The Precision Toothbrush

Prianka Jhingan

Monday November 3, 2014

1

The launch of Colgate’s Precision Toothbrush results in increased profitability and is a financially viable decision long-term.

Increased advertising expenditures will result in increased category visibility in the super premium segment

Positive NPV suggests that Colgate can expect a gain from launching the Precision toothbrush with a mainstream positioning strategy in comparison to its current market situation.

A strategic price will ensure that Colgate will remain competitive in the toothbrush market

Colgate can expect an increase in market share and can assume position of a market leader within the toothbrush

category after the launch.

With an increased market share and size, Colgate is able to expect a return on the investment costs

NPV Before Investment $55,007,345

Investment Costs $9,550,000

NPV $45,457,345

2

With a projected growing market size, Colgate’s super premium product offering can satisfy the increasing demand in the toothbrush category.

1989 1990 1991 1992 1993 1994

Population 246,820,000 249,620,000 252,980,000 256,510,000 259,075,100 261,665,851

% of those using toothbrushes 88% 88% 88% 88% 88% 88%

Total Toothbrush Users

217,201,600

219,665,600 222,622,400 225,728,800 227,986,088 230,265,949

# of Toothbrushes/Person

/Year (how many they have) 1.5 1.5 1.5 1.8 1.9 2

Total Toothbrushes

325,802,400

329,498,400 333,933,600 406,311,840 433,173,567 460,531,898

% of Toothbrushes Coming from Retail 75% 75% 75% 78% 75% 75%

Total Retail Toothbrushes

244,351,800

247,123,800 250,450,200 316,923,235 324,880,175 345,398,923

Calculated using historical retail units sold from Exhibit 13 (Shown in Appendix 1)

Increasing because of the number of promotions and free brushes, so although the number of people are not purchasing as many brushes, they are stocking. Trend is expected to continue due to new products in the market and increased consumer sampling.

On average, one in four toothbrushes come from the dentist. In 1992, 22% of all toothbrushes were expected to be distributed to consumers by dentists.

On average replace brushes every 7.5 months and 65% of people had more than one toothbrush

Estimated to grow at approximately 1%, keeping in line with historical increases

3

Without introducing a super premium product in this category, Colgate will lose 3% share in 1993 and 4.5% share in 1994 in the toothbrush market.

Current Colgate users, currently looking for a super premium offering will have to switch to

another brand, resulting in loss of market share and falling behind competition.

Base Case

% of Market Share Changes by Product/Company 1992-1993 1993-1994

Colgate Classic -2.5% -1.5%

Colgate Plus -0.5% -3%

Colgate Precision 0% 0%

Total Change for Colgate -3% -4.5%

Oral-B Indicator +2.5% +2.5%

Oral-B Regular -2% -1.5%

Total Change for Oral-B 0% +1%

J&J Reach -1.5% -1.5%

J&J Reach Advanced +2.5% +2.5%

Total Change for J&J +1% +1%

Crest +4% +3%

Total Change for P&G +4% +3%

Aquafresh Flex +3% +2.5%

Total Change for Aquafresh +3% +2.5%

Base Case

Total Market Share 1992 1993 1994

Colgate 22.2% 19.2% 14.7%

Oral-B 19.8% 20.3% 21.3%

J&J 19.4% 20.2% 21.2%

Crest 2% 6% 9%

Aquafresh Flex 4.6% 7.6% 10.1%

The increase in the premium segment is coming from the professional segment, as more consumers are concerned about oral health and are taking more interest in the category.

Super-premium brushes accounted for 35% of the unit volume and the professional segment

accounted for a corresponding 41% . Colgate would be excluding itself from a large portion of

the evolving market.

4

Colgate should establish Precision’s position as being a technological breakthrough in the oral health market.

Results of the consumer concept test revealed the following criteria as highest in consumer priority. Precision is an overall superior product on dimensions that matter to consumers.

How Precision Compares Evaluation: Is Precision

technologically superior?

Oral-B

Indicator

- Removes 35% more plaque than Oral-B

- Dental professional focus groups

conducted to verify the overall acceptance

of Precision

Reach

Advanced

Design

- Removes 35% more plaque than Reach

- Handle design offering maximum plaque

removal

Crest

Complete

- Triple action bristles – short (scrub plaque

off surface of teeth), long (remove plaque

between teeth), angled (sweep plaque

from gum lines)

