1. Saqib Shakil (156004799) Colgate Precision Case Analysis Page 1 of 13 MEMORANDUM DATE: 02/23/2015 TO: Nigel Burton Division General Manager Oral Care FROM: Saqib Shakil RE: Positioning, branding and communication strategies of Colgate Precision Toothbrush Based on the detailed STP analysis of CPs Precision Toothbrush and the existing production capabilities of CPs Oral Care Division, I recommend that the company should initially position Precision toothbrush towards a niche market comprising of Therapeutic Brushers that not only constitute the biggest customer segment of the market (46% of adults) but is also psychographically aligned with the value proposition of this product that has proven to be 35% more effective in cleaning plaque and subsequently prevent gum diseases. Niche positioning strategy will not only fit well with the product line logic of the company but will also result in better gross and net profit margins of the product as compared to those of mainstream strategy. Lastly, the current operational capacity of CP can fulfill the projected demand for niche strategy only; as it is insufficient for mainstream strategy, which needs further capacity building that can delay the product launch by 10 months and may put the product at competitive disadvantage due to potential product launches by other competitors. Firstly, analysis of the product line logic of Colgate Precision, positioned as a niche product (Exhibit 1) as opposed to mainstream product (Exhibit 2), suggests that selective positioning under niche strategy is a more logical choice to avoid product-market overlap and cannibalization of existing well-performing brands, especially Colgate Plus. On contrary, under mainstream strategy the Precision brand will not only compete with Colgate Plus for share of market and revenue but may also suffer from lower consumer preference towards the brand as has happened to Colgate Plus (see Exhibit 2). Furthermore, considering the competitive positioning of Precision brand under both strategies it can be easily observed that under niche strategy (Exhibit 3) the brand will compete in super-premium price-performance segment, where CP lacks presence, and will contribute to the corporate strategy of building CPs brand equity by enhancing its image as a producer of premium brands. Also, this strategy is appropriate for the existing consumer trend of up-trading as consumers are increasingly consuming premium brands rather than value 2. Saqib Shakil (156004799) Colgate Precision Case Analysis Page 2 of 13 brands and it is resulting in better dollar sales for lesser unit volume than that of professional segment. The mainstream strategy (Exhibit 4) will saturate the professional market segment with CPs brands and any downward fluctuation in unit sales or revenue of this segment will have drastically adverse effects on overall profitability of CPs oral care division. So, based on the aforementioned information and the comprehensive SWOT analyses of both strategies (Exhibits 5 and 6), I recommend niche strategy for Colgate Precision along with appropriate marketing mix suggestions (see Exhibit 7). Secondly, the communication strategy (see Exhibit 8) should highlight the gum disease prevention benefit of the Precision toothbrush as it stimulated highest purchase intent and the advertising agency should promote the usage timings of after breakfast and before bed to align the product consumption timing with consumer usage behavior (see Exhibit 9). Additionally, $11.2 million is the appropriate advertising and promotion amount for launching Precision brand as it is slightly better than the ad spend of Oral-B ($15.7 million to be divided between Oral-B Regular, Angle and Indicator) and J&J ($21.7 million to be divided between Reach and Reach Advance). Furthermore, marketing the Precision brand as a niche product results in at least 3% more gross and net profit margins as compared to those of