MKTG 6010
Colgate-Palmolive Company: The Precision Toothbrush
Anthony Garver
Issue: In 1992, Colgate-Palmolive (CP) faced a dilemma regarding the release and positioning of a new technologically advanced toothbrush – the Precision. Susan Steinberg, Precision product manager, was weighing the option of introducing the new toothbrush to a niche market or to a mainstream market. Both options had potential benefits and challenges. Until 1991, the toothbrush category consisted of two segments: value and professional. Prior to 1990, industry growth rates for the toothbrush category were in the single digits. That changed in 1992 when 47 new products/line extensions were released. Their introduction led to 21% growth in value and 18% growth in volume for the industry. Several factors influenced that growth, but the primary driver was the introduction of the super-premium sub-category of toothbrushes. Exhibit 1 shows the amazing impact of the super-premium toothbrush on the market where unit volume is second to the professional segment and unit sales exceed both professional and value segments. Prior to 1992, CP offered the Colgate Classic to the value segment and the Colgate Plus to the professional segment. Market share and volume for the Classic was decreasing and market share and volume for the Plus had marginal growth (Exhibit 2). In 1991 CP controlled 16% of the toothbrush market and toothbrushes represented 19% of CP’s overall Oral Care Division sales. In 1991, CP was the market leader with 23% of all retail toothbrush sales. Toothbrush selection for consumers was as important as toothpaste selection when it came to oral care. Exhibit 3 details consumer reasons for toothbrush use. The Precision toothbrush was a technological innovation with a design that increased plaque removal by 35% compared with other brands. In consumer concept testing plaque removal & preventing gum disease, together, ranked as the most important attribute in the purchase decision by prospective consumers (Exhibit 4). Recommendation: CP should pursue the mainstream positioning strategy for the Precision. Pro forma income statement analysis supports the decision as does the cannibalization analysis. Further supporting this recommendation, pursuing a mainstream strategy takes advantage of the rapid growth in the retail outlets (mass merchandisers & club stores) that would purchase this new product. Analysis of the Pro forma income statements shows the mainstream positioning strategy will lose almost $6.7MM in year one, but earn $16MM in year two (Exhibit 5). A niche strategy loses less money in year one ($1.4MM) and makes $7.4MM in year two. Further, the mainstream strategy net income increases 142% year one to year two. With a niche strategy the net income increases 119%. Pro forma analysis indicates supporting a mainstream strategy. The risk of cannibalization was analyzed in Exhibit 6. Two estimates were given for lost sales of the Plus: best case 35% loss and worst case 60% loss. In the worst case scenario, neither strategy leads to a profit. In the best case scenario, a niche strategy generates a profit in year one while a mainstream strategy generates a loss. In year two, however, the mainstream strategy generates significantly more net profit than the niche strategy generates. Cannibalization analysis indicates supporting a mainstream strategy. Lastly, Exhibit 7 shows the impressive growth of the non-food and non-drug outlets. Mass merchandisers and club stores have had impressive growth from 1989-1991 and they will generate a tremendous market for the Precision in a mainstream strategy. Exhibit 8 shows the stark differences in growth for the various markets. Analysis of the market for Precision indicates supporting a mainstream strategy. Two other factors should be addressed by CP. First, reduce the overall number of SKU’s carried. Exhibit 5 from the case shows Colgate has significantly more SKU’s than their competition. Colgate should evaluate their lowest performers and eliminate them. Second, it’s unacceptable that CP took 3 years to develop this toothbrush. CP should evaluate its R&D process and implement efficiencies designed to speed their rate of innovation.
Exhibit 1 Unit Volume 24%
35%
Dollar Sales
Professional
41%
12%
Super-premium Value
Source: Colgate-Palmolive Company: The Precision Toothbrush – Product Segments
46% 42%
Super Premium Professional Value
Exhibit 2 Market Share - Volume 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0
Market Share - Value 20.0 15.0 10.0 5.0
1989
1990 Plus
1991
1992E
0.0
1989
Classic
Source: CP Case Exhibit 6 - Principal Toothbrush Brand Product Unit & Dollar Market Shares: 1989-1992E
1990 Plus
1991 Classic
1992E
Exhibit 3 Reasons for Use Other 5%
Therapeutic Use 41%
Indifferent Users 33%
Cosmentic Use 21% Source: Colgate-Palmolive Company: The Precision Toothbrush – Table B
Exhibit 4 Concept Test 2
Probably Would Buy Definitely Would Buy
35% More Plaque Removal & 35% More Plaque Prevent Gum Removal Disease 80.0% 71.0% 19.0% 19.0%
Source: Colgate-Palmolive Company: The Precision Toothbrush – Break-out of Exhibit 17
Prevent Gum Disease
Feel the Difference
74.0% 18.0%
68.0% 14.0%
Exhibit 5 Niche Positioning Pro Forma
Revenue COGS Gross Profit (Loss)
Year 1 $18,706,800 $8,606,400 $10,100,400
Year 2 $32,766,000 $13,200,000 $19,566,000
Mainstream Positioning Pro Forma
Revenue COGS Gross Profit (Loss)
Year 1 $53,744,000 $26,752,000 $26,992,000
Year 2 $84,192,000 $37,824,000 $46,368,000
$32,800,000 $886,667 $33,686,667
$29,000,000 $1,270,000 $30,270,000
($6,694,667)
$16,098,000
Expenses Advertising Depreciation Total Expenses
$11,200,000 $316,667 $11,516,667
$11,700,000 $450,000 $12,150,000
Expenses Advertising Depreciation Total Expenses
Net Income
($1,416,267)
$7,416,000
Net Income
*Investment in capcity and additional capacity were not recognized as income statement items because our interpritation is that they are assets and therefore should be recognized on the balance sheet and on the statement of cash flows. Source: Colgate-Palmolive Company: The Precision Toothbrush – Table D & E
*Investment in capcity and additional capacity were not recognized as income statement items because our interpritation is that they are assets and therefore should be recognized on the balance sheet and on the statement of cash flows.
