Reviewing  the  NPV  of  the  Colgate  Precision  Launch  

Stephen  Shnier  

The  launch  of  the  Precision  yields  a  posi=ve  NPV  and  will  allow  CP  to  grow  their  overall  toothbrush  por?olio    

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NPV  is  107%  higher  than  the  expected  1992  retail  net  income  

Colgate  can  leverage  their  market  leader  posi=on  and  take  advantage  of  market  trends  to  maintain  their  posi=on  at  the  top  of  the  toothbrush  market  and  own  the  top  super-­‐premium  product  

Strategy  Breakdown   Page  #  

Market  Size  Analysis   3-­‐4  

Toothbrush  Market/Consumer  Analysis  

5-­‐6  

Base  Case  Analysis   7-­‐8  

Mainstream  Analysis   9-­‐10  

Pricing  Strategy   11  

Adver=sing  Strategy   12  

SKU  Analysis   13  

Variable  Costs  Analysis   14  

Investment  Cost  Analysis   15  

Mainstream  Net  Income   16  

Net$Present$Value$of$Income 30,638,834$$$$$$$$Investment$Cost 12,300,000$$$$$$$$NPV$of$Innovation 18,338,834$$$$$$$$

Colgate  must  iden=fy  the  number  of  toothbrushes  distributed  through  the  retail  channel  in  order  to  determine  an  accurate  market  size  

3  

Retail  Market  Size  

#  of  TB  in    Market  

%  of    Retail  TB  

#  of  consumer  using  TB’s  

#  of  TB’s    Per  Person  

US  Popula=on  

%  of  Popula=on  who  use  TB’s  

X  

X  

X  

The  market  size  can  also  be  expressed  as  the  total  popula=on  less  those  who  do  not  use  toothbrushes,  mul=plied  by  the  number  of  toothbrushes  per  person,  then  mul=plied  by  the  retail  %  

ShiZing  trends  towards  more  purchases  and  increased  promo=ons  are  causing  the  retail  market  to  steadily  increase  

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1992 1993 1994Total+US+Population+(2%+growth+rate) 256,510,000''''''' 261,640,200''''''' 266,873,004'''''''Less:+Non+TB+Users+(90%) 230,859,000''''''' 235,476,180''''''' 240,185,704'''''''#+of+TB's+Owned/Year 1.75 1.90 2.05Total+#+of+TB's+in+Market 404,003,250''''''' 447,404,742''''''' 492,380,692'''''''%+of+Retail+TB's 78% 75% 76%Total+Retail+Market+Size 315,122,535''''''' 335,553,557''''''' 374,209,326'''''''

US+Retail+Market+Size

%  of  Retail  TB’s  

#  of  TB’s/  Person  

%  of  Popula=on  who  use  TB’s  

Den=sts  are  distribu=ng  approximately  1  in  4  TB’s  to  consumers  (page  4,  footnote)  

By  using  historical  market  size  numbers  and  determining  the  number  of  toothbrushes  owned  per  person,  you  can  calculate  the  %  of  the  

popula=on  that  does  not  use  toothbrushes  

In  1992,  it  was  es=mated  that  consumers  were  replacing  toothbrushes  on  average  less  than  every  7.5  months,  and  purchasing  every  9.7  months  

CP  research  also  shows  that  65%  of  consumers  own  more  than  one  toothbrush  

It  can  be  es=mated  based  on  this  informa=on  that  consumers  on  average  own  at  least  1,  but  more  than  likely  2  toothbrushes  in  a  given  year    

Increased  consumer  involvement  and  interest  in  oral  hygiene  has  created  the  need  for  a  “Super-­‐Premium”  toothbrush  segment  

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Not  Involved  Consumers  are  very  price  driven  Do  not  brush  mul=ple  =mes  per  day  Purchase  products  for  themselves  and  all  family  members  No  interest  in  func=onal  benefits  

Semi-­‐Involved  More  focus  towards  cosme=c/aesthe=c  benefits  such  as  whiter  teeth,  control  of  bad  breath  

Brush  mul=ple  =mes  per  day  Primarily  purchase  products  for  themselves  Less  price  sensi=ve  than  un-­‐involved  

High-­‐Involved  More  focus  towards  therapeu=c  benefits  of  brushing  such  as  reduc=on  in  gum  disease,  plaque,  etc.  

