Once the tooth fairy claims your baby teeth you've only got one set left for the rest of your life, so it's in your best interests to protect them. But, relax; I have no intention of criticizing your oral hygiene habits (even if I did work in a dental lab once upon a time).
Instead, I'm here to point out what a monstrous market the toothpaste business has become. According to Statista, in 2011 U.S. toothpaste sales totaled just shy of $1.6 billion. That may not sound like a lot, but considering that most toothpaste tubes cost just a few dollars and can last for months, it's quite a large figure.
But, have you ever stopped to consider which toothpaste is America's favorite? If you've walked down the toothpaste aisle in the grocery store you've probably noticed that it goes on forever, which can make choosing a toothpaste a chore. Well, here's a big hint toward the answer: America's favorite toothpaste comes down to either Colgate, which is made by Colgate-Palmolive (NYSE:CL), or Crest made by Procter & Gamble (NYSE:PG).
Both companies are consumer staple giants, so this really should come as no surprise. They both have deep pockets which they can use to advertise their products, and have plenty of cash flow to reinvest in eye-catching packaging as well as research and development aimed at creating the next exciting oral-care product.
Brand loyalty is more important than you realize
However, determining which brand is America's favorite isn't as simple as determining which one sells more toothpaste. As New York-based research firm Brand Keys has discovered, brand loyalty, or how attached consumers become to a brand on an emotional level, can play a key role in determining future sales.
Brand loyalty might not seem particularly important in the toothpaste industry since toothpaste is considered a basic-need good and people are going to buy it regardless of how healthy the U.S economy is. However, both Colgate and Crest are considered premium brands, and are therefore going to be priced higher than a majority of its shelf-space competition. What this means for Colgate and Crest is that they need to drive new customers to try its product without scaring them away based on price, as well as retain existing customers, because these customers, if loyal and attached to the brand, will be more adept to accept price increases. Thus customer loyalty is really where Colgate's and Procter & Gamble's bread and butter margins are located in this space.
America's favorite toothpaste brand is...
Before I reveal which of this two companies America is most loyal to, would you care to venture a guess as to which on you think is the favorite before reading any further?
Got your pick?
If you chose Crest, you've chosen a strong household brand, but only the second-favorite household toothpaste. Truth be told, Colgate is America's favorite toothpaste brand.
"Why Colgate?" you ask? To begin with, Colgate is considerably more of an oral health-focused company from a sales perspective than P&G. Although Colgate-Palmolive generates sales from products like detergents and shampoos, the lion's share of its revenue is derived from oral care products like toothpaste, toothbrushes, and mouthwash. In fact, according to Colgate-Palmolive's second-quarter results, it boasts the leading global market share in toothpaste and toothbrushes at 44.4% and 33.5%, respectively. The company notes that it also is making strides in mouthwash with market share rising 80 basis points to 17.2% from the prior-year period.
Having exceptionally high market share and being the prominent face of an industry often demonstrates to the consumer that a company knows what it's doing. Clearly consumers have placed their faith in Colgate given that the company is so focused on oral care for its ultimate survival.
Secondly, I'd give credit to Colgate's accolades. This isn't to say that P&G is sitting on its laurels by any means. It just means that Colgate-Palmolive has been able to walk step-for-step right along with Crest while also introducing revolutionary new products.
Take, for instance, the labeling of its classic Colgate Total toothpaste, one of the company's core toothpaste products. As the company boldly states on in its press releases, Colgate Total is the "only toothpaste approved by the Food and Drug Administration to prevent gingivitis, as well as by the American Dental Association to fight plaque and gingivitis." To be clear, it's no substitute for a visit to the dentist, but its accolades certainly help boost sales.
Finally, and to add on the aforementioned point, it has a lot to do with innovation. In 2012 Colgate introduced the Optic White regimen which consisted of a whitening toothpaste, a specialized toothbrush, and a mouthwash. Earlier this year it added to this lineup with an Optic White Platinum Whiten & Protect toothpaste claiming more than three shades of whitening power. By focusing on consumers' insecurities (and trust me, teeth are a big insecurity for many people) and giving consumers plenty of easy solutions to those insecurities, Colgate continues to attract a loyal customer base.
But this innovation extends beyond just new products; it's also about how it presents the products to consumers. Colgate-Palmolive's packaging gives consumers a demo to touch and feel what rough enamel and smooth enamel should feel like, further reinforcing the imagery of its brand and coercing consumers to buy.
Keep this in context
Though Colgate remains America's favorite toothpaste, there are two things investors should keep in mind.
First, P&G is coming on strong in the U.S. with innovative products of its own. During its 2013 annual report P&G noted that it had gained U.S. market share in the toothpaste segment for 13 straight quarters. The introduction of newer Optic White products may ebb or stop that trend, but for now Crest is showing some excellent momentum in the U.S.
Secondly, and perhaps most importantly, realize that these are consumer product behemoths that are so much more than just toothpaste. They both have portfolios which are full of brand-name products that fill bathrooms, kitchens, and laundry rooms around the globe. Because they provide basic-needs goods they both possess strong pricing power and pay exceptionally strong dividends. In other words, regardless of which one finishes at No. 1 or No. 2 in toothpaste loyalty, it probably won't amount to too much when the number crunching is finished. I'd suggest that risk-averse investors who are looking for an above-average dividend yield give both companies a look.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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