mainstream product (see Exhibit 10) and it can help CP to further improve its overall operating margin even after considering 35%-60% cannibalization (see Exhibit 11) that may be minimized through careful retail shelf placement. Lastly, the branding of Precision should follow the Colgates corporate strategy of increasing the Colgate brand equity and it should use the umbrella brand name strategy by using Colgate to increase marketing and advertising efficiencies and to enhance the quality perception of CP among consumers. Although such branding may further cannibalize existing CP toothbrush sales, the new product will become profitable in second year after initial losses during the first year of product launch (see Exhibit 12). So, keeping in view all the relevant information and analyses presented above, I recommend following niche strategy for Colgate Precision to minimize cannibalization, increase profitability and enhance the brand equity of Colgate Palmolive; without higher initial investment into production capacity. 3. Saqib Shakil (156004799) Colgate Precision Case Analysis Page 3 of 13 Exhibit 1: Product Line Logic of Precision Toothbrush as a Niche Product Market (Price segments) Value Professional Super- Premium Product (Toothbrush) Colgate Classic Colgate Plus Colgate Precision Market (Customer segments) Therapeutic (46% 1) Cosmetic (21% ) Uninvolved (33% ) Product (Toothbrush) Colgate Classic Colgate Plus2 Colgate Precision3 1 Percentage of adult brushers 2 Light color shows weaker preference for a Colgate Plus brand by a customer segment i.e. this brand holds 3rd or 4th position in terms of customer preference and usage in a specific segment (information from Table B of the case). 3 Colgate Precision is scientifically breakthrough product with high functional effectiveness in cleaning plaque and prevent gum disease the functional benefits sought after by therapeutic brushers. 4. Saqib Shakil (156004799) Colgate Precision Case Analysis Page 4 of 13 Exhibit 2: Product Line Logic of Precision Toothbrush as a Mainstream Product Market (Price segments) Value Professional Super- Premium Product (Toothbrush) Colgate Classic Colgate Plus Colgate Precision Market (Customer segments) Therapeutic (46% 1) Cosmetic (21% ) Uninvolved (33% ) Product (Toothbrush) Colgate Classic Colgate Plus2 Colgate Precision3 1 Percentage of adult brushers 2 Light color shows weaker preference for a Colgate Plus brand by a customer segment i.e. this brand holds 3rd or 4th position in terms of customer preference and usage in a specific segment (information from Table B of the case). 3 Darker color represents strong estimated preference of customer segment towards Precision brand as it is positioned against Oral B Regular that holds a major position in all customer segments. 5. Saqib Shakil (156004799) Colgate Precision Case Analysis Page 5 of 13 Exhibit 3: Competitive Positioning ofColgate Precision as Niche Product $0 $1 $2 $3 Value Professional Super- Premium Colgate Classic Pepsodent Regular Price Quality/Performance Low High Colgate Plus Reach Regular Pepsodent Prof. Oral-B Indicator Oral-B Regular Crest Complete Reach Advanced Aquafresh Flex Colgate Precision Unit Volume: 35% $ Sales: 46% Unit Volume: 41% $ Sales: 42% Unit Volume: 24% $ Sales: 12% 6. Saqib Shakil (156004799) Colgate Precision Case Analysis Page 6 of 13 Exhibit 4: Competitive Positioning of Colgate Precision as Mainstream Product $0 $1 $2 $3 Value Professional Super- Premium Colgate Classic Pepsodent Regular Price Quality/Performance Low High Colgate Plus Reach Regular Pepsodent Prof Colgate Precision . Oral-B Indicator Oral-B Regular Crest Complete Reach Advanced Aquafresh Flex Unit Volume: 35% $ Sales: 46% Unit Volume: 41% $ Sales: 42% Unit Volume: 24% $ Sales: 12% 7. Saqib Shakil (156004799) Colgate Precision Case Analysis Page 7 of 13 Exhibit 5: SWOT Analysis for Colgate Precision Niche StrategyInternalSituation Strengths Precision