Church & Dwight: Time to Rethink the Portfolio?(Roy A. Cook)âA decade ago, Church & Dwight was a largely household domestic products company withone iconic brand, delivering less than $1 billion in annual sales. Today, the company has beentransformed into a diversified packaged goods company with a well-balanced portfolio ofleading household and personal care brands delivering over $2.5 in annual sales worldwideâ.Now, after a decade of rapid growth fueled by a string of acquisitions, the top management teamis faced with a new challenge. It must now rationalize the firmâs expanded consumer productsportfolio of 80 brands into the existing corporate structure while continuing to scout for newavenues of growth. This is no easy task as it competes for market share with such formidableconsumer products powerhouses as Colgate-Palmolive, Clorox, and Procter & Gamble,commanding combined sales of over $100 billion. Future decisions will determine if thecompany can compete successfully with these other well-known giants in the consumer productsarena or remain in their shadows.BackgroundFor over 160 years, Church & Dwight Co. Inc. has been working to build market share on abrand name that is rarely associated with the company. When consumers are asked, âAre youfamiliar with Church & Dwight products?â the answer is typically âNoâ. Yet, Church & Dwightproducts can be found among a variety of consumer products in 95% of all U.S. households. Asthe worldâs producer and marketer of sodium bicarbonate-based products, Church & Dwight hasachieved fairly consistent growth in both sales and earnings as new and expanded uses werefound for its core sodium bicarbonate products. Although Church & Dwight may not be ahousehold name, many of its core products bearing the ARM & HAMMER name are easilyrecognized.Shortly after its introduction in 1878, ARM & HAMMER Baking Soda became afundamental item on the pantry shelf as homemakers found many uses for it other than baking,such as cleaning and deodorizing. The ingredients that can be found in that ubiquitous yellowbox of baking soda can also be used as a dentrifice, a chemical agent to absorb or neutralizeodors and acidity, a kidney dialysis element, a blast media, an environmentally friendly cleaningagent, a swimming pool ph stabilizer, and a pollution-control agent.Finding expanded uses for sodium bicarbonate and achieving orderly growth have beenconsistent targets for the company. Over the past 30 years, average company sales haveincreased 10% – 15% annually. While top-line sales growth has historically been a focal point forthe company, a shift may have occurred in managementâs thinking, as more emphasis seems tohave been placed on bottom-line profitability growth. Since President and Chief ExecutiveOfficer James R. Cragie took over the helm of Church & Dwight from Robert A. Davies III inJuly of 2004, he has remained focused on âbuilding a portfolio of strong brands with sustainablecompetitive advantages.â At that time, he proposed a strategy of reshaping the company throughacquisitions and organic growth and he continues to state that âOur long-term objective is tomaintain the companyâs track record of delivering outstanding TSR (Total Shareholder Return)relative to that of the S&P 500. Our long-term business model for delivering this sustainedearnings growth is based on annual organic growth of 3-4%, gross margin expansion, tightmanagement of overhead costs and operating margin improvement of 60-70 basis pointsresulting in sustained earnings growth of 10-12% excluding acquisitions.â In addition, Cragienoted that ââ¦[W]e have added $1 billion in sales in the past five years, a 72% increase, whilereducing our total headcount by 5%, resulting in higher revenue per employee than all of ourmajor competitors.â The results of these efforts can be seen in the financial statements shown inExhibits 1, 2, and 3.Exhibit 1: Consolidated Statements of Income: Church & Dwight Co. Inc. (Dollars in thousands, except per share data)ManagementThe historically slow but steady course Church & Dwight has traveled over the decades reflectedstability in the CEO and a steady focus on long-term goals. The ability to remain focused maybeattributable to the fact that about 25% of the outstanding shares of common stock were owned bydescendants of the companyâs co-founders. Dwight C. Minton, a direct descendant of AustinChurch, actively directed the company as CEO from 1969 through 1995 and remained on theboard as Chairman Emeritus. He passed on the duties of CEO to the first non-family member inthe companyâs history, Robert A. Davies III, in 1995 and leadership at the top has remained astable hallmark of the company.Many companies with strong brand names in the consumer products field have beensusceptible to leveraged buy-outs and hostile takeovers; however, a series of calculated actionshas spared Church & Dwightâs board and management from having to make last-minutedecisions to ward off unwelcome suitors. Besides maintaining majority control of theoutstanding common stock, the board amended the companyâs charter, giving currentshareholders four votes per share; however, they required future shareholders to buy and holdshares for four years before receiving the same privilege. The board of directors was alsostructured into three classes with four directors in each class serving staggered three-year terms.According to Minton, the objective of these moves was to â[give] the board control so as toprovide the best results for shareholders.