Exhibit 6 Plus Sales (79%) Classic Sales (21%) Precision Sales Total Revenue:
Mainstream Positioning Best Case 35% Worst Case 60% No Cannibalization Year 1 Year 2 Year 1 Year 2 Year 1 Year 2 $92,146 $117,233 $59,895 $76,201 $46,893 $23,958 $24,406 $31,051 $15,864 $20,183 $12,420 $6,346 $53,744 $84,192 $53,744 $84,192 $53,744 $84,192 $170,296 $232,475 $129,503 $180,576 $113,057 $114,496
Plus COGS $43,155 Classic COGS $11,430 Precision COGS $26,752 Total COGS: $81,338
Plus Sales (86%) Classic Sales (14%) Precision Sales Total Revenue:
No Cannibalization Year 1 Year 2 $92,146 $117,233 $24,406 $31,051 $18,707 $32,766 $135,259 $181,049
Niche Positioning Best Case 35% Worst Case 60% Year 1 Year 2 Year 1 Year 2 $59,895 $76,201 $36,858 $46,893 $15,864 $20,183 $9,762 $12,420 $18,707 $32,766 $18,707 $32,766 $94,466 $129,150 $65,328 $92,079
$52,528 $13,913 $37,824 $104,265
$28,051 $7,430 $26,752 $62,233
$34,143 $9,043 $37,824 $81,011
$21,011 $5,565 $26,752 $53,328
$11,220 $2,972 $37,824 $52,016
Plus COGS Classic COGS Precision COGS Total COGS:
$43,155 $11,430 $8,606 $63,192
$52,528 $13,913 $13,200 $79,641
$28,051 $7,430 $8,606 $44,087
$34,143 $9,043 $13,200 $56,387
$17,262 $4,572 $8,606 $30,441
$21,011 $5,565 $13,200 $39,776
$88,958
$128,210
$67,270
$99,565
$59,729
$62,479
Gross Profit (Loss)
$72,067
$101,408
$50,378
$72,763
$34,887
$52,303
Fixed Overhead $15,933 Media $13,530 Consumer Promos $7,914 Trade Promos $9,613 Precision Advertising $32,800 Precision Depreciation $887 Total Fixed Costs: $80,677
$22,223 $19,025 $8,976 $12,392 $29,000 $1,270 $92,885
$15,933 $13,530 $7,914 $9,613 $32,800 $887 $80,677
$22,223 $19,025 $8,976 $12,392 $29,000 $1,270 $92,885
$15,933 $13,530 $7,914 $9,613 $32,800 $887 $80,677
$22,223 $19,025 $8,976 $12,392 $29,000 $1,270 $92,885
Fixed Overhead $15,933 Media $13,530 Consumer Promos $7,914 Trade Promos $9,613 Precision Advertising $11,200 Precision Depreciation $317 Total Fixed Costs: $58,507
$22,223 $19,025 $8,976 $12,392 $11,700 $450 $74,765
$15,933 $13,530 $7,914 $9,613 $11,200 $317 $58,507
$22,223 $19,025 $8,976 $12,392 $11,700 $450 $74,765
$15,933 $13,530 $7,914 $9,613 $11,200 $317 $58,507
$22,223 $19,025 $8,976 $12,392 $11,700 $450 $74,765
$35,325
($13,407)
Gross Profit (Loss)
Net Profit (Loss):
$8,281
$6,680
*Assumes share value remains constant Yr. 1 to Yr.2
Source: Colgate-Palmolive Company: The Precision Toothbrush
($20,948) ($30,406)
Net Profit (Loss):
$13,560
$26,643
($8,128)
($2,002)
*Assumes share value remains constant Yr. 1 to Yr.2
($23,620) ($22,462)
Exhibit 7 70%
Volume Growth
100% 90%
60%
80%
50%
70% 60%
40% 30%
Food & Drug Total
50%
Food & Drug Total
All Others Total
40%
All Others Total
30%
20%
20%
10% 0%
Dollar Growth
10% 0%
% Growth
% Growth
Source: Colgate-Palmolive Company: The Precision Toothbrush
Exhibit 8 400%
UNIT GROWTH (MM)
350%
400%
SALES GROWTH (MM)
350%
300%
Club Stores
300%
Club Stores
250%
Mass Merch.
250%
Mass Merch.
200%
Military
200%
Food Stores
Food Stores
150%
Drug Stores
100%
Other
50% 0%
% Growth
Source: Colgate-Palmolive Company: The Precision Toothbrush
Drug Stores
150%
Military
100%
Other
50% 0%
% Growth