Toothbrush targeted towards niche market as a super-premium product fits appropriately into product-line logic of Colgate, which doesnt have any product in this price- category. This strategy benefits from trading-up trend of consumers that placed more customers in professional category since 1980 and gave way to creation of super-premium category. Aging population of rich baby boomers are increasingly becoming oral-health oriented and may look for premium and effective oral care products. Precision toothbrushes satisfy these needs. The current operational capacity of CP supports the desired market share goals of the company. So, additional capacity needs not to be deployed immediately before the product starts generating cash inflows that can be used to fund the operational expansion. Cannibalization of Colgate Plus, the bread and butter of the company, can be avoided under this strategy. 4 SKUs will not disrupt the other existing SKUs. Weaknesses The first feeling of using Colgate Precision toothbrush is mixed or strange for brushers and it may ward off further trial and usage by customers with indifferent or disliked stance towards the product. The product doesnt explicitly addresses a specific reason for using a brand, such as Reach brand focuses on hard to reach places functional benefit of its toothbrushes. Increased advertising and promotion expenses to launch a product in a new category. The existing brand image of CP toothbrushes as mainstream products may hamper the niche super-premium positioning of Precision brand. Only 3%-5% volume share of the market may be gained under this strategy, which may not be an ideal volume for an FMCG company. ExternalSituation Opportunities Positioning the product in super-premium and therapeutic brushers category will help the company to maintain its market leader position by taking share away from its closest competitor Oral-B. Presence in super-premium category may elevate the brand equity of Colgate and the perception of high quality toothbrushes may boost the sales of other CP toothbrushes in their respective categories. Threats Focus on super-premium category for new product launches by existing and upcoming competitors may dilute the perception of this category, resulting in higher promotion and advertising costs than usual and reducing product margins. Consumers generally assume that premium products are more durable than non-premium ones and tend to use them longer, so, frequent two-for-one or one- for-one promotions may increase the replacement time for super-premium toothbrushes. 8. Saqib Shakil (156004799) Colgate Precision Case Analysis Page 8 of 13 Exhibit 6: SWOT Analysis for Colgate Precision Mainstream StrategyInternalSituation Strengths Reduction in replacement time for toothbrushes will in generalincrease the market size for CP Toothbrush products. An outstanding product like Precision doesnt exist in a Professional and Value category, so, it may be able to gain large market share quickly to provide appropriate return on investment within first two years of its launch. Large volume sales will result in steep learning curve and economies of scale to bring down the cost of the product, thereby increasing its contribution margin. Value proposition of Precision based on increased gum disease prevention due to plaque removal motivates the greatest purchase intent among test consumers and it may appeal to larger consumer market that seeks the functional benefit of cleaner teeth. This strategy can take benefit of increasing sales through mass merchandisers a distribution channel increasing in volume sales as compared to other channels. Weaknesses 35%-60% cannibalization of Colgate Classic and Plus sales due to this strategy may adversely affect the overall profitability of OralCare division. Like Colgate Plus, Precision brand may fail to become the top choice among the three segments of consumers under this strategy. This strategy may fix the CPs brand image as a mainstream product and may thwart future attempts of CP to launch a premium brand. The current operational capacity and production schedules dont support the desired market penetration and high initial investment is needed to avoid product shortages and lost revenue. 