Church & Dwight: Time to Rethink the Portfolio?
(Roy A. Cook)
“A decade ago, Church & Dwight was a largely household domestic products company with
one iconic brand, delivering less than $1 billion in annual sales. Today, the company has been
transformed into a diversified packaged goods company with a well-balanced portfolio of
leading household and personal care brands delivering over $2.5 in annual sales worldwide”.
Now, after a decade of rapid growth fueled by a string of acquisitions, the top management team
is faced with a new challenge. It must now rationalize the firm’s expanded consumer products
portfolio of 80 brands into the existing corporate structure while continuing to scout for new
avenues of growth. This is no easy task as it competes for market share with such formidable
consumer products powerhouses as Colgate-Palmolive, Clorox, and Procter & Gamble,
commanding combined sales of over $100 billion. Future decisions will determine if the
company can compete successfully with these other well-known giants in the consumer products
arena or remain in their shadows.
Background
For over 160 years, Church & Dwight Co. Inc. has been working to build market share on a
brand name that is rarely associated with the company. When consumers are asked, “Are you
familiar with Church & Dwight products?” the answer is typically “No”. Yet, Church & Dwight
products can be found among a variety of consumer products in 95% of all U.S. households. As
the world’s producer and marketer of sodium bicarbonate-based products, Church & Dwight has
achieved fairly consistent growth in both sales and earnings as new and expanded uses were
found for its core sodium bicarbonate products. Although Church & Dwight may not be a
household name, many of its core products bearing the ARM & HAMMER name are easily
recognized.
Shortly after its introduction in 1878, ARM & HAMMER Baking Soda became a
fundamental 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 yellow
box of baking soda can also be used as a dentrifice, a chemical agent to absorb or neutralize
odors and acidity, a kidney dialysis element, a blast media, an environmentally friendly cleaning
agent, a swimming pool ph stabilizer, and a pollution-control agent.
Finding expanded uses for sodium bicarbonate and achieving orderly growth have been
consistent targets for the company. Over the past 30 years, average company sales have
increased 10% – 15% annually. While top-line sales growth has historically been a focal point for
the company, a shift may have occurred in management’s thinking, as more emphasis seems to
have been placed on bottom-line profitability growth. Since President and Chief Executive
Officer James R. Cragie took over the helm of Church & Dwight from Robert A. Davies III in
July of 2004, he has remained focused on “building a portfolio of strong brands with sustainable
competitive advantages.” At that time, he proposed a strategy of reshaping the company through
acquisitions and organic growth and he continues to state that “Our long-term objective is to
maintain the company’s 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 sustained
earnings growth is based on annual organic growth of 3-4%, gross margin expansion, tight
management of overhead costs and operating margin improvement of 60-70 basis points
resulting in sustained earnings growth of 10-12% excluding acquisitions.” In addition, Cragie
noted that “…[W]e have added $1 billion in sales in the past five years, a 72% increase, while
reducing our total headcount by 5%, resulting in higher revenue per employee than all of our
major competitors.” The results of these efforts can be seen in the financial statements shown in
Exhibits 1, 2, and 3.
Exhibit 1: Consolidated Statements of Income: Church & Dwight Co. Inc. (Dollars in thousands, except per share data)
Management
The historically slow but steady course Church & Dwight has traveled over the decades reflected
stability in the CEO and a steady focus on long-term goals. The ability to remain focused maybe
attributable to the fact that about 25% of the outstanding shares of common stock were owned by
descendants of the company’s co-founders. Dwight C. Minton, a direct descendant of Austin
Church, actively directed the company as CEO from 1969 through 1995 and remained on the
board as Chairman Emeritus. He passed on the duties of CEO to the first non-family member in
the company’s history, Robert A. Davies III, in 1995 and leadership at the top has remained a
stable hallmark of the company.
Many companies with strong brand names in the consumer products field have been
susceptible to leveraged buy-outs and hostile takeovers; however, a series of calculated actions
has spared Church & Dwight’s board and management from having to make last-minute
decisions to ward off unwelcome suitors. Besides maintaining majority control of the
outstanding common stock, the board amended the company’s charter, giving current
shareholders four votes per share; however, they required future shareholders to buy and hold
shares for four years before receiving the same privilege. The board of directors was also
structured into three classes with four directors in each class serving staggered three-year terms.
According to Minton, the objective of these moves was to “[give] the board control so as to
provide the best results for shareholders.”
