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
Net$Present$Value$of$Income
Investment$Cost
NPV$of$Innovation

$$$$$$$$30,638,834
$$$$$$$$12,300,000
$$$$$$$$18,338,834

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
2

Colgate must iden=fy the number of toothbrushes distributed through

the retail channel in order to determine an accurate market size
% of
Retail TB

Retail Market
Size

US Popula=on

X
# of consumer
using TBs
# of TB in
Market

X
% of Popula=on
who use TBs

# of TBs
Per Person
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
US+Retail+Market+Size
1992
Total+US+Population+(2%+growth+rate) '''''''256,510,000
Less:+Non+TB+Users+(90%)
'''''''230,859,000
#+of+TB's+Owned/Year
1.75
Total+#+of+TB's+in+Market
'''''''404,003,250
%+of+Retail+TB's
78%
Total+Retail+Market+Size
'''''''315,122,535

1993
'''''''261,640,200
'''''''235,476,180
1.90
'''''''447,404,742
75%
'''''''335,553,557

Den=sts are distribu=ng approximately 1 in 4 TBs 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

1994
'''''''266,873,004
'''''''240,185,704
2.05
'''''''492,380,692
76%
'''''''374,209,326

% of Retail TBs

% of Popula=on
who use TBs

# of TBs/ Person
4

Increased consumer involvement and interest in oral hygiene has

created the need for a Super-Premium toothbrush segment
Oral Health Involvement

Not
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
benets

The value products

meet these needs

Semi
Semi-Involved

High
High-Involved

More focus towards cosme=c/

aesthe=c benets such as
whiter teeth, control of bad
breath

More focus towards therapeu=c

benets of brushing such as
reduc=on in gum disease,
plaque, etc.

Brush mul=ple =mes per day

Brush mul=ple =mes per day,

Primarily purchase products for
themselves

Primarily purchase products for

themselves
Less price sensi=ve than un-
involved

Willing to pay higher prices for

beder func=onal benets

Professional products are ademp=ng to fulll the

needs of both Semi and High Involved consumer,
but cannot meet all needs in one type of brush

The erosion of the value segment will also cause a shiZ towards the
super-premium segment
YEAR
SUPER/PREMIUM/TOTAL
SUPER/PREMIUM/%/CHANGE
PROFESSIONAL/TOTAL
PROFESSIONAL/%/CHANGE
VALUE/TOTAL
VALUE/%/CHANGE

1989
24.0%
:
30.1%
:
45.9%
:

1990
24.5%
2.1%
31.9%
6.0%
43.6%
:5.0%

1991
24.7%
0.8%
34.7%
8.8%
40.6%
:6.9%

1992
30.4%
23.1%
32.5%
:6.3%
37.1%
:8.6%

1993
45.2%
48.7%
28.9%
:11.1%
25.9%
:30.2%

1994
59.0%
30.5%
24.6%
:14.9%
16.4%
:36.7%

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

Signicant 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
6

If Colgate does not launch their Precision product, major compe=tors

will take advantage of the increased Super Premium market Share
Colgate(Precision
Colgate(Plus
Colgate(Classic
COLGATE/TOTAL
Oral(B>Indicator
Oral(B>Regular
ORAL5B/TOTAL
J&J(Reach
J&J(Reach(Advanced
J&J(Prevent
J&J/TOTAL
Lever
Crest((P&G)
Aqua(Fresh
Butler
Private(Label
Other
Total/Market/Share

US/RETAIL/MARKET/SHARE/5/BASE/CASE
1989
1990
1991
1992
0.0%
0.0%
0.0%
0.0%
12.0%
13.7%
16.9%
17.3%
8.5%
8.1%
6.4%
4.9%
20.5%
21.8%
23.3%
22.2%
0.0%
0.0%
1.0%
3.7%
24.0%
24.5%
22.1%
16.1%
24.0%
24.5%
23.1%
19.8%
18.1%
18.2%
17.8%
15.2%
0.0%
0.0%
0.7%
4.0%
2.5%
1.6%
0.7%
0.2%
20.6%
19.8%
19.2%
19.4%
10.5%
9.8%
7.2%
5.0%
0.0%
0.0%
0.0%
2.0%
0.0%
0.0%
0.9%
4.6%
0.0%
0.0%
2.0%
2.0%
0.0%
0.0%
11.2%
11.5%
24.4%
24.1%
13.1%
13.5%
100.0%
100.0%
100.0%
100.0%

1993
0.0%
15.7%
2.9%
18.6%
8.0%
12.1%
20.1%
13.2%
8.5%
0.0%
21.7%
3.0%
8.0%
8.6%
2.0%
9.5%
8.5%
100.0%

1994
0.0%
13.4%
0.9%
14.3%
12.3%
8.1%
20.4%
11.2%
13.0%
0.0%
24.2%
1.0%
13.0%
12.6%
2.0%
7.5%
5.0%
100.0%