7 SKUs under this strategy may force the dropping of childrens brush line, which might be a strategic SKU as todays children are tomorrows adults and may remain loyal to Colgate brand. ExternalSituation Opportunities 10%-15% volume share within first two years of launch may establish Precision brand as a successfulmainstream toothbrush. Precision toothbrush can be positioned next to Oral-B Regular on retail shelf space and in terms of pricing to not only gain increased customer awareness in all customer segments as a premium product but also to gain snatch market share away from a close competitor of CP (i.e. Oral-B), which plans to increase its presence in other oral-care products such as floss and mouth rinses. This strategy can threaten the core market of Oral-B, preventing it from targeting CPs other oral-care product lines. Threats Distributors may reject to carry two CP toothbrush brands under same product category Professional. Retailers may hinder to allocate more shelf space to multiple CP brands positioned closely to each other. Increased reliance on mass merchandisers under this strategy will transfer the bargaining power to few large buyers, which may be detrimental to the long term profitability of CPs oral care division. 9. Saqib Shakil (156004799) Colgate Precision Case Analysis Page 9 of 13 Exhibit 7: Consumer-Product-Market-Distribution Mapping Market (Customer segments) Therapeutic (46% 1) Cosmetic (21% ) Uninvolved (33% ) Market(PriceSegments) Value 1. Colgate classic1 1. Colgate classic Mass Merchandisers RelevantDistributionChannel Professional 3. Colgate Plus 4. Reach Regular 3. Colgate Plus 3. Colgate Plus 4. Reach Regular Mass Merchandisers & Food Stores Super Premium 1. Oral-B Angle 2. Oral-B Regular 2. Oral-B Regular 4. Oral-B Angle 2. Oral-B Regular Food and Drug Stores 1. Numbers before brand names show the consumer preference with 1 and 2 being most preferred and 3 and 4 being least preferred (Data from Table B and Exhibit 4 of the case). 2. Distribution mapping has been done using data from Exhibit 4 & 7 of the case. 3. Blue highlighted box is the recommended niche positioning of Colgate Precision. 10. Saqib Shakil (156004799) Colgate Precision Case Analysis Page 10 of 13 Exhibit 8: Proposed TVand Advertising Copy Strategy and Execution Exhibit 9: Consumer Toothbrush Usage Behavior Colgate Precision Product Unconventional, triple action design with superior cleaning capability that removes 35% more plaque than Oral-B and Reach. Message Prevents gum disease Tagline Computer graphic display of product design followed by more clean looking teeth if brushed with Colgate Precision as compared to Oral-B and Reach. Execution Breakfast Lunch Dinner Bedtime 45% 57% 28% 24% 71% Recommended usage time Recommended usage time 11. Saqib Shakil (156004799) Colgate Precision Case Analysis Page 11 of 13 Exhibit 10: Pro Forma Income Statement under Niche and Mainstream Strategies Year 1 1993 Year 2 1994 Year 1 1993 Year 2 1994 Revenue - Retail Sales ($MM) 16.19 30.35 47.10 77.51 Revenue - Professionals ($MM) 2.47 2.47 6.58 6.58 Total Revenue ($MM) 18.65 32.82 53.68 84.08 Less: COGS ($MM) (7.26) (11.88) (22.27) (33.34) Gross Profit ($MM) 11.39 20.94 31.41 50.74 Expenses Advertising ($MM) 5.00 5.00 15.00 12.00 Consumer Promotions ($MM) 4.60 4.00 13.00 10.00 Trade Promotions ($MM) 1.60 2.70 4.80 7.00 Total Marketing Expenses (11.20) (11.70) (32.80) (29.00) Net Profit 0.19 9.24 (1.39) 21.74 Gross Profit Margin 70.39% 68.98% 66.68% 65.46% Net Profit Margin 1.04% 28.15% -2.60% 25.85% Niche Strategy Mainstream Strategy Pro Forma Income Statement 12. Saqib Shakil (156004799) Colgate Precision Case