Aquafresh

Flex

- Bristles allow freer movement

- Designed to help prevent gum disease

Summary of Concept Test Results

Probably Would Buy

Plaque Removal 69%

35% More Plaque Removal/ Prevention of Gum Disease 80%

Gum Disease Only 72%

- 67% of consumers are actively involved in their oral health, searching for better products - Able to differentiate among products and search out functionally effective products - Research indicates that consumers are becoming more concerned about the health of their gums - Consumers are willing to experiment with new toothbrushes - Crucial to communicate the importance of plaque removal to overall health

5

Mainstream Case

% of Market Share Changes by Product/Portfolio 1992-1993 1993-1994

Colgate Classic -3.5% -1%

Colgate Plus -2% -3%

Colgate Precision 6% 15%

Total Change for Colgate +0.5% +11%

Oral-B Indicator +1% 2%

Oral-B Regular -2% -5%

Total Change for Oral-B -1% -3%

J&J Reach -1.5% -3.5%

J&J Reach Advanced +1.5% +1%

Total Change for J&J 0% -2.5%

Crest +2.5% +2%

Total Change for P&G +2.5% +2%

Aquafresh Flex +2% +1.5%

Total Change for Aquafresh +2% +1.5%

Mainstream Case

Total Market Share 1992 1993 1994

Colgate 22.2% 22.7% 27.7%

Oral-B 19.8% 18.8% 15.3%

J&J 19.4% 19.2% 16.7%

Crest 2% 4.5% 6.5%

Aquafresh Flex 4.6% 6.5% 8.1%

With a mainstream launch, Colgate will be the market leader in

the toothbrush category, gaining 22.7% of the market share in

1993 and 27.7% in 1994.

The super premium products of competitors would have increased by significantly higher had it not been for the launch of the Precision toothbrush

Oral B and Johnson & Johnson, former market leaders in the super premium segment, do not experience a growth in their toothbrush category overall.

Colgate experienced the largest growth in 1994, substantially ahead of its competitors, with a growth of 11% overall.

6

Colgate Precision should expect 6% of the market share in the category in its first year and 15% in the next year.

Here’s What we Know: - Competitors have launched a super premium toothbrush

in the category and have been able to experience a growth - Past launches suggest that the professional product

offering is cannibalized by its super premium product - Precision is a product that offers consumers a benefit that

is valued and is not offered by any other product in the market

- Oral B and J&J super premium launches saw similar results but the category is further developed and consumers are demanding quality and are aware

- Steinberg’s estimate for the first year at 10% is too high based on past launches

1991 1992E BRAND Vol (%) Vol (%)

ORAL-B Oral-B Indicator 1.0 3.7

J & J

Reach Advanced Design 0.7 4.0 AQUA-FRESH 0.9 4.6

How Precision will be able to capture share:

First Year: Therapeutic brushers most commonly use Oral B Regular, J&J Reach and Colgate Plus - Colgate Precision would be able to capture share from the products on the basis of switching from professional to the super premium segment

Second year: Colgate Precision would be able to take share from Oral-B Indicator and J&J Advanced Reach as consumers get involved with media exposure and advertising and become aware of functionality and features

Aqua-Fresh’s Flex was the only launch that explicitly focussed on gum health and was able to experience a higher growth than industry leaders (Oral-B and J&J). - Aqua-Fresh is a recent entrant in the toothbrush category, Colgate has an

established name in the industry - Advertising budget is doubled than that of Smithkline Beecham

7

Colgate Precision should increase its advertising ahead of its competition in order to successfully support the launch of its innovation.

Increased Exposure

Increased Enthusiasm

Increased Product

Knowledge

Increased Trial/Usage

1992 1993 1994

Media $9,623,000 (11%) $ 21,856,296 (21%) $ 30,598,814 (20%)

Consumer Promotions $6,978,000 (8%) $ 13,113,778 (12%) $ 18,359,289 (12%)

Trade Promotions $7,457,000 (8%) $ 8,742,518 (8%) $ 12,239,526 (8%)

Reach was estimated to spend $17.1M and Oral-B was estimated to spend $11.2M on media expenditures to support the launch of their product. With this advertising budget, Colgate can expect the highest share voice %, resulting in increased exposure.

-Increased total advertising by 40% every year for two years -Results of overall promotional efforts seen in 1994

Total Colgate 1992 1993 1994

Net Income $7,732,624 $6,149,818 $16,008,443

8

Media expenditures, consumer and trade promotions are fundamental to Precision’s success as a market leader.

Profitable Market Leader

Trade Promotions

Floorstands and Sidekicks throughout the store (82% unplanned purchases)

Leverage being leader in toothpaste category

Increase purchase frequency to 3 months (No BOGO)

Consumer Promotions

Increased product education Encourage Trial Usage In-store sampling with dentist

professionals

Media Expenditures

Increase awareness and perceived value

Presence higher than competitors Health Magazine, ADA

Ensure a leading position in

competitive media market

Increase presence in store to increase category visibility and fuel demand

Increase product enthusiasm through consumer sampling

9

With a competitive price strategy at $1.80 in the first year, and $1.85 in the second year, Colgate can expect to be an appealing offering to retailers.