âExhibit 2: Consolidated Balance Sheets: Church & Dwight Co. Inc. (Dollars in thousands, except share and per share data)As a further deterrent to would-be suitors or unwelcome advances, the company enteredinto an employee severance agreement with key officials. This agreement provided severancepay of up to two times (three times for Mr. Cragie) the individualâs highest annual salary andbonus plus benefits for two years (three times for Mr. Cragie) if the individual was terminatedwithin one year after a change in control of the company. Change of control was defined as theacquisition by a person or group of 50% or more of company common stock; a change in themajority of the board of directors not approved by the pre-change board of directors; or theapproval by the stockholders of the company of a merger, consolidation, liquidation, dissolution,or sale of all the assets of the company.Exhibit 3: Business Segment Results: Church & Dwight Co. Inc.As Church & Dwight pushed aggressively into consumer products outside of sodiumbicarbonate-related products and into the international arena in the early 2000s, numerouschanges were made in key personnel. These changes can be seen by reviewing Exhibit 4 andnoting the original date of hire for these key decision-makers. Many of the new members of thetop management team brought extensive marketing and international experience fromorganizations such as Spalding Sports Worldwide, Johnson & Johnson, FMC, and CarterWallace.In addition to the many changes that have taken place in key management positions,changes have also been made in the composition of the board of directors. Four members of the10-member board have served for 10 years or more, whereas the other six members range from50 to 74, with six members being younger than 60. All but one of the newer additions to theboard brought significant consumer products and service industry insights from their ties withcom-panies such as Revlon, ARAMARK, VF Corporation, Welch Foods, and H.J. Heinz.Although in a less active role as Chairman Emeritus, Dwight Church Minton, who became aboard member in 1965. Continued to provide leadership and a long legacy of âcorporatememory.âChanging DirectionsEntering the 21st century, â⦠[m]angement recognized a major challenge to overcome⦠was thecompanyâs small size compared to its competitors in basic product lines of household andpersonal care. They also recognized the value of a major asset, the companyâs pristine balancesheet, and made the decision to grow.â According to Cragie, âChurch & Dwight has undergone asubstantial transformation in the past decade largely as a result of three major acquisitions whichdoubled the size of the total company, created a well balanced portfolio of household andpersonal care business, and established a much larger international business.â TheMENTADENT, PEPSODENT, AIM, and CLOSE-UP brands of toothpaste products werepurchased from Unilever in October of 2003; the purchase of the remaining 50% of Armkel, theacquisition vehicle that had been used to purchase Carter-Wallaceâs consumer brands such asTROJAN, was completed in May of 2004; and SPINBRUSH was purchased from Procter &Gamble in October of 2005.Five years later, another major acquisition was finalized when the stable of Orange GlowInternational products, including the well-known OXICLEAN brand, were added to theportfolio. The acquisition didnât stop as Del Pharmaceuticalâs ORAGEL brands were added in2008. What impact has this string of acquisitions made? The numbers speak for themselves asrevenues have been pumped up from less than $500 million in 1995 to over $1 billion in 2001,then to $1.7 billion in 2005, and finally topping $2.5 billion in 2009.Explosive growth through acquisitions transformed this once small company focused ona few consumer and specialty products into a much larger competitor, not only across a broaderrange of products, but also geographic territory. Consumer products now encompassed a broadarray of personal care, deodorizing and cleaning, and laundry products while specialty productsofferings were expanded to specialty chemicals, animal nutrition, and specialty cleaners.International consumer product sales, which were an insignificant portion of total revenue at