are sold in over 100 countries with manufacturing
and distribution facilities in 54 countries.

Its operations are however organised into 7 divisions-United

States, Mexico, France, Europe, Latin America, Asia-Pacific
and Africa.

The Mexico and France operations were not combined with

the Latin America or Europe operations but treated
separately because they were CPs largest subsidiaries in
size and profits.

+
Introduction

Though the Mexico division had responded well to two

oil price shocks in the 1970s, changes in the Mexican
economy since the beginning of the debt crises in 1982
made Colgate Mexico a special concern among CPs
division.

This is more-so considering Mexicos inexperience in

operating under hyperinflation which was projected to
reach 120% at the beginning of 1987 with a slow
growth in GDP of 1%.

+
Introduction

Their major objective was to increase profitability and

enhance shareholder value

Its functional goal was to be a cost-competitive producer

of high-quality household and personal care products for
the Mexican domestic market.

To achieve this, they agreed on the following goals:

15% return on capital

Achieve global low-cost producer status

Concentrate on three core businesses

The over-arching problem is How can CP Mexico achieve

its goals in the midst of hyperinflation in Mexico?

+
Problem #1 - Inflation
Problem

Increased production costs

as a result of rising inflation
necessitated price
increases amidst
Government placing
controls on certain
categories of products.

Solution

Getting customer approvals for

prices prior to shipping pricecontrolled products.

Product costing based on

replacement costs away from
the LIFO method previously
used.

Monitoring prices for some

2,000 items of raw and
packaging materials.

Stricter credit and trading

terms.

+
Problem #2 Achieving market
dominance
Problem

Maintaining dominant
market position amidst
price controls imposed by
Government
Possible change in demand
as a result of consumers
being more price sensitive
due to tough economic
conditions.

Solution
Creation of products which
were largely recession-proof

New product introductions

in categories that were
identified as fast payback.
And non-price controlled

Minimum standards were

set for new product
launches. e.g. payback of
5months, contribution
margin greater than 30%

+
Problem #3 Currency
Devaluation
Problem

Frequent currency
devaluations.

Foreign currency translation

losses.

Solution

Backward integration.

Developing lighter weight, cheaper,

plastic bottles for liquid cleaners and
fabric softeners with the aim of reducing
packaging costs.

Use of Government controlled exchange

rates for imported and domestic
materials and royalty payments rather
than the highly volatile free-market rate.

Use of imported raw materials

Colgate-USs international purchasing

department helped find the best
alternative sourcing by combining its
worldwide purchasing and competitively
bidding on sources

Exchange rate fluctuations.

Difficulty in sourcing raw
materials for local
production in Mexico

+
Problem #4 Profitability and
Return on Capital
Problem

By 1991, the company

hoped to reach and
maintain a 15% return on
capital
It had averaged 10.5%
since 1984, when Mark first
established the 15% goal

Solution
Improve export to grow
dollar profit and remittance

Build consumer franchises

and brand loyalty

Strive to produce costcompetitive high-quality

household and personal
care products

Aggressively track progress

to achieve budgeted profit

+
Problem #5 High Interest Rate
Problem

High cost of borrowing.

Loss of value as a result of

stock market crash.

Uncertain government
policies.

Solution

Dollar-denominated
borrowing rather than
borrowing in domestic
currency from local banks.

Purchase of a controlled
rate hedge contract to
protect against
devaluations.

+
Problem #6 High Incidence of
Taxation
Problem

Solution

Difficulty in deciding which

form remittance to home
country can be made

Colgate-Palmolive decided
to make remittance to
home country in the form of
Royalty due to lower with
holding tax (WHT) of 21%
versus 55% of dividend.