Research suggests that: - Consumers are willing to pay a premium for new

products addressing issues regarding the health of their gums

- Relatively unfamiliar with prices - Even at a ‘20% Price Premium to Oral-B Prevent

Gum Disease’, 61% were still probably going to buy precision in the concept testing

Manufacturer

Net Price

Super-premium

Oral-B Indicator $1.92

Oral-B Regular $1.78

Crest Complete $1.67

Reach Advanced $1.66

Aquafresh Flex $1.61

Professional

Colgate Plus $1.35

Reach Regular $1.30

Pepsodent Prof. $1.08

Value

Colgate Classic $0.69

Pepsodent Regular $0.48

Colgate Precision

Why Colgate can demand a higher price than $1.76: - Based on existing product offerings in professional and value,

Colgate has been a more expensive product - Should be lower than Oral-B Indicator to be appealing to retailers,

but higher than Oral-B Regular, as it is a super premium product

The increase in price by 10% in year 2 is justifiable because: - Precision will be more established in the market - Less discount will be necessary and Precision will sell on the basis of

its features - Established demand in the market in year 1, will increase appeal for

retailers - The price will still be less than Oral-B’s super premium product

Placement in stores between Oral-B Indicator and Johnson and Johnson’s Advanced Reach. Price is not justified as indicator bristles are less of a concern for consumers than gum disease prevention.

10

Colgate’s Precision toothbrush’s UVC should expect a decrease in comparison to its existing products.

1989 1990 1991 1992E

Unit sales ('000s) 55,296 63,576 70,560 78,336

Net sales ($'000s) 43,854 (100%) 57,248 (100%) 77,001 (100%) 91,611 (100%)

Cost of sales 23,988 (55%) 28,190 (49%) 36,827 (48%) 44,846 (49%)

Colgate’s historical cost of goods sold for all toothbrush product lines have consistently stayed at approximately the same percentage of sales.

Suggested Prediction

Manufacturer Per Unit Price $0.64 $0.77

Manufacturer Price $1.76 (36%) $1.80 (43%)

1993 1994

Unit sales ('000s) 73,748 95,676

Net sales ($'000s) 105,329 (100%) 156,227 (100%)

Cost of sales 49,506 (47%) 70,676 (45%) However, with moving Precision’s manufacturing with Plus, Colgate can expect economies of scale.

11

Over the two year period, Colgate can expect a return on its investment for the Precision product line.

Based on required quantity of 19, 492, 811 in year 1 and 51, 809, 838 in year 2. The Total Investment Cost Amounts to $9,550,000 for the first two years of launching Precision.

12

Appendix 1: Market Size

13

1989 1990 1991 1992 1993 1994

Population 246,820,000 249,620,000 252,980,000 256,510,000 259,075,100 261,665,851

Retail Units Sold

(Exhibit 13)

243,000,000

242,000,000

261,000,000

307,000,000

-

-

Methodology:

Retail units sold

% of total retail market

Number of toothbrushes in the market

Number of toothbrushes/person/year

Number of people who use toothbrushes

Population in that year

= Number of toothbrushes in the market

= Number of people who use toothbrushes

= % of people who use toothbrushes

1989 1990 1991 1992

Percent of

People who Use

a Toothbrush

88%

86%

92%

85%

On average, 88% of people use toothbrushes

Appendix 2: Advertising Budget Allocation

14

1992 1993 1994

Fixed Costs $35,481,000 $49,673,400 $69,542,760

1992 1993 1994

Fixed Overhead (12%)

Total Advertising

$4,257,720

$31,223,280

$5,960,808

$43,712,592

$8,345,131

$61,197,629

1992

Media (40%)

Consumer Promotions (29%)

Trade Promotions (31%)

$12,489,312

$9,054,751

$9,679,217

1993 1994

Media (50%)

Consumer Promotions (30%)

Trade Promotions (20%)

$21,856,296

13,113,778

$8,742,518

$30,598,814

$18,359,289

$12,239,526

Fixed Costs from 1992 are based on Exhibit 1 Increased by 40% in 1993 and 1994

1992 1993 1994

Revenue Media

Consumer Promotions

Trade Promotions

$84,732,596

15%

11%

11%

$105,329,402

21%

12%

8%

$156,227,387

20%

12%

8%

Significant increases in advertising in 1993 and 1994, with large proportions allocated to media expenditures.