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Hurdles in Clorox’s Growth: Weaknesses and Threats

Penny Morgan - Author
By

Dec. 10 2015, Updated 10:04 a.m. ET

Limited geographic presence

Clorox (CLX) derives most of its revenue from the United States. In fiscal 2015,[1. year ended on June 30, 2015] 81.5% of the company’s net sales were generated in the US market. This is a high dependence on the US market. As a result, price increases, market and category declines, changes to the company’s products, and geographic mix may adversely impact the company’s sales growth objectives. This could, however, serve as an advantage during a difficult macroeconomic environment as the stronger dollar prevails against other currencies.

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Dependence on retailers

Dependence on large-format retailers such as Walmart (WMT), Target (TGT), and Costco (COST), which have greater bargaining strength, can be a weakness for Clorox. Net sales of the company’s largest customers to Walmart and its affiliates were 26% in fiscal 2015.

As a result, changes in the strategies of these retailers to demand higher trade discounts, slotting fees, or reduced shelf space for private labels may lead to reduced sales or profitability for Clorox as well as peers such as Procter & Gamble (PG) and Colgate-Palmolive (CL).

Pricing and competition threat

Clorox faces stiff competition in terms of pricing decisions, product development, and innovation. Advertising and promotional events from Unilever and PG’s home cleaners and a rise in the popularity of store brands pose threats to Clorox.

According to Kantar’s report on Brand Footprint, half the world’s fastest rising brands are local.

Threat of private labels

Apart from competition, Clorox may also face the threat of government intervention regarding production and pricing of products. It may also face a rise in the prices of commodities and the introduction of more private brands in the cleaning products market. This may significantly impact Clorox’s revenue and market share.

Clorox has exposure in the iShares S&P 500 Value ETF (IVE), with ~0.1%[2. updated as of November 17, 2015] of the total weight of the portfolio.

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