What is a cash cow? Definition and meaning
The term cash cow refers to either a profitable product, company division or business that brings in a steady flow of income, or a business venture that generates a stable and healthy return of profits which are considerably greater than the outlay of cash needed to start or acquire it.
The expression refers to the idea that the product, business unit or investment produces ‘milk’, i.e. profit, long after the cost of investment has been recovered.
In the growth-share matrix (BCG-Matrix), which was created by Bruce D. Henderson for the Boston Consulting Group in 1970, cash cow is where a company has high market share in a slow-growing industry.
The cash cow generally generates money in excess of the amount needed to maintain the business.
Companies love cash cows, because of their income-generating qualities. The product can be ‘milked’ continuously with the minimum of investment, because investment would be a waste of money in an industry with low growth.
Cash cow is one of the four rankings for a business, company unit or product (brand) in the BCG-Matrix.
Example of cash cow
Imagine fictitious company ZYX International. has four divisions, one of which makes roof tiles. The roof tile division manufactures and sells 70% of its products in the European Union and USA and has an return on assets (ROA) of 30%.
The tile business, which has been around for a very long time (mature), grows at a rate of about 3% annually. XYZ has a leading market share in the sector.
ZYX’ roof tile division is a cash cow. The market is growing slowly, so little investment is needed, while the high ROA means that profits in the division should be strong. The company does not need to, and really shouldn’t, reinvest in the roof tile division.
A cash cow typically has a large market share in a mature industry. There is no point in spending money in trying to grab more market share. Market share refers to the percentage of the total market your company’s sales represents.
One risk, however, is complacency. Smaller competitors may try to capture greater market share and eat into yours.
Coca-Cola’s fizzy drink Coke is the perfect example of a cash cow, because is generates abnormal profit in a mature market and does not need to grow more.
Cash cow companies
These are slow-growing, mature companies with plenty of cash left over after meeting their necessary annual expenses. They dominate their industries.
Small investors love cash cow companies because they can finance their own growth and value. They can reinvest free cash flow to expand – which boosts stockholder returns – without undermining profitability or coming to shareholders cap-in-hand asking for additional capital.
Cash cow businesses can also return their free cash flow to stockholders through bigger dividends or share buybacks.
These companies’ strong market share, which typically thrive in sectors with competitive barriers to entry, bring in strong revenues every year.
They are also appealing targets for takeovers.
The term in German and Italian is also ‘cash cow’, and is vache à lait in French, vaca de dinero in Spanish, 摇钱树 in Chinese, and ドル箱 in Japanese.
The Cambridge English Dictionaries has two meanings for cash cow:
1: (Finance) “A business, product, or service that makes a large profit, often used to make money to support other business activities.”
2: (Marketing) “A product that has a large share of a market that is growing very little.”
Cash cow may also refer to a company, often a state-run one, that is milked until it is dry, with very little money reinvested. For several decades, the Mexican government drew the income from its state oil & gas company PEMEX without putting much money back into it.
Venezuela’s state run oil industry has also suffered the same fate.
Video – Is your brand a cash cow?
In this video, Jim Glover looks at the Boston Consulting Group’s growth-share matrix and how this influences resource allocations.