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 CPs 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 SKUs carried. Exhibit 5 from the case shows Colgate has significantly more SKUs than their competition. Colgate should evaluate their lowest performers and eliminate them. Second, its 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.

35%

41%

24%

Unit Volume

Super-premium

Professional

Value

46% 42%

12%

Dollar Sales

Super Premium

Professional

Value

Source: Colgate-Palmolive Company: The Precision Toothbrush Product Segments

Exhibit 1

0.02.04.06.08.0

10.012.014.016.018.0

1989 1990 1991 1992E

Market Share - Volume

Plus Classic

0.0

5.0

10.0

15.0

20.0

1989 1990 1991 1992E

Market Share - Value

Plus Classic

Exhibit 2

Source: CP Case Exhibit 6 - Principal Toothbrush Brand Product Unit & Dollar Market Shares: 1989-1992E

Exhibit 3

Therapeutic Use 41%

Cosmentic Use 21%

Indifferent Users 33%

Other 5%

Reasons for Use

Source: Colgate-Palmolive Company: The Precision Toothbrush Table B

Source: Colgate-Palmolive Company: The Precision Toothbrush Break-out of Exhibit 17

Exhibit 4 Concept Test 2

35% More Plaque Removal &

Prevent Gum Disease

35% More Plaque Removal

Prevent Gum Disease Feel the Difference

Probably Would Buy 80.0% 71.0% 74.0% 68.0% Definitely Would Buy 19.0% 19.0% 18.0% 14.0%

Exhibit 5

Source: Colgate-Palmolive Company: The Precision Toothbrush Table D & E

Year 1 Year 2Revenue $18,706,800 $32,766,000COGS $8,606,400 $13,200,000Gross Profit (Loss) $10,100,400 $19,566,000

ExpensesAdvertising $11,200,000 $11,700,000

Depreciation $316,667 $450,000Total Expenses $11,516,667 $12,150,000

Net Income ($1,416,267) $7,416,000

Niche Positioning Pro Forma

*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.

Year 1 Year 2Revenue $53,744,000 $84,192,000COGS $26,752,000 $37,824,000Gross Profit (Loss) $26,992,000 $46,368,000

ExpensesAdvertising $32,800,000 $29,000,000

Depreciation $886,667 $1,270,000Total Expenses $33,686,667 $30,270,000

Net Income ($6,694,667) $16,098,000

*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.

Mainstream Positioning Pro Forma

Exhibit 6

Source: Colgate-Palmolive Company: The Precision Toothbrush

Best Case 35% Worst Case 60%Year 1 Year 2 Year 1 Year 2 Year 1 Year 2

Plus Sales (79%) $92,146 $117,233 $59,895 $76,201 $46,893 $23,958Classic Sales (21%) $24,406 $31,051 $15,864 $20,183 $12,420 $6,346

Precision Sales $53,744 $84,192 $53,744 $84,192 $53,744 $84,192Total Revenue: $170,296 $232,475 $129,503 $180,576 $113,057 $114,496

Plus COGS $43,155 $52,528 $28,051 $34,143 $21,011 $11,220Classic COGS $11,430 $13,913 $7,430 $9,043 $5,565 $2,972

Precision COGS $26,752 $37,824 $26,752 $37,824 $26,752 $37,824Total COGS: $81,338 $104,265 $62,233 $81,011 $53,328 $52,016

Gross Profit (Loss) $88,958 $128,210 $67,270 $99,565 $59,729 $62,479

Fixed Overhead $15,933 $22,223 $15,933 $22,223 $15,933 $22,223Media $13,530 $19,025 $13,530 $19,025 $13,530 $19,025

Consumer Promos $7,914 $8,976 $7,914 $8,976 $7,914 $8,976Trade Promos $9,613 $12,392 $9,613 $12,392 $9,613 $12,392

Precision Advertising $32,800 $29,000 $32,800 $29,000 $32,800 $29,000Precision Depreciation $887 $1,270 $887 $1,270 $887 $1,270

Total Fixed Costs: $80,677 $92,885 $80,677 $92,885 $80,677 $92,885

Net Profit (Loss): $8,281 $35,325 ($13,407) $6,680 ($20,948) ($30,406)

Mainstream PositioningNo Cannibalization

*Assumes share value remains constant Yr. 1 to Yr.2

Best Case 35% Worst Case 60%Year 1 Year 2 Year 1 Year 2 Year 1 Year 2

Plus Sales (86%) $92,146 $117,233 $59,895 $76,201 $36,858 $46,893Classic Sales (14%) $24,406 $31,051 $15,864 $20,183 $9,762 $12,420

Precision Sales $18,707 $32,766 $18,707 $32,766 $18,707 $32,766Total Revenue: $135,259 $181,049 $94,466 $129,150 $65,328 $92,079

Plus COGS $43,155 $52,528 $28,051 $34,143 $17,262 $21,011Classic COGS $11,430 $13,913 $7,430 $9,043 $4,572 $5,565

Precision COGS $8,606 $13,200 $8,606 $13,200 $8,606 $13,200Total COGS: $63,192 $79,641 $44,087 $56,387 $30,441 $39,776

Gross Profit (Loss) $72,067 $101,408 $50,378 $72,763 $34,887 $52,303

Fixed Overhead $15,933 $22,223 $15,933 $22,223 $15,933 $22,223Media $13,530 $19,025 $13,530 $19,025 $13,530 $19,025

Consumer Promos $7,914 $8,976 $7,914 $8,976 $7,914 $8,976Trade Promos $9,613 $12,392 $9,613 $12,392 $9,613 $12,392

Precision Advertising $11,200 $11,700 $11,200 $11,700 $11,200 $11,700Precision Depreciation $317 $450 $317 $450 $317 $450

Total Fixed Costs: $58,507 $74,765 $58,507 $74,765 $58,507 $74,765

Net Profit (Loss): $13,560 $26,643 ($8,128) ($2,002) ($23,620) ($22,462)*Assumes share value remains constant Yr. 1 to Yr.2

No CannibalizationNiche Positioning

Exhibit 7

Source: Colgate-Palmolive Company: The Precision Toothbrush

0%

10%

20%

30%

40%

50%

60%

70%

% Growth

Volume Growth

Food & Drug Total

All Others Total

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

% Growth

Dollar Growth

Food & Drug Total

All Others Total

0%

50%

100%

150%

200%

250%

300%

350%

400%

% Growth

UNIT GROWTH (MM)

Club Stores

Mass Merch.

Military

Food Stores

Drug Stores

Other

0%

50%

100%

150%

200%

250%

300%

350%

400%

% Growth

SALES GROWTH (MM)

Club Stores

Mass Merch.

Food Stores

Drug Stores

Military

Other

Exhibit 8

Source: Colgate-Palmolive Company: The Precision Toothbrush