Analysis Page 12 of 13 Exhibit 11: Impact of Cannibalization under Niche and Mainstream Strategies *The unit sales and the operating profits for 1993 and 1994 are estimated using linear regression with R2 values of 99% and 96% respectively. The per unit operating profit is calculated by dividing total operating profit by total unit sales. *35% to 60% of the Precision total volume sales are taken away from Colgate Plus and Colgate Classic. So, the operating profit per unit is used as a proxy for the combined revenue loss by other product lines, because the cannibalization of individual product lines cant be calculated from the case information. Op. profit cannibalization = Op. profit per unit x volume cannibalization. 1989 1990 1991 1992 1993 1994 Unit Sales (000's) 55296 63576 70560 78336 85968 93578.4 CP Toothbrushes Operating Profit ($000's) 3,744.00 5,739.00 9,833.00 11,284.00 14,328.50 16,999.90 Operating Profit per unit ($) 0.07 0.09 0.14 0.14 0.17 0.18 From Table C Year 1 Year 2 Year 1 Year 2 Unit Sales - Retail (MM) 8 15 26.8 44.1 Unit Sales - Professionals (MM) 3 3 8 8 Consumer Promotion Volume (MM) 2 2 7 7 Total Unit Sales (MM) 13 20 41.8 59.1 Volume Cannibalization - 35% 4.55 7.00 14.63 20.69 Volume Cannibalization - 60% 7.80 12.00 25.08 35.46 Op.Profit Cannibalization - 35% ($MM) 0.77 1.26 2.49 3.72 Op.Profit Cannibalization - 60% ($MM) 1.33 2.16 4.26 6.38 Niche Strategy Mainstream Strategy Year 1 1993 Year 2 1994 Year 1 1993 Year 2 1994 Revenue - Retail Sales ($MM) 16.19 30.35 47.10 77.51 Revenue - Professionals ($MM) 2.47 2.47 6.58 6.58 Total Revenue ($MM) 18.65 32.82 53.68 84.08 Less: COGS ($MM) (7.26) (11.88) (22.27) (33.34) Gross Profit ($MM) 11.39 20.94 31.41 50.74 Expenses Advertising ($MM) 5.00 5.00 15.00 12.00 Consumer Promotions ($MM) 4.60 4.00 13.00 10.00 Trade Promotions ($MM) 1.60 2.70 4.80 7.00 Total Marketing Expenses (11.20) (11.70) (32.80) (29.00) Cannibalization - 35% (0.77) (1.26) (2.49) (3.72) Net profit (0.58) 7.98 (3.88) 18.01 Net Profit Margin -3.11% 24.31% -7.23% 21.42% Cannibalization - 60% (1.33) (2.16) (4.26) (6.38) Net profit (1.13) 7.08 (5.66) 15.35 Net Profit Margin -6.07% 21.57% -10.54% 18.26% Pro Forma Income Statement With Cannibalization Niche Strategy Mainstream Strategy 13. Saqib Shakil (156004799) Colgate Precision Case Analysis Page 13 of 13 Exhibit 12: Impact of Additional 20% Cannibalization due to Colgate Precision Branding 1989 1990 1991 1992 1993 1994 Unit Sales (000's) 55296 63576 70560 78336 85968 93578.4 CP Toothbrushes Operating Profit ($000's) 3,744.00 5,739.00 9,833.00 11,284.00 14,328.50 16,999.90 Operating Profit per unit ($) 0.07 0.09 0.14 0.14 0.17 0.18 From Table C Year 1 Year 2 Year 1 Year 2 Unit Sales - Retail (MM) 8 15 26.8 44.1 Unit Sales - Professionals (MM) 3 3 8 8 Consumer Promotion Volume (MM) 2 2 7 7 Total Unit Sales (MM) 13 20 41.8 59.1 Volume Cannibalization - 55% 7.15 11.00 22.99 32.51 Volume Cannibalization - 80% 10.40 16.00 33.44 47.28 Op.Profit Cannibalization - 55% ($MM) 1.22 1.98 3.91 5.85 Op.Profit Cannibalization - 80% ($MM) 1.77 2.88 5.68 8.51 Niche Strategy Mainstream Strategy Year 1 1993 Year 2 1994 Year 1 1993 Year 2 1994 Revenue - Retail Sales ($MM) 16.19 30.35 47.10 77.51 Revenue - Professionals ($MM) 2.47 2.47 6.58 6.58 Total Revenue ($MM) 18.65 32.82 53.68 84.08 Less: COGS ($MM) (7.26) (11.88) (22.27) (33.34) Gross Profit ($MM) 11.39 20.94 31.41 50.74 Expenses Advertising ($MM) 5.00 5.00 15.00 12.00 Consumer Promotions ($MM) 4.60 4.00 13.00 10.00 Trade Promotions ($MM) 1.60 2.70 4.80 7.00 Total Marketing Expenses (11.20) (11.70) (32.80) (29.00) Cannibalization - 55% (1.22) (1.98) (3.91) (5.85) Net profit (1.02) 7.26 (5.30) 15.89 Net Profit Margin -5.48% 22.12% -9.88% 18.89% Cannibalization - 80% (1.77) (2.88) (5.68) (8.51) Net profit (1.57) 6.36 (7.08) 13.23 Net Profit Margin -8.44% 19.37% -13.19% 15.73% Pro Forma Income Statement With 20% Additional Cannibalization Niche Strategy Mainstream Strategy