Brush  mul=ple  =mes  per  day,  Primarily  purchase  products  for  themselves  Willing  to  pay  higher  prices  for  beder  func=onal  benefits  

Professional  products  are  ademp=ng  to  fulfill  the  needs  of  both  Semi  and  High  Involved  consumer,  but  cannot  meet  all  needs  in  one  type  of  brush  

The  value  products  meet  these  needs  

Oral  Health  Involvement  

Not   Semi   High  

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The  erosion  of  the  value  segment  will  also  cause  a  shiZ  towards  the  super-­‐premium  segment  

Just  as  consumers  moved  from  value  to  professional,  they  have  begun  to  move  from  the  professional  into  the  super  premium    New  Super-­‐Premium  products  such  as  Oral-­‐B  Indicator  and  J&J  Reach  Advanced  are  gaining  share  due  to  cannibaliza=on  of  their  lower  end  products    Significant  decreases  in  the  value  segment  may  lead  to  the  elimina=on  of  the  segment  en=rely,  as  product  innova=ons  are  driving  customers  towards  the  professional  and  super  premium  products    Super-­‐Premium  total  from  1989  –  1991  is  solely  based  on  the  Oral-­‐B  Regular  brush  

YEAR 1989 1990 1991 1992 1993 1994SUPER/PREMIUM/TOTAL 24.0% 24.5% 24.7% 30.4% 45.2% 59.0%SUPER/PREMIUM/%/CHANGE : 2.1% 0.8% 23.1% 48.7% 30.5%PROFESSIONAL/TOTAL 30.1% 31.9% 34.7% 32.5% 28.9% 24.6%PROFESSIONAL/%/CHANGE : 6.0% 8.8% :6.3% :11.1% :14.9%VALUE/TOTAL 45.9% 43.6% 40.6% 37.1% 25.9% 16.4%VALUE/%/CHANGE : :5.0% :6.9% :8.6% :30.2% :36.7%

If  Colgate  does  not  launch  their  Precision  product,  major  compe=tors  will  take  advantage  of  the  increased  Super  Premium  market  Share  

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1989 1990 1991 1992 1993 1994Colgate(Precision 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Colgate(Plus 12.0% 13.7% 16.9% 17.3% 15.7% 13.4%Colgate(Classic 8.5% 8.1% 6.4% 4.9% 2.9% 0.9%

COLGATE/TOTAL 20.5% 21.8% 23.3% 22.2% 18.6% 14.3%Oral(B>Indicator 0.0% 0.0% 1.0% 3.7% 8.0% 12.3%Oral(B>Regular 24.0% 24.5% 22.1% 16.1% 12.1% 8.1%ORAL5B/TOTAL 24.0% 24.5% 23.1% 19.8% 20.1% 20.4%

J&J(Reach 18.1% 18.2% 17.8% 15.2% 13.2% 11.2%J&J(Reach(Advanced 0.0% 0.0% 0.7% 4.0% 8.5% 13.0%

J&J(Prevent 2.5% 1.6% 0.7% 0.2% 0.0% 0.0%J&J/TOTAL 20.6% 19.8% 19.2% 19.4% 21.7% 24.2%

Lever 10.5% 9.8% 7.2% 5.0% 3.0% 1.0%Crest((P&G) 0.0% 0.0% 0.0% 2.0% 8.0% 13.0%Aqua(Fresh 0.0% 0.0% 0.9% 4.6% 8.6% 12.6%

Butler 0.0% 0.0% 2.0% 2.0% 2.0% 2.0%Private(Label 0.0% 0.0% 11.2% 11.5% 9.5% 7.5%

Other 24.4% 24.1% 13.1% 13.5% 8.5% 5.0%Total/Market/Share 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

US/RETAIL/MARKET/SHARE/5/BASE/CASE

Compe=tor’s  will  move  far  ahead  of  Colgate  in  the  super-­‐premium  category  as  they  gain  market  share  from  consumers  upgrading  from  professional  brushes  –  this  will  nega=vely  impact  Colgate  as  well  as  they  will  lose  Classic  and  Plus  consumers  to  other  professional  and  super-­‐premium  segments  Companies  like  Oral-­‐B  and  J&J  have  shown  a  willingness  in  the  past  to  cannibalize  lower  end  products  for  their  new  product  launches  

CP  will  see  consistent  decreases  in  Net  Income  on  their  en=re  toothbrush  por?olio  by  not  launching  the  Precision  

8  

CP  can  mi=gate  losses  in  this  scenario  by  reducing  spending  on  adver=sing  and  promo=on    This  may  lead  to  a  further  reduc=on  in  market  share  as  consumers  become  less  aware  and  are  not  drawn  to  CP  products    By  not  innova=ng,  CP  is  losing  more  professional  consumers  to  other  super-­‐premium  products  than  they  are  gaining  from  their  value  consumers  moving  into  professional  

