With over $14Bn in Sales worldwide, (2014A) Ecolab is the global leader in water, hygiene and energy technologies and services. They are the largest dominant global provider of cleaning, sanitizing and water treatment solutions to 1MM businesses in over 170 countries. Dishwashing chemicals in restaurants? Ecolab. Laundry solutions for clean sheets in hotels? Ecolab. Pest control at schools, soap dispensers in mall bathrooms and even pipe cleaning chemicals for downstream oil companies? You got it. Ecolab provides chemicals and services for all of these and much more. The effects of their far reaching global business are prevalent everywhere in our day-to-day lives and most of us as end consumers do not even realize it. Ecolab has enjoyed top notch and long lasting share price performance since its IPO in 1978. Two major pillars of this success have been a business model that emphasizes tangible value returned to customers and an operational model that supports it. The way these two models align and support one another in the business make Ecolab highly effective, and a definite Winner – both for its customers and investors.
Basically every way you look at it, Ecolab’s financial performance has been a success story. Since its IPO in 1978, Ecolab’s stock has amassed a cumulative return of 8,896%. This translated into an annualized return of 12.5% and trumps the S&P benchmark by a legitimate margin (which had Cumulative Returns of 2,135% and Annualized Returns of 8.4% in this time period). This outperformance has been even more pronounced in recent history as well – as displayed by the charts below:
NYSE: ECL Performance Compared to the S&P 500 Over 1-Year and 10-Year Time Horizons
So this leads to the obvious question, “How has Ecolab been able to achieve this type of enduring success over various periods of time since its public offering?” The answer lies in its business model that focuses on maximizing value for its customers and then the equally important operational model that allows it to do so.
Ecolab’s Business model is divided into 4 main parts: Global Industrial, Global Institutional, Global Energy and Other
Provides water treatment and process applications, and cleaning and sanitizing solutions primarily to large industrial customers. Operating units within the Global Industrial reportable segment include Water, Food & Beverage, Paper and Textile Care
Provides specialized cleaning and sanitizing products to the foodservice, hospitality, lodging, healthcare and retail industries. The Institutional operating unit provides specialized cleaners, sanitizers and equipment for warewashing, on-premise laundries and general food safety and housekeeping functions.
Operating under the Nalco Champion name, serves the process chemical and water treatment needs of the global petroleum and petrochemical industries in both upstream and downstream applications.
Provides pest elimination and kitchen equipment repair and maintenance through the Pest Elimination and Equipment Care operating units
Ecolab’s business model is centered around taking the value created for its customers and transforming that into earnings growth for its investors. A key contributor to the company’s steadily growing earnings (which of course translates to a growing share price) has been its ability to consistently grow sales. It accomplishes this in two ways. Ecolab A) charges their customer 10-20% more than their competitors for similar products and B) increases the prices of their services annually for their customers. In a generally fragmented space this is very hard to do, yet Ecolab is able to successfully do so and simultaneously grow their customer base. The aggressive business model Ecolab executes is only achievable due to the an effective operational model that puts the customer first.
Ecolab’s business model is certainly a wonder in today’s age of highly competitive business environments. To maintain profitability, they charge more than their competitors and they increase this amount on their customers every year. How are they able to achieve this? Ecolab attributes their success in this regard is their “Circle the Customer” approach (which is essentially their operational model). There are a few main keys to their operational model:
Innovation and Product Development Processes
- Has a robust pipeline of innovative products (products introduced within the last 5 years represent over 30% of total sales) and over 6,000 patents
- With over 1,500 employees, they also have one of the largest (if not the largest) research and development departments among competitors
- 120 separate customer service centers that field 11.5MM calls annually
- A network of over 25,000 field associates – all hired with the purpose of aiding customers
Best in Class Service and Delivery Process
- Guaranteed 24 hour / 7 day a week for assistance with all chemicals and equipment
- Complimentary onsite employee training in which customer employees are trained by Ecolab associates and taught on ECL best practices and protocols
- Regular visits to ensure that customers’ needs are being met, and that solutions and systems are delivering superior results. Below is a video that displays Ecolab warewashing training, used to maximize operational efficiency:
The collective result of these initiatives is increased operational efficiency for the customer…
As one can easily see, Ecolab’s operational model places a high emphasis on putting the customer first and being ready for their every need. So, although the company sells its chemicals at a 10%-20% premium to competitors, its innovative products and best-in-class services allow for the total cost of its products (ECL chemicals only make up ~6% of total company warewashing costs for example) to reduce the overall costs to the customer. Thus the customer ends up happily paying the difference!
The Ecolab playbook for success is simple, yet sustainable. They have created an operational model that puts the customer first and creates as much value as possible. After making this value clear to the customer, Ecolab takes advantage of the stickiness of its services to consistently place its products at a premium and gradually escalate these prices over time. This ability to take price as well as grow volumes via a broad and dependable service network allows the business to consistently grow its earnings in a way that the stock market appreciates and will likely continue to do so for the foreseeable future. With the way its business model and operating model seamlessly work together, generating great value for both its customers and shareholders, it’s easy to see how Ecolab is a clear Winner.
Annual Report (http://investor.ecolab.com/~/media/Files/E/Ecolab-IR/Annual%20Reports/2014-annual-report.pdf)