Final Report
Clorox: Life isn't a matter of milestones, but of moments.
The Clorox Company Narrative
The Clorox Company’s first guiding principle is “do the right thing,” and it is not just lipservice. From their namesake bleach to Glad bags to Hidden Valley dressing to Burt’s
Bees lip balm, Clorox is a multinational manufacturer and marketer of a variety of
products that “make everyday life better, every day” with 8,800 employees.
Clorox maintains a careful blend between being a customer intimate company and
a product leader, articulated in their signature IGNITE strategy vision to be
“exceptional innovators who earn people’s enduring loyalty.”
As a product leader, more than 80% of Clorox’s sales are generated from brands that hold
the No. 1 or No. 2 market share positions in their categories and the company has
demonstrated steady, significant investments in R&D. As a customer intimate company,
Clorox has taken strong strides in social issues their constituents are passionate about,
whether it be ending animal testing globally, maintaining 100% renewable electricity and
reducing 50% of the virgin plastic and fiber in their packaging by 2030.
The Clorox Company has seen great financial success in response to the pandemic,
particularly regarding their cleaning supplies. Clorox’s bleach sales alone increased by
32% and they increased production of their cleaning products by 50% to reach rising
demand, in response to COVID-19. Cash from sales is up 684.68% and working capital is
up 545.93% compared to results from 2019, most likely due to increased demand for
cleaning products (see in Appendix 1). This cash has been poured back into production,
where Clorox has onboarded 10 new suppliers to optimize the supply chain and
continues to invest in state-of-the-art manufacturing facilities to meet the ever growing
demand.
Clorox’s Glassdoor reviews speak to how it is “a company that cares.” Reviewers often
speak about appreciating their emphasis on work-life balance and demonstration of
gratitude during the stressful pandemic. Additionally, Clorox is often recognized for their
stellar work as a recipient of the 2020 Axios Harris Poll 100 reputation rankings, Barron’s
2020 100 Most Sustainable Companies list, and the Human Rights Campaign’s 2020
Corporate Equality Index. Looking at their job postings, potential employees must be
agile, proactive, collaborative, compassionate and bring deep expertise to the table to
succeed at Clorox. The cover art for their latest Annual Report caught our eye, as it
illustrated a can of Clorox disinfecting wipes with quotes from company stakeholders
about how Clorox supported them through such an unpredictable time. Clearly, ‘doing
the right thing’ and taking corporate social responsibility seriously is important at
Clorox.
Clorox's Leader DNA
Most surprisingly, many C-suite executives at Clorox have spent around 20 years and
more with the company. The Clorox executives’ long tenure told us that Clorox’s senior
management have a deep relationship with the company and its value, culture and
social conscience, maybe more than the bottom line. All executives have excellent
educational backgrounds, have held countless leadership positions within Clorox and at
peer institutions and lead extensive individual philanthropic efforts.
During her nearly 17 years at Clorox, new CEO Linda Rendle, a Harvard graduate and the
first woman to run Clorox, has held numerous positions at Clorox such as president,
executive vice president in Cleaning, International, strategy and operations and senior
vice president in Cleaning. As one of the youngest CEOs to run a Fortune 500 company,
CEO Rendle has focused the company’s efforts on ramping up production to meet the
immense 500% increase in demand for cleaning products as a result of the pandemic.
Rendle’s media coverage has celebrated her ascent through the company, having been
responsible for the ambitious broadening of the Green Works earth-friendly product
line, the decision to pull advertising from Facebook, and marketing initiatives that
revitalized the slow sales in Kingsford coal and Glad trash bags. Rendle was also recently
profiled for Fortune’s 2020 Most Powerful Women International list.
Clorox’s CFO Kevin Jacobsen has been with the company for 25 years, where he has
served as vice president of Financial Planning and Analysis, vice president of Finance,
Business Development and International, vice president of Finance, Specialty Division
and many other positions. During Clorox’s latest earnings call, CFO Jacobsen was
transparent about Clorox’s success and the myriad of factors that inform Clorox’s
financial predictions and safety nets for the fourth quarter, concluding that “Clorox is
well positioned to manage through an economic recession while capitalizing on
changing consumer behaviors as a result of this health crisis.” With a deep familiarity in
Clorox’s successful financial practices and habits and a revenue growth mindset for the
future, CFO Jacobsen is rightly trusted with handling Clorox’s financial future.
Clorox in Action
In this section, we are going to walk through how Clorox has responded to the
pandemic, beginning with important historical context in terms of previous acquisitions.
We will explore Clorox’s balance sheet, profitability and current blind spots as well.
Acquisition Nutranext: Stepping foot into the wellness industry
On April 2, 2018, Clorox acquired Nutranext, a dietary supplements company based in
Florida. Nutranext manufactures and markets leading dietary supplement brands in the
retail and e-commerce channels as well as in its direct-to-consumer business. The
purchase of the business reflects Clorox’s strategy to acquire leading brands in fast
growing categories with attractive gross margins. The Nutranext acquisition brings
customer relationships, production lines, retail, and e-commerce channels into Clorox. It
also helps Clorox better construct its health and wellness segment which represents
about 4% of the total company sales in FY 20.