1992 1993 1994Unit*Sales 69,957,203))))))))) 62,412,962))))))))) 53,511,934)))))))))Revenue 84,251,161$))))))) 79,354,725$))))))) 72,833,993$)))))))Cost*of*Goods*Sold 41,283,069$))))))) 38,883,815$))))))) 35,688,656$)))))))Gross*Margin 42,968,092$))))))) 40,470,910$))))))) 37,145,336$)))))))Total*Fixed*Costs 34,110,139$))))))) 38,721,153$))))))) 43,973,269$)))))))Net*Income 8,857,953$********* 1,749,757$********* (6,827,932)$********

Colgate  should  launch  the  Precision  Toothbrush  with  a  message  focus  on  gum  disease  preven=on  and  func=onal  benefits  to  gain  a  strong  market  posi=on  

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1989 1990 1991 1992 1993 1994Colgate(Precision 0.0% 0.0% 0.0% 0.0% 8.0% 14.0%Colgate(Plus 12.0% 13.7% 16.9% 17.3% 14.3% 11.3%Colgate(Classic 8.5% 8.1% 6.4% 4.9% 2.9% 0.9%COLGATE/TOTAL 20.5% 21.8% 23.3% 22.2% 25.2% 26.2%Oral(B>Indicator 0.0% 0.0% 1.0% 3.7% 6.7% 10.7%Oral(B>Regular 24.0% 24.5% 22.1% 16.1% 12.1% 8.1%ORAL5B/TOTAL 24.0% 24.5% 23.1% 19.8% 18.8% 18.8%J&J(Reach 18.1% 18.2% 17.8% 15.2% 12.2% 9.2%J&J(Reach(Advanced 0.0% 0.0% 0.7% 4.0% 7.0% 10.0%J&J(Prevent 2.5% 1.6% 0.7% 0.2% 0.0% 0.0%J&J/TOTAL 20.6% 19.8% 19.2% 19.4% 19.2% 19.2%Lever 10.5% 9.8% 7.2% 5.0% 3.0% 1.0%Crest((P&G) 0.0% 0.0% 0.0% 2.0% 7.0% 12.0%Aqua(Fresh 0.0% 0.0% 0.9% 4.6% 8.6% 12.6%Butler 0.0% 0.0% 2.0% 2.0% 2.0% 2.0%Private(Label 0.0% 0.0% 11.2% 11.5% 8.1% 5.1%Other 24.4% 24.1% 13.1% 13.5% 8.1% 3.1%Total/Market/Share 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

US/RETAIL/MARKET/SHARE/5/MAINSTREAM

Colgate  can  cannibalize  some  of  their  professional  market  share  and  s=ll  be  able  to  turn  a  profit  on  that  product  -­‐  The  launch  will  most  likely  lead  to  the  demise  of  the  Colgate  Classic  as  the  value  segment  is  decreasing  overall  Colgate’s  entrance  into  the  market  will  also  slow  compe=tors  growth  in  comparison  to  the  base  case,  allowing  the  Precision  too  take  the  top  spot  

Colgate’s  strong  concept  tes=ng  (77%  of  consumers  think  it  is  beder  than  current  brush/87%  probably  would  buy/29%  definitely  would  buy)  will  allow  Colgate  to  gain  super  premium  market  share  over  compe=tors  

The  Colgate  Precision  will  earn  a  posi=ve  Net  Income  by  the  end  of  1994  that  surpasses  total  por?olio  Net  Income  of  previous  years  

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Colgate(Precision 1993 1994Price 1.80$+++++++++++++++++++ 1.84$+++++++++++++++++++

Quantity 26,844,285+++++++++ 52,389,306+++++++++Unit+Variable+Cost 0.72$+++++++++++++++++++ 0.73$+++++++++++++++++++

Revenue 48,319,712.14$+ 96,186,765.21$+Cost+of+Goods+Sold 19,327,884.85$+ 38,474,706.08$+

Gross+Margin 28,991,827.28$+ 57,712,059.13$+Fixed+Costs 32,478,000.00$+ 36,376,000.00$+Net(Income (3,486,172.72)$(( 21,336,059.13$(

Although  the  Precision  is  losing  money  in  1993,  this  is  similar  to  the  compe==ve  landscape:  J&J,  Crest  and  Aqua  Fresh  all  produced  a  loss  on  their  new  super  premium  brushes  in  their  first  year  of  launching  

Oral%B'Indicator J&J%Reach%Advanced

Crest%(P&G) Aqua%Fresh

Net%Income 1,322,467.69$++++ (1,511,725.02)$++ (611,199.03)$++++++ (1,764,113.78)$++