Exhibit 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 entered
into an employee severance agreement with key officials. This agreement provided severance
pay of up to two times (three times for Mr. Cragie) the individual’s highest annual salary and
bonus plus benefits for two years (three times for Mr. Cragie) if the individual was terminated
within one year after a change in control of the company. Change of control was defined as the
acquisition by a person or group of 50% or more of company common stock; a change in the
majority of the board of directors not approved by the pre-change board of directors; or the
approval 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 sodium
bicarbonate-related products and into the international arena in the early 2000s, numerous
changes were made in key personnel. These changes can be seen by reviewing Exhibit 4 and
noting the original date of hire for these key decision-makers. Many of the new members of the
top management team brought extensive marketing and international experience from
organizations 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 the
10-member board have served for 10 years or more, whereas the other six members range from
50 to 74, with six members being younger than 60. All but one of the newer additions to the
board brought significant consumer products and service industry insights from their ties with
com-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 a
board member in 1965. Continued to provide leadership and a long legacy of “corporate
memory.”
Changing Directions
Entering the 21st century, “… [m]angement recognized a major challenge to overcome… was the
company’s small size compared to its competitors in basic product lines of household and
personal care. They also recognized the value of a major asset, the company’s pristine balance
sheet, and made the decision to grow.” According to Cragie, “Church & Dwight has undergone a
substantial transformation in the past decade largely as a result of three major acquisitions which
doubled the size of the total company, created a well balanced portfolio of household and
personal care business, and established a much larger international business.” The
MENTADENT, PEPSODENT, AIM, and CLOSE-UP brands of toothpaste products were
purchased from Unilever in October of 2003; the purchase of the remaining 50% of Armkel, the
acquisition vehicle that had been used to purchase Carter-Wallace’s consumer brands such as
TROJAN, 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 Glow
International products, including the well-known OXICLEAN brand, were added to the
portfolio. The acquisition didn’t stop as Del Pharmaceutical’s ORAGEL brands were added in
2008. What impact has this string of acquisitions made? The numbers speak for themselves as
revenues 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 on
a few consumer and specialty products into a much larger competitor, not only across a broader
range of products, but also geographic territory. Consumer products now encompassed a broad
array of personal care, deodorizing and cleaning, and laundry products while specialty products
offerings were expanded to specialty chemicals, animal nutrition, and specialty cleaners.
International consumer product sales, which were an insignificant portion of total revenue at the
turn of the century, now accounted for 16% of sales. In the face of consumer products behemoths
such as Clorox, Colgate-Palmolive, and Procter & Gamble, Church & Dwight had been able to
carve out a respectable position with several leading brands. Regardless, the firm was not a
major market force and needed to evaluate its portfolio of 80 different consumer brands.
Consumer Products
Prior to its acquisition spree, the company’s growth strategy had been based on finding new uses
for sodium bicarbonate. Using an overall family branding strategy to penetrate the consumer
products market in the United States and Canada, Church & Dwight introduced additional
products displaying the ARM & HAMMER logo. This logoed footprint remained significant as
the ARM & HAMMER brand controlled a commanding 85% of the baking soda market. By
capitalizing on its easily recognizable brand name, logo and established marketing channels,
Church & Dwight moved into such related products as laundry detergent, carpet cleaners and
deodorizers, air deodorizers, toothpaste, and deodorant/antiperspirants. This strategy worked
well, allowing the company to promote multiple products using only one brand name, but it
limited growth opportunities “… in highly competitive consumer product markets, in which cost
efficiency, new product offering and innovation are critical to success.”
From the company’s founding until 1970, it produced and sold only two consumer
products: ARM & HAMMER Baking Soda and a laundry product marketed under the name
Super Washing Soda. In 1970, under Minton, Church & Dwight began testing the consumer
products market by introducing a phosphate-free, powdered laundry detergent. Several other
products, including a liquid laundry detergent, fabric softener sheets, an all-fabric bleach, tooth
powder 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 niche
markets to avoid a head-on attack from competitors with more financial resources and marketing
clout limited growth opportunities.
