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Morningstar | Clorox Is Not Immune to Intense Competitive Pressures, but Long-Term Edge Still Unwavering

We think Clorox’s ability to consistently generate excess returns for shareholders stems from its adherence to categories and markets where it has an advantage and where larger manufacturers have mostly chosen to refrain from operating. Midsize categories including bleach, charcoal, and trash bags (where the firm has amassed market-leading shares of 60%, 74%, and 30%, respectively) account for nearly 40% of the firm’s sales in combination. And while Clorox faces outsize competition from lower-priced private-label fare, it has distinguished its mix by spending 2%-2.5% on research and development and 9%-10% on advertising, nearly $700 million on average annually in total. When taken together, we think its portfolio of leading brands and the resources it reinvests behind its products entrenches Clorox with physical and e-commerce retailers. Its consistent low- to mid-single-digit sales growth and profit gains are evidence of the success of this strategy, and we doubt the firm will veer from this path.Clorox also has a presence in faster-growing categories, such as natural personal care and health and wellness, which it has historically entered through prudent acquisitions, including its recent tie-up with Nutranext. We expect it to make further inroads into these categories through expanded distribution and new product launches. Management believes it is especially proficient in building distribution in food, drug, and mass market stores, so we anticipate it will pursue targets where it can leverage this advantage. In our view, Clorox’s international footprint (around 16% of sales) provides outsize growth potential; more than half of international sales are in Latin American countries including Chile, Colombia, Peru, Argentina, and Mexico, which stand to benefit from a growing middle class and favorable demographic trends. As with the categories in which it plays, we view Clorox’s bent to participate only in geographies where it has an edge as a plus. That philosophy has kept it from building a sizable presence in many fast-growing regions, such as the BRIC countries, but has resulted in Clorox consistently generating excess returns for shareholders.