theturn of the century, now accounted for 16% of sales. In the face of consumer products behemothssuch as Clorox, Colgate-Palmolive, and Procter & Gamble, Church & Dwight had been able tocarve out a respectable position with several leading brands. Regardless, the firm was not amajor market force and needed to evaluate its portfolio of 80 different consumer brands.Consumer ProductsPrior to its acquisition spree, the companyâs growth strategy had been based on finding new usesfor sodium bicarbonate. Using an overall family branding strategy to penetrate the consumerproducts market in the United States and Canada, Church & Dwight introduced additionalproducts displaying the ARM & HAMMER logo. This logoed footprint remained significant asthe ARM & HAMMER brand controlled a commanding 85% of the baking soda market. Bycapitalizing on its easily recognizable brand name, logo and established marketing channels,Church & Dwight moved into such related products as laundry detergent, carpet cleaners anddeodorizers, air deodorizers, toothpaste, and deodorant/antiperspirants. This strategy workedwell, allowing the company to promote multiple products using only one brand name, but itlimited growth opportunities â⦠in highly competitive consumer product markets, in which costefficiency, new product offering and innovation are critical to success.âFrom the companyâs founding until 1970, it produced and sold only two consumerproducts: ARM & HAMMER Baking Soda and a laundry product marketed under the nameSuper Washing Soda. In 1970, under Minton, Church & Dwight began testing the consumerproducts market by introducing a phosphate-free, powdered laundry detergent. Several otherproducts, including a liquid laundry detergent, fabric softener sheets, an all-fabric bleach, toothpowder and toothpaste, baking soda chewing gum, deodorant/antiperspirants, deodorizers(carpet, room, and pet), and clumping cat litter have been added to the expanding list of ARM &HAMMER brands; however, simply relying on baking soda extensions and focusing on nichemarkets to avoid a head-on attack from competitors with more financial resources and marketingclout limited growth opportunities.So, in the late 1990s, the company departed from its previous strategy of developing newproduct offerings in-house and bought several established consumer brands such as BRILLO,PARSONS Ammonia, CAMEO Aluminum & Stainless Steel Cleaner, RAIN DROPS watersoftener, SNO BOWL toilet bowl cleaner, and TOSS âN SOFT dryer sheets from one of itscompetitors, the Dial Corporation. An even broader consumer product assortment includingTROJAN, NAIR, and FIRST RESPONSE was added to the companyâs mix of offerings with theacquisition of the consumer products business of Carter-Wallace in partnership with the privateequity group, Armkel. The list of well-known brands was further enhanced with the acquisitionof Crestâs SPINBRUSH, Cotyâs line of ORAJEL products, and OXICLEAN, as well as otherbrands from Orange Glow International. In fact, acquisitions have been so important that sevenof the companyâs eight brands are the result of these moves. The company has achievedsignificant success in the consumer products arena.Church & Dwight faced the same dilemma as other competitors in mature domestic andinternational markets for consumer products. New consumer products had to muscle their wayinto markets by taking market share from larger competitorsâ current offerings. With the majorityof company sales concentrated in the United States and Canada where sales were funneledthrough mass merchandisers, such as Wal-Mart (accounting for 22% of sales), supermarkets,wholesale clubs, and drugstores, it was well-equipped to gain market share with its low-coststrategy. In the international arena where growth was more product driven and less marketingsensitive, the company was less experienced. To compensate for this weakness, Church &Dwight relied on acquisitions and management changes to improve its international footprint andreach.With its new stable of products and expanded laundry detergent offerings, Church &Dwight found itself competing head-on with both domestic and international consumer productgiants such as Clorox, Colgate-Palmolive, Procter & Gamble, and Unilever. The breadth of itsexpanded consumer product offerings composed of 60% premium and 40% value band names.According to Minton, as the company grew, âWe have made every effort to keep costsunder control and manage frugally.â A good example of this approach to doing business can beseen in the Armkel partnership. âArmkel borrowed money on a non-recourse basis so a failurewould have no impact on Church & Dwight, taking any risk away from shareholders.