How the Economic Crisis in Venezuela Affects One of the Strongest Corporations in the World
Colgate is glorified as the toothpaste supplier for more than half of the world’s households. Yet the multi-billion dollar company shocked the world when it recently announced lagging sales in Venezuelan markets.
Colgate, owned by its parent company Colgate-Palmolive Co., is a New York based corporation that generated sales of over $15 billion in 2017.
With presence in 222 countries, it is the only company in the world to sell its products to more than half of the world’s households (roughly 68 percent).
It is also the largest consumer product corporation in the world to garner the most amount of households in the top 10 percent income bracket, accounting for $6.4 million of its sales.
In Venezuela, Colgate-Palmolive Co. owns over 90 percent of the toothpaste market, but also sells other household and hygiene products such as laundry detergents, dishwasher liquid and soap.
How could one of the strongest, most established companies in the world tussle to survive in Venezuela?
Once a nation bountiful in oil with steady revenue, overexploitation, corruption and poor government management have caused the nation to lose half of its economy (since 2013).
Currently, this pauper state is experiencing a 30 percent unemployment rate (compared to 25 percent during the Great Depression in the U.S.), food scarcity, crime, decreased productivity, a worthless currency, and one of the worst rates of hyperinflation in the world.
When a country experiences such severe hyperinflation, companies must consistently update their prices to a higher level to keep up with the current prices and the local currency purchasing power.
When inflation in Venezuela hit 85 percent in December, Colgate-Palmolive Co., along with countless other firms, was left with no other option than to raise its prices in order to survive and keep up with the price level.
As wages have been unable to keep up with the country’s expected 13,000 percent inflation rate, consumers struggle to purchase even the most basic staple items such as bread.
When Colgate-Palmolive Co. raised the price of its laundry detergent Vel Rosa, it faced immediate backlash from the government demanding a nearly 90 percent price cut.
According to union leaders and employees of the price control agency Sundde, Colgate -Palmolive Co. was ordered to decrease the price of a one-liter container of Vel Rosa detergent from the equivalent of $1.40 to $0.16.
As a result, Colgate-Palmolive Co, like many other firms that conduct business in Venezuela, responded by shutting down its production plant in February 2018.
The multibillion-dollar corporation wrote in a letter that business would be unprofitable on the terms demanded by Maduro’s government and Sundde. Ultimately, the corporation resumed operations after negotiating a new price and size of the detergent.
The severity of Venezuela economic toll on Colgate-Palmolive Co is rampant through its balance sheet. The net sales from this tropical continent decreased 10.5 percent in the fourth quarter of 2016, with the impact of the deconsilation of the company’s Venezuelan operations accounting for 9 percent of the overall percentage.
Usually, profit earned in Latin America account for 24 percent of the company’s total sales (beating the U.S. at 21 percent, Europe at 16 percent, and Asia Pacific at 18 percent).
Conflicts arising from the government’s push for products being sold below production level have been experienced by other global corporations as well.
Nestle, a market-dominating transnational Swiss food and drink company who closed off 2017 with 89.8 billion Swiss francs in sales, surprised investors and consumers worldwide by announcing its plans to close a food plant located in Venezuela.
This plant, like numerous other plants, stopped operating due to a lack of raw materials. Nestle simply cannot afford to import the raw materials when government regulations orders the corporation to sell its products for a quarter of the normal price.
Venezuela’s lack of food products can thus be explained, in part, due to companies like Nestle no longer being able to operate in the country.
The Venezuelan market is left with a spiraling cycle: consumers are unable to purchase necessities due to skyrocketing inflation, the government attempts to lower the price of food, food companies operate on negative profit and stop operation in the country, which leads to more complications for consumers.
Meanwhile, on the producer side, companies are unable to find important inputs to their production of goods due to the collapsed economy.
One month after General Motors announced its halt on car production in the aching nation, Pirelli, a Milan-based tire producer also added itself to the ever-growing list of firms pulling out after 26 years of business in the country.
Similar to Colgate-Palmolive Co and Nestle, Pirelli’s exit from the market was also due to a lack of raw materials.
In the World Bank’s 2016 Doing Business report, Venezuela ranked fourth in the list of the world’s worst countries to run a business in. With South Sudan (experiencing a civil war), Libya (experiencing a civil war), and Eritrea (military dictatorship) occupying the first three spots on the ranking, Venezuela has scored worse than even Syria.