Upgrade supply chain: catching up on operational excellence in pandemic.
Clorox invested in a new supply chain planning platform called “state-of-the-art
manufacturing facility in Georgia” which offers real-time visibility into supply chain
operating conditions and global inventory. This new system also manages a 5 million
inventory reduction in fiscal year 2020. This upgrade demonstrates Clorox has long
committed to renew and build a better supply chain system to achieve operational
excellence.
And their effort has paid-off. Clorox managed to remain a stable supply chain and very
few disruptions related to the COVID. They also managed to bring on more than 10 new
suppliers to meet the supply shortage in a short term.
Investment in Innovation: benefit the steady growth in pandemic
Clorox’s main sales growth came from the cleaning segment, which includes
disinfectants products. They are the cash cow of Clorox in the pandemic. However, other
brands of the group are not holding back. Sales of household products grew by 17%,
mainly due to the popularity of the new Glas ForceFlex garbage bags. Grilling sales also
went up by double digits, supported by the new Kingsford strategy. These innovative
products are the stars of the company and contribute to the company's steady growth
in pandemic. Clorox spent 8% on research and development in FY20, an increase of 6.6%
compared to the previous year. Although being a customer intimate company, the high
percentage on research and development shows them pursuing a product leadership
goal and concentrating on high craftsmanship. CEO Linda Rendle expressed Clorox’s
concern with keeping their innovative momentum going during the latest earnings call,
"Where do we go from here, and how do we leverage what is an opportunity to serve so
many people around the world, not just with our disinfecting products but with our
broad portfolio?"
Strong Financial Management
As of June 2020, Clorox had far more cash, not just as a
percentage of current assets but also in general.
This increase is due to the huge boom in demand, almost five times 2019s regular levels,
for Clorox cleaning products as a response to COVID-19. Again, Clorox’s bleach sales alone
increased by 32%, as a response to COVID-19. Additionally, Clorox maintained far less
inventory as they increased production of their cleaning products by 50% to reach rising
demand. Their receivables and prepaid expenses have not truly changed very much and
make up less of their current assets due to the immense increase in cash. Their boom in
cash is indicative of how their products are considered high-quality, and thus builds upon
their value proposition as a product leader
Here, we can see that Clorox has had to change
how they finance their operations in order to meet
the immense demand for their cleaning products.
Their accounts payables now make up 93.72% of
their current liabilities, as a result of drastically
increasing production and requiring more material
from their suppliers, while their notes and loans
payable have been completely paid off. Clorox has
a negative cash conversion cycle of -35 days, which
means that Clorox has developed a very intimate
rapport with their vendors, being able to negotiate
more credit and longer terms to pay the invoices.
Clorox has also introduced operating lease liabilities, as they require more factories to
increase production but do not want to own such factories as the future is unpredictable.
The gross profit margin increased from 43.9% in 2019 to 45.57% in 2020, while the net
margin for Clorox keeps steady between 13%-14%. The steady margin figures have shown
that Clorox enjoys a steady business structure without major adjustments except for
slightly increasing administrative expenses due to Covid-19. Overall, during the
pandemic, Clorox is not greatly affected by the negative impacts but benefited as we see
a rising figure (14.51% increase) in net earnings. With a current ratio at 1.42, Clorox’s
balance sheet shows an efficiency to pay its obligation within the due date. Clorox’s
current ratio ranged average in the consumer packaged goods industry. Seen from the
long-term, Clorox's debt financing structure is primarily made up of accounts payable,
mostly obligations to suppliers, and long-term debt.
Earnings Call
The Covid-19 caught many companies unprepared, same as Clorox. However, just as the
core value of Clorox says, Do the Right Things, Clorox supplies the core necessities to the
public during this ongoing pandemic. In the earnings call, Clorox also noticed their
increased responsibility as an essential business since the customers are counting on
their disinfecting products to survive in this panic situation.
Kevin Jacobsen, the CFO of the company, was proud to indicate that Clorox was
privileged to supply its disinfecting products that supported public health that benefit
the day-to-day lives of people, thus creating great social values. The mounting demand
for disinfecting products has been an opportunity for Clorox to accelerate its sales. It was
also reflected in the earnings calls that for the whole company, the sales has been up for
22%, and the executive team showed a very confident attitude towards Clorox’s 2020 Q4
and overall performance.
During the earnings call, the executive announced that they are planning to increase
expenses in the marketing section which we thought would be a bold move during the
pandemic. One of the analysts asked about our concerns, questioning if the increase in
marketing expenses is necessary. Nevertheless, then CEO Benno Dorer answered
confidently that the investment would be profitable in terms of helping the long term
operation of the company and now is the right time.
Where are the blind spots and missteps?
Can Clorox do better in the epidemic? The answer is “Yes”. Despite the company's
excellent sales growth and strong financial performance in the epidemic, we found some
issues that the company could have done better.
Firstly, the supply shortage.
Supply shortages have been a thorny issue for Clorox since the pandemic outbreak. The
company claims to have taken various steps to increase capacity, including bringing in
more than 10 new suppliers and using co-packers to increase production. But in Q4,
demand still far exceeded supply. The shortage of stock continued. How did this happen?