Colgate  will  achieve  this  through  an  above  average  Manufacturing  Net  Price,  as  well  as  produc=on  capabili=es  that  will  allow  them  to  lower  their  variable  costs  The  Precision  Net  Loss  in  1993  can  be  adributed  to  a  significant  increase  in  adver=sing  spending  

A  penetra=on  pricing  strategy  to  Oral-­‐B  enable’s  Colgate  to  take  advantage  of  more  price  conscious  super-­‐premium  consumers  

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Manufacturer*List*Price

Manufacturer*Net*Price

Food*Retail*Price*(avg.*42%*margin)

Drug*Retail*Price*(avg.*35%*margin)

Mass*Merchandiser*Retail*Price*(avg.*30%*margin)

1.89$&&&&&&&&&&&&&&&& 1.80$&&&&&&&&&&&&&&& 2.55$&&&&&&&&&&&&&&&&&&&& 2.42$&&&&&&&&&&&&&&&&&&&& 2.33$&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&

COLGATE*PRECISION

The  Colgate  Precision  would  take  the  #2  price  in  all  major  retail  outlets,  posi=oning  itself  as  a  high  end  super-­‐premium  product    By  not  posi=oning  as  the  most  expensive  or  least  expensive  super-­‐premium  brush,  it  leaves  Colgate  a  future  opportunity  to  release  a  new  brush  and  strategically  price  it  higher/lower  than  the  Precision  to  capture  more  of  the  super-­‐premium  market    By  pricing  below  the  Indicator,  Colgate  can  adract  more  of  the  Involved  Oral  Care  market  (both  therapeu=c  and  cosme=c)    Colgate  currently  has  the  majority  of  sales  in  the  food  outlet,  which  offers  the  greatest  retail  margin  –  product  success  with  precision  could  lead  to  a  greater  demand  in  the  food  outlets  and  give  Colgate  an  opportunity  to  raise  their  Manufacturer  Net  Price  

Colgate  needs  to  increase  adver=sing  spending  to  be  on  par  with  their  compe=tors  

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Colgate  is  already  the  market  leader  coming  out  of  1992,  and  the  80%  increase  puts  them  level  with  the  spending  of  top  compe=tors  

Category 1992 1993Media&($M) 9,623$&&&&&&&&&&&&&&&& 21,652$&&&&&&&&&&&Consumer&Promotion&($M) 6,978$&&&&&&&&&&&&&&&& 10,826$&&&&&&&&&&&Trade&Promotion($M) 7,457$&&&&&&&&&&&&&&&& 10,826$&&&&&&&&&&&TOTAL1SPENDING 24,058$11111111111111 43,304$11111111111

A  strong  media  strategy  for  the  Precision  launch  will  enable  Colgate  to  take  a  larger  ini=al  market  share  than  their  compe=tors  

The  promo=on  spending  for  precision  is  almost  equal  to  the  total  1992  promo=on  spending  –  this  should  lead  to  a  much  higher  trial  rate  and  poten=al  repeat  purchase  of  the  Precision  

Oral%B J&J Crest ColgateMedia2Spending2on2New2Product2Launch2($M) 10.0$%%%%%%%%%% 8.0$%%%%%%%%%%%% 15.0$%%%%%%%%%% 19.5$%%%%%%%%%%Year212Anticipated/Actual2Market2Share 3.7% 4.0% 7.0% 8.0%

ProductYear %,Split 1993 1994Media,($'000s) 60% 19,487$+++++ 21,825$+++++Consumer,Promotion,($'000s) 18% 5,846$++++++++ 6,548$++++++++Trade,Promotion,($'000s) 22% 7,145$++++++++ 8,003$++++++++TOTAL,SPENDING,($'000s) 100% 32,478$,,,,, 36,376$,,,,,

Precision

Colgate’s  large  SKU  presence  will  give  it  the  best  opportunity  to  reach  the  consumer  for  this  low-­‐involvement  product    

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Adult&SKUs SKU&% Child&SKUs SKU&%Colgate 28 33.73% 8 38.10%Oral5B 16 19.28% 5 23.81%Reach 14 16.87% 4 19.05%Crest&Complete 10 12.05% 0 0.00%Aquafresh&Flex 6 7.23% 1 4.76%Lever 7 8.43% 2 9.52%Plax 2 2.41% 1 4.76%TOTAL 83 100.00% 21 100.00%