So, in the late 1990s, the company departed from its previous strategy of developing new
product offerings in-house and bought several established consumer brands such as BRILLO,
PARSONS Ammonia, CAMEO Aluminum & Stainless Steel Cleaner, RAIN DROPS water
softener, SNO BOWL toilet bowl cleaner, and TOSS ‘N SOFT dryer sheets from one of its
competitors, the Dial Corporation. An even broader consumer product assortment including
TROJAN, NAIR, and FIRST RESPONSE was added to the company’s mix of offerings with the
acquisition of the consumer products business of Carter-Wallace in partnership with the private
equity group, Armkel. The list of well-known brands was further enhanced with the acquisition
of Crest’s SPINBRUSH, Coty’s line of ORAJEL products, and OXICLEAN, as well as other
brands from Orange Glow International. In fact, acquisitions have been so important that seven
of the company’s eight brands are the result of these moves. The company has achieved
significant success in the consumer products arena.
Church & Dwight faced the same dilemma as other competitors in mature domestic and
international markets for consumer products. New consumer products had to muscle their way
into markets by taking market share from larger competitors’ current offerings. With the majority
of company sales concentrated in the United States and Canada where sales were funneled
through 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-cost
strategy. In the international arena where growth was more product driven and less marketing
sensitive, the company was less experienced. To compensate for this weakness, Church &
Dwight relied on acquisitions and management changes to improve its international footprint and
reach.
With its new stable of products and expanded laundry detergent offerings, Church &
Dwight found itself competing head-on with both domestic and international consumer product
giants such as Clorox, Colgate-Palmolive, Procter & Gamble, and Unilever. The breadth of its
expanded consumer product offerings composed of 60% premium and 40% value band names.
According to Minton, as the company grew, “We have made every effort to keep costs
under control and manage frugally.” A good example of this approach to doing business can be
seen in the Armkel partnership. “Armkel borrowed money on a non-recourse basis so a failure
would have no impact on Church & Dwight, taking any risk away from shareholders.” As
mentioned previously, the remaining interest in Armkel was purchased in 2005. This important
move cleared the way to increase marketing efforts behind TROJAN, a brand which controlled
71% of the market.
As more and more products were added to the consumer line-up, Church & Dwight
brought many of its marketing tasks in-house as well as stepping out with groundbreaking and
often controversial marketing campaigns. The first major in-house marketing project was in
dental care. Although it entered a crowded field of specialty dental products, Church & Dwight
rode the rest of increasing interest by both dentists and hygienists in baking soda for maintaining
dental health; enabling it to sneak up on the industry giants. The company moved rapidly from
the position of a niche player in the toothpaste market to that of a major competitor.
In a groundbreaking marketing campaign that some considered controversial, the
company aired commercials for condoms on prime-time television. “Church & Dwight
executives said their new campaign was designed to shake people up, particularly those who
don’t think they need to use condoms. Attempts were made to shock them out of complacency
and grab their attention.” Other campaigns, such as when the Trojan brand advertised its own
stimulus package at the same time as the federal stimulus package was enacted, stated, “because
we believe we should ride out these hard times together.” A Valentine’s Day ad featuring
condoms in place of candy in a heart-shaped box of chocolates continued to highlight the shock
theme.
The company’s increasing marketing strength caught the attention of potential partners as
is evidenced by its partnership with Quidel Corporation, a provider of point-of-care diagnostic
tests, to meet women’s health and wellness needs. “The partnership combined Church &
Dwight’s strength in the marketing, distribution and sales of consumer products with Quidel’s
strength in the development and manufacture of rapid diagnostic tests.” Other product tie-ins,
especially with ARM & HAMMER Baking Soda, have been created with air filter, paint, and
vacuum cleaner bag brands.
For the most part, Church & Dwight’s acquired products and entries into the consumer
products market have met with success; however, potential marketing problems maybe looming
on the horizon for its ARM & HAMMER line of consumer products. The company could be
falling into the precarious line-extension snare. Placing a well-known brand name on a wide
variety of products could cloud the brand’s image, leading to consumer confusion and loss of
marketing pull. In addition, competition in the company’s core laundry detergent market
continues to heat up as the market matures and sales fall with major retailers such as Wal-Mart
and Target wringing price concessions from all producers. Will the addition of such well-known
brand names as ORAJEL, OXICLEAN, and SPINBRUSH continue the momentum gained from
the XTRA, NAIR, TROJAN, and FIRST RESPONSE additions? Where would new avenues for
consumer products’ growth come from?