â Asmentioned previously, the remaining interest in Armkel was purchased in 2005. This importantmove cleared the way to increase marketing efforts behind TROJAN, a brand which controlled71% of the market.As more and more products were added to the consumer line-up, Church & Dwightbrought many of its marketing tasks in-house as well as stepping out with groundbreaking andoften controversial marketing campaigns. The first major in-house marketing project was indental care. Although it entered a crowded field of specialty dental products, Church & Dwightrode the rest of increasing interest by both dentists and hygienists in baking soda for maintainingdental health; enabling it to sneak up on the industry giants. The company moved rapidly fromthe position of a niche player in the toothpaste market to that of a major competitor.In a groundbreaking marketing campaign that some considered controversial, thecompany aired commercials for condoms on prime-time television. âChurch & Dwightexecutives said their new campaign was designed to shake people up, particularly those whodonât think they need to use condoms. Attempts were made to shock them out of complacencyand grab their attention.â Other campaigns, such as when the Trojan brand advertised its ownstimulus package at the same time as the federal stimulus package was enacted, stated, âbecausewe believe we should ride out these hard times together.â A Valentineâs Day ad featuringcondoms in place of candy in a heart-shaped box of chocolates continued to highlight the shocktheme.The companyâs increasing marketing strength caught the attention of potential partners asis evidenced by its partnership with Quidel Corporation, a provider of point-of-care diagnostictests, to meet womenâs health and wellness needs. âThe partnership combined Church &Dwightâs strength in the marketing, distribution and sales of consumer products with Quidelâsstrength in the development and manufacture of rapid diagnostic tests.â Other product tie-ins,especially with ARM & HAMMER Baking Soda, have been created with air filter, paint, andvacuum cleaner bag brands.For the most part, Church & Dwightâs acquired products and entries into the consumerproducts market have met with success; however, potential marketing problems maybe loomingon the horizon for its ARM & HAMMER line of consumer products. The company could befalling into the precarious line-extension snare. Placing a well-known brand name on a widevariety of products could cloud the brandâs image, leading to consumer confusion and loss ofmarketing pull. In addition, competition in the companyâs core laundry detergent marketcontinues to heat up as the market matures and sales fall with major retailers such as Wal-Martand Target wringing price concessions from all producers. Will the addition of such well-knownbrand names as ORAJEL, OXICLEAN, and SPINBRUSH continue the momentum gained fromthe XTRA, NAIR, TROJAN, and FIRST RESPONSE additions? Where would new avenues forconsumer productsâ growth come from?Specialty ProductsIn addition to a large and growing stable of consumer products, Church & Dwight also has a verysolid core of specialty products. The Specialty Products Division basically consists of themanufacture and sale of sodium bicarbonate for three distinct market segments: specialtychemicals, animal nutrition products, and specialty cleaners. Manufacturers utilize sodiumbicarbonate performance products as a leavening agent for commercial baked goods; an antacidin pharmaceuticals; a chemical in kidney dialysis; a carbon dioxide release agent in fireextinguishers; and an alkaline in swimming pool chemicals, detergents, and various textile andtanning applications. Animal feed producers use sodium bicarbonate nutritional productspredominantly as a buffer, or antacid, for dairy cattle feeds and make a nutritional supplementthat enhances milk production of dairy cattle. Sodium bicarbonate has also been used as anadditive to poultry feeds to enhance feed efficiency.âChurch & Dwight has long maintained its leadership position in the industry through astrategy of sodium bicarbonate product differentiation, which hinges on the development ofspecial grades for specific end users.â Managementâs apparent increased focus on consumerproducts has only recently impacted the significance of specialty products in the overallcorporate mix of revenues.Church & Dwight was in an enviable position to profit from its dominant niche in thesodium bicarbonate products market since it controlled the primary raw material used in itsproduction. The primary ingredient in sodium bicarbonate is produced from the mineral trona,which is extracted from the companyâs mines in southwestern Wyoming. The other ingredient,carbon dioxide, is a readily available chemical which can be obtained from a variety of sources.Production of the final product, sodium bicarbonate, for both consumer and specialty products iscompleted at one of the two company plants located in Green River, Wyoming, and Old Fort,Ohio.The company maintained a dominant position in the production of