Colgate  has  close  to  twice  the  number  of  adult  and  child  SKUs  as  the  next  closest  compe=tor  which  will  allow  give  the  Precision  a  much  greater  presence  than  any  of  the  other  products  in  major  retail  outlets  As  consumers  are  not  usually  ac=vely  searching  for  a  toothbrush,  Colgate’s  SKU  ra=o  gives  it  more  awareness  than  other  products  Colgate  should  look  to  remove  low  performing  children’s  SKU’s  from  the  Classic  product  to  make  room  for  the  Precision  The  brush  should  be  posi=oned  in  store  with  it’s  own  separate  display  to  maximize  consumer  awareness  

The  combining  produc=on  of  the  precision  and  plus  will  allow  Colgate  to  decrease  its  Unit  Variable  Costs  

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From  1989  to  1992,  Colgate  product  their  products  with  a  49%  margin,  and  averaged  23M  units  per  year    Under  a  mainstream  strategy  the  Precision  would  be  adding  53M  units  over  two  years  to  the  current  Classic  and  Plus    This  increased  produc=on  would  allow  Colgate  and  Anchor  Bay  to  achieve  an  economy  of  scales  that  can  be  passed  on  to  the  Precision  product    This  will  allow  Colgate  to  achieve  a  lower  margin  on  the  Precision  product,  which  we  are  es=ma=ng  to  be  40%  

1989$1991%Average

1992 1993 1994

Classic 13,972,500))))) 42,039,000))))) 7,047,000))))))) 2,187,000)))))))Plus 25,879,500))))) 11,907,000))))) 34,749,000))))) 27,459,000)))))Precision ,)))))))))))))))))) ,)))))))))))))))))) 19,440,000))))) 34,020,000)))))Total 39,852,000%%%%% 53,946,000%%%%% 61,236,000%%%%% 63,666,000%%%%%

An  investment  of  $12.3M  in  produc=on  equipment  is  needed  to  product  the  required  output  over  1993  and  1994  

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1993 1994 1993 1994 1993 1994Total*Units*Required*(MM) 26.8 56.1 Total*Units*Required*(MM) 26.8 56.1 Total*Units*Required*(MM) 26.8 56.1Opening*Unit*Balance*(MM) 0 0.2 Opening*Unit*Balance*(MM) 0 1.2 Opening*Unit*Balance*(MM) 0 13.2Total*Ouput*Required*(MM) 26.8 55.9 Total*Ouput*Required*(MM) 26.8 54.9 Total*Ouput*Required*(MM) 26.8 42.9Output/Tufter*(MM) 3 3 Output/Mold*(MM) 7 7 Output/Packaging*(MM) 40 40Total*Tufters*Required 9 19 Total*Molds*Required 4 8 Total*Packaging*Required 1 2Current*Tufters*on*hand 0 9 Current*Molds*on*hand 0 4 Current*Packaging*on*hand 0 1#*of*Tufters*to*be*Purchased 9 10 #*of*Molds*to*be*Purchased 4 4 #*of*Packaging*to*be*Purchased 1 1Total*Output 27 57 Total*Output 28 56 Total*Output 40 80Excess*Output 0.2 1.1 Excess*Output 1.2 1.1 Excess*Output 13.2 37.1Cost*per*Tufter*($MM) 0.5$- 0.5$- Cost*per*Mold*($MM) 0.3$- 0.3$- Cost*per*Packaging*($MM) 0.15$- 0.15$-Total*Investment*Cost*($MM) 4.5$- 5.0$- Total*Investment*Cost*($MM) 1.2$- 1.2$- Total*Investment*Cost*($MM) 0.2$---- 0.2$----

MOLD PACKAGINGTUFTER

Launching  the  Precision  will  allow  Colgate  to  substan=ally  increase  their  retail  Net  Income  over  the  next  two  years  

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Even  with  substan=al  increases  to  fixed  costs  (primarily  from  adver=sing)  the  overall  Toothbrush  por?olio  s=ll  turns  a  higher  profit  in  1993  than  it  did  in  1992    AZer  being  on  the  market  for  two  years,  the  Toothbrush  por?olio  net  income  will  have  increased  by  183%  

1992 1993 1994Unit*Sales 69,957,203))))))))) 84,559,496))))))))) 98,042,843)))))))))Revenue 84,251,161$))))))) 121,205,636$))))) 157,983,327$)))))Cost*of*Goods*Sold 41,283,069$))))))) 55,041,987$))))))) 68,755,021$)))))))Gross*Margin 42,968,092$))))))) 66,163,648$))))))) 89,228,305$)))))))Total*Fixed*Costs 34,110,139$))))))) 54,425,153$))))))) 64,198,269$)))))))Net*Income 8,857,953$********* 11,738,495$******* 25,030,037$*******