Specialty Products
In addition to a large and growing stable of consumer products, Church & Dwight also has a very
solid core of specialty products. The Specialty Products Division basically consists of the
manufacture and sale of sodium bicarbonate for three distinct market segments: specialty
chemicals, animal nutrition products, and specialty cleaners. Manufacturers utilize sodium
bicarbonate performance products as a leavening agent for commercial baked goods; an antacid
in pharmaceuticals; a chemical in kidney dialysis; a carbon dioxide release agent in fire
extinguishers; and an alkaline in swimming pool chemicals, detergents, and various textile and
tanning applications. Animal feed producers use sodium bicarbonate nutritional products
predominantly as a buffer, or antacid, for dairy cattle feeds and make a nutritional supplement
that enhances milk production of dairy cattle. Sodium bicarbonate has also been used as an
additive to poultry feeds to enhance feed efficiency.
“Church & Dwight has long maintained its leadership position in the industry through a
strategy of sodium bicarbonate product differentiation, which hinges on the development of
special grades for specific end users.” Management’s apparent increased focus on consumer
products has only recently impacted the significance of specialty products in the overall
corporate mix of revenues.
Church & Dwight was in an enviable position to profit from its dominant niche in the
sodium bicarbonate products market since it controlled the primary raw material used in its
production. The primary ingredient in sodium bicarbonate is produced from the mineral trona,
which is extracted from the company’s 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 is
completed 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 raw
materials for both its consumer and industrial products. It manufactures almost two-thirds of the
sodium bicarbonate sold in the United States and, until recently, was the only U.S. producer of
ammonium bicarbonate and potassium carbonate. The company has the largest share
(approximately 75%) of the sodium bicarbonate capacity in the United States and is the largest
consumer of baking soda as it fills its own needs for company-produced consumer and industrial
products.
The Specialty Products focused on developing new uses for the company’s 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 widespread
recognition when it was utilized successfully for the delicate task of stripping the fragile copper
skin. It is now being considered for other specialized applications in the transportation and
electronics 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) as
well as many emerging aqueous-based cleaning technologies such as automotive parts cleaning
and circuit board cleaning. Safety-Kleen and Church & Dwight teamed up through a 50-50 joint
venture, ARMAKLEEN, to meet the parts cleaning needs of automotive repair shops. Safety-
Kleen’s 2,800 strong sales and service team markets Church & Dwight’s aqueous-based cleaners
as an environmentally friendly alternative to traditional solvent-based cleaners.
The company’s ARMAKLEEN product is also used for cleaning printed circuit boards. This
nonsolvent-based product may have an enormous potential market because it may be able to
replace chlorofluorocarbon-based cleaning systems. Sodium bicarbonate also has been used to
remove lead from drinking water and, when added to water supplies, coats the inside of pipes
and prevents lead from leaching into the water. This market could grow in significance with
additions to the Clean Water Bill. The search for new uses of sodium bicarbonate from
pharmaceutical to environmental protection continues in both the consumer and industrial
products divisions.
International Operations
Church & Dwight has traditionally enjoyed a great deal of success in North American
markets and is attempting to gain footholds in international markets through acquisitions. The
company’s first major attempt to expand its presence in the international consumer products
market was with the acquisition of DeWitt International Corporation, which manufactured and
marketed personal care products including toothpaste. The DeWitt acquisition not only provided
the company with increased international exposure but also with much-needed toothpaste
production facilities and technology; however, until the 2001 acquisition of the Carter-Wallace
line of products, only about 10% of sales were outside the United States. By 2009, 19% of
revenue was derived from sales outside the United States. Most of the growth in international
markets was being fueled by consumer products.
As the company cautiously moved into the international arena of consumer products, it
also continued to pursue expansion of its specialty products into international markets. Attempts
to enter international markets have met with limited success, probably for two reasons: (1) lack
of name recognition and (2) transportation costs. Although ARM & HAMMER was one of the
most recognized brand names in the United States (in the top 10), it did not enjoy the same name
recognition elsewhere. In addition, on an historic basis, international transportation costs were at
least four times as much as domestic transportation costs; however, export opportunities
continued to present themselves as 10% of all U.S. production of sodium bicarbonate was
exported. 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 in
Asia. Although demand was particularly strong in Asia, “… little of the chemical produced in
North America and Europe is exported to Asia because of prohibitive transportation costs.” Two
significant projects were completed in 2009. One was the completion and start-up of a major new
manufacturing 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 laundry
detergent, the company consolidated into one facility the functions that had previously been
completed in five separate facilities with room to grow. This move took place in an industry
facing slowing growth. Global laundry detergent sales had grown by 8% between 2003 and
2008, but were only forecast to grow by 3% between 2008 and 2013.