Former CEO Benno Dole admitted that this was because they
“failed to properly estimate the demand for the fourth quarter
in the face of this ongoing epidemic”.
The supply shortage will not only affect sales in the short term but also have some
other long-term impacts. As he said, “customers are counting on all our products”. If
Clorox could not meet consumer demand, they would have to buy other brands. The
shortage of stock led to a decrease in consumer preference and loyalty.
Some alternative products, such as the spay just launched by P&G, may also take the
market share of household disinfectants from Clorox.
Secondly, too much cash.
Due to the unprecedented increase in sales, Clorox has generated a significantly large
amount of cash. Cash from sales is up 684.68% compared to results from 2019 (appendix
table 1), most likely as a result of increased sales of its cleaning products.
This large amount of cash indicates liquidity and a good financial position in the
company. However, we wonder whether Clorox has taken good use of this cash.
According to the CFO Kevin Jacobsen, the majority of cash is now invested in capacity
expansion. The problem is when pandemic eventually passes and demand drops, the
overcapacity may be a burden. Moreover, when demand beyond the pandemic is
difficult to predict, we question whether Clorox's has increased investment in other
projects within R&D or an international expansion will create long-term value in the postpandemic era.
Looking to the Future
“Positive” Future vs “Negative” Needs: Outlook for future
As evidenced in the insatiable wipe demand, consumers will stick to Clorox as a solution
to combat the spread of the coronavirus. But competitors like P&G and Reckitt Benckiser
also catch up with the trend, pushing brands attached with “99.9% kill virus” labels. P&G
also reported an increase in revenue with more marketing input though the total SG & A
expense was cut. To increase its competitiveness, Clorox raised its proportion in R&D and
marketing investment. The recent report in Qingdao, China, confirmed the theoretical
possibility of spread through virus-positive objects, which may give another boost to
Clorox’s multi-surface products.
Clorox should react by enhancing its efficiency in managing variable and
fixed costs; focusing on omnichannel including e-commerce will be of great
importance for the purchase journey.
However, in the late or post Covid-negative times, do we still need it? Not necessarily. The
trend in stocking grocery and other supplies is declining (though still high) as the
situation is witnessing positive changes.
We see that Clorox tried to avoid overwhelming future capacity in their rising adoption of
operating leasing liabilities instead of fixed assets, but should prepare for change as the
future beyond the pandemic is still uncertain.With the -35 cash conversion cycle, we
believe in its ability to pay back its short-term liability with its booming revenue.
External Push vs Internal Dynamic: Rejuvenation via sustainability
Clorox had “anemic” growth and received negative comments because of the price rise
in 2019 (Warba, 2020). Its success in 2020 is more of a stroke of luck because it is the
pandemic that pushed and made Clorox product a daily necessity, not Clorox. Still, the
company should seize this chance to reinforce its value proposition of product
leadership and customer intimacy to thrive over time.
Consumers mainly have a passive loyalty relationship with Clorox, and a simple yet
strong marketing strategy like “Help Prevent the Spread of Coronavirus” on the
homepage is what Clorox should continue in the long run. We think building an
emotional relationship by sending Clorox products to people or communities that
cannot afford or have no access to Clorox products could be an effective method to bring
active consumers, a tradeoff of capital using for a long-term benefit. In the executive
process, Clorox has reduced decision time from 22 weeks to 14 weeks in recent years, and
we estimate that with new energy brought by CEO Linda Rendle, this figure will grow
smaller and be a strategy to confront the Covid situation. Focusing on ESG in future
planning will help Clorox gain more social recognition. The awareness of natural, earthfriendly ingredients instead of chemical products is likely to come back in one or two
years after the pandemic, so Clorox’s decision to promote natural and environmentally
friendly actions will bring a positive effect to Clorox’s future.
Developing Depth vs Building Breadth: New influence on the market
Clorox is focusing deeper into technology and innovation to strengthen consumer
relationships. Clorox has created Beta Device that can detect fevers, coughs, and sneezes
in classrooms to allow its product to be “active” in consumers’ lives instead of “passive”
packaged products, and it may bring more lifetime value. On the other hand, it is also a
step to create a strong brand ecosystem within Clorox, which could be one direction for
future development.
This input may bring a higher ROI because it reveals Clorox’s ambition to the hygiene
technology field, where hygiene service could provide future revenue.
Cross-industry cooperation during the pandemic is an effective way to expand the
market and brand awareness. Clorox cooperated with United Airlines, and Uber, to
establish the United CleanPlus and Uber + Clorox programs for better hygiene
conditions, which improved Clorox’s professionalism in hygiene control, brought more
exposure, and generated trust from the consumers. For a better influence on the market,
we also think that Clorox could borrow Freshippo’s “employee sharing” case as a part of
their social responsibility initiatives during the crisis and, in the meantime, could help to
solve some insufficient capacity problem.
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Appendix
Table 1: Clorox sees an increase in cash in FY20 compared to that in FY19.
Table 2: Clorox enjoys a steady net margin