the required rawmaterials for both its consumer and industrial products. It manufactures almost two-thirds of thesodium bicarbonate sold in the United States and, until recently, was the only U.S. producer ofammonium bicarbonate and potassium carbonate. The company has the largest share(approximately 75%) of the sodium bicarbonate capacity in the United States and is the largestconsumer of baking soda as it fills its own needs for company-produced consumer and industrialproducts.The Specialty Products focused on developing new uses for the companyâs core product,sodium bicarbonate. Additional opportunities continue to be explored for ARMEX Blast Media.This is a sodium bicarbonate-based used as a paint-stripping compound. It gained widespreadrecognition when it was utilized successfully for the delicate task of stripping the fragile copperskin. It is now being considered for other specialized applications in the transportation andelectronics industries and in industrial cleaning because of its apparent environmental safety.ARMEX also has been introduced into international markets.Specialty cleaning products are found in blasting (similar to sand blasting applications) aswell as many emerging aqueous-based cleaning technologies such as automotive parts cleaningand circuit board cleaning. Safety-Kleen and Church & Dwight teamed up through a 50-50 jointventure, ARMAKLEEN, to meet the parts cleaning needs of automotive repair shops. Safety-Kleenâs 2,800 strong sales and service team markets Church & Dwightâs aqueous-based cleanersas an environmentally friendly alternative to traditional solvent-based cleaners.The companyâs ARMAKLEEN product is also used for cleaning printed circuit boards. Thisnonsolvent-based product may have an enormous potential market because it may be able toreplace chlorofluorocarbon-based cleaning systems. Sodium bicarbonate also has been used toremove lead from drinking water and, when added to water supplies, coats the inside of pipesand prevents lead from leaching into the water. This market could grow in significance withadditions to the Clean Water Bill. The search for new uses of sodium bicarbonate frompharmaceutical to environmental protection continues in both the consumer and industrialproducts divisions.International OperationsChurch & Dwight has traditionally enjoyed a great deal of success in North Americanmarkets and is attempting to gain footholds in international markets through acquisitions. Thecompanyâs first major attempt to expand its presence in the international consumer productsmarket was with the acquisition of DeWitt International Corporation, which manufactured andmarketed personal care products including toothpaste. The DeWitt acquisition not only providedthe company with increased international exposure but also with much-needed toothpasteproduction facilities and technology; however, until the 2001 acquisition of the Carter-Wallaceline of products, only about 10% of sales were outside the United States. By 2009, 19% ofrevenue was derived from sales outside the United States. Most of the growth in internationalmarkets was being fueled by consumer products.As the company cautiously moved into the international arena of consumer products, italso continued to pursue expansion of its specialty products into international markets. Attemptsto enter international markets have met with limited success, probably for two reasons: (1) lackof name recognition and (2) transportation costs. Although ARM & HAMMER was one of themost recognized brand names in the United States (in the top 10), it did not enjoy the same namerecognition elsewhere. In addition, on an historic basis, international transportation costs were atleast four times as much as domestic transportation costs; however, export opportunitiescontinued to present themselves as 10% of all U.S. production of sodium bicarbonate wasexported. While Church & Dwight dominated the United States sodium bicarbonate market,Solvay Chemicals was the largest producer in Europe and Ashi Glass was the largest producer inAsia. Although demand was particularly strong in Asia, â⦠little of the chemical produced inNorth America and Europe is exported to Asia because of prohibitive transportation costs.â Twosignificant projects were completed in 2009. One was the completion and start-up of a major newmanufacturing facility and the other was the disposition of some non-core assets.With the completion of a 1.1 million square foot manufacturing plant for laundrydetergent, the company consolidated into one facility the functions that had previously beencompleted in five separate facilities with room to grow. This move took place in an industryfacing slowing growth. Global laundry detergent sales had grown by 8% between 2003 and2008, but were only forecast to grow by 3% between 2008 and 2013.
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