Gross Margins: The Gas in the TSR Engine

Since it began working with BCG in 2006, US consumer packaged goods company Church & Dwight has consistently delivered TSR at the top of its peer group. How has the company created such sustainable value? By transforming its corporate portfolio, redrawing its financial policies, creating a TSR culture, and engaging with its investors.

In 2006, Church & Dwight was financially healthy and already boasted a strong value creation track record. Yet, after a long period of delivering top-quartile TSR, it was unclear how the company could sustain that type of performance.

Organic growth had slowed significantly, and the company had taken on debt to fund new growth through acquisitions. But as Church & Dwight grew, the number of available acquisition targets that were big enough to impact growth declined.

Working with BCG, Church & Dwight analyzed its business and compared it with other players in the packaged goods sector. The analysis showed that, although revenue growth is an important contributor to TSR, it is not a key driver of differences in valuation multiples in the packaged goods sector.

If Church & Dwight had chosen to maximize its organic revenue growth without paying close attention to the impact of that growth on the company’s gross margins, the result could have been precisely the opposite of what the company intended. Instead of sustaining the company’s multiple, the changes could have weakened it, and the company might have lost more TSR in the decline of its valuation multiple than it gained from the increased revenue growth.

Church & Dwight had been treating gross margins as just one of many factors affecting stock price and TSR. “The key insight was that gross margins are ‘the gas in the engine,’” says CEO Jim Craigie. “They drive everything: revenue, profits, share-price appreciation, our valuation multiple, and TSR.”

Supercharged Value Creation Strategy

With a renewed focus on gross margins, the team created a more comprehensive value creation strategy. It had four key components.

Transform the Portfolio

Redraw Financial Policies

Institutionalize a TSR Culture

Engage Actively with Investors

“Now our investors understand how we plan to [reach our goals]. And then, we deliver on what we promise—top-quartile TSR,” says Craigie. “They understand how we operate the business, and as a result, have bought into our value creation strategy.”

Driven by Results

Church & Dwight continues to refine its value creation strategy as the market and the economy evolve, but so far the results have been exactly what the team hoped for when the project began.