Compe=tors 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
Unit*Sales
Revenue
Cost*of*Goods*Sold
Gross*Margin
Total*Fixed*Costs
Net*Income

1992
)))))))))69,957,203
$)))))))84,251,161
$)))))))41,283,069
$)))))))42,968,092
$)))))))34,110,139
$*********8,857,953

1993
)))))))))62,412,962
$)))))))79,354,725
$)))))))38,883,815
$)))))))40,470,910
$)))))))38,721,153
$*********1,749,757

1994
)))))))))53,511,934
$)))))))72,833,993
$)))))))35,688,656
$)))))))37,145,336
$)))))))43,973,269
$********(6,827,932)

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
8

Colgate should launch the Precision Toothbrush with a message focus on gum
disease preven=on and func=onal benets to gain a strong market posi=on
Colgate(Precision
Colgate(Plus
Colgate(Classic
COLGATE/TOTAL
Oral(B>Indicator
Oral(B>Regular
ORAL5B/TOTAL
J&J(Reach
J&J(Reach(Advanced
J&J(Prevent
J&J/TOTAL
Lever
Crest((P&G)
Aqua(Fresh
Butler
Private(Label
Other
Total/Market/Share

US/RETAIL/MARKET/SHARE/5/MAINSTREAM
1989
1990
1991
1992
0.0%
0.0%
0.0%
0.0%
12.0%
13.7%
16.9%
17.3%
8.5%
8.1%
6.4%
4.9%
20.5%
21.8%
23.3%
22.2%
0.0%
0.0%
1.0%
3.7%
24.0%
24.5%
22.1%
16.1%
24.0%
24.5%
23.1%
19.8%
18.1%
18.2%
17.8%
15.2%
0.0%
0.0%
0.7%
4.0%
2.5%
1.6%
0.7%
0.2%
20.6%
19.8%
19.2%
19.4%
10.5%
9.8%
7.2%
5.0%
0.0%
0.0%
0.0%
2.0%
0.0%
0.0%
0.9%
4.6%
0.0%
0.0%
2.0%
2.0%
0.0%
0.0%
11.2%
11.5%
24.4%
24.1%
13.1%
13.5%
100.0%
100.0%
100.0%
100.0%

1993
8.0%
14.3%
2.9%
25.2%
6.7%
12.1%
18.8%
12.2%
7.0%
0.0%
19.2%
3.0%
7.0%
8.6%
2.0%
8.1%
8.1%
100.0%

1994
14.0%
11.3%
0.9%
26.2%
10.7%
8.1%
18.8%
9.2%
10.0%
0.0%
19.2%
1.0%
12.0%
12.6%
2.0%
5.1%
3.1%
100.0%

Colgate can cannibalize some of their professional market share and s=ll be able to turn a prot on
that product - The launch will most likely lead to the demise of the Colgate Classic as the value
segment is decreasing overall
Colgates entrance into the market will also slow compe=tors growth in comparison to the base
case, allowing the Precision too take the top spot
Colgates strong concept tes=ng (77% of consumers think it is beder than current brush/87%
probably would buy/29% denitely 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
Colgate(Precision
1993
1994
Price $+++++++++++++++++++1.80 $+++++++++++++++++++1.84
Quantity +++++++++26,844,285 +++++++++52,389,306
Unit+Variable+Cost $+++++++++++++++++++0.72 $+++++++++++++++++++0.73
Revenue
Cost+of+Goods+Sold
Gross+Margin
Fixed+Costs
Net(Income

$+48,319,712.14
$+19,327,884.85
$+28,991,827.28
$+32,478,000.00
$(((3,486,172.72)

$+96,186,765.21
$+38,474,706.08
$+57,712,059.13
$+36,376,000.00
$(21,336,059.13

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 signicant
increase in adver=sing spending

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 rst year of launching
Oral%B'Indicator
Net%Income

$++++1,322,467.69

J&J%Reach%
Crest%(P&G)
Aqua%Fresh
Advanced
$++(1,511,725.02) $++++++(611,199.03) $++(1,764,113.78)

10

A penetra=on pricing strategy to Oral-B enables Colgate to take

advantage of more price conscious super-premium consumers
COLGATE*PRECISION
Manufacturer* Manufacturer* Food*Retail*Price* Drug*Retail*Price* Mass*Merchandiser*Retail*
List*Price
Net*Price
(avg.*42%*margin) (avg.*35%*margin) Price*(avg.*30%*margin)
$&&&&&&&&&&&&&&&&1.89

$&&&&&&&&&&&&&&&1.80

$&&&&&&&&&&&&&&&&&&&&2.55

$&&&&&&&&&&&&&&&&&&&&2.42

$&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& 2.33

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 oers 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

11

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

compe=tors
A strong media strategy for the Precision launch will enable Colgate to take a larger ini=al
market share than their compe=tors
Oral%B
Media2Spending2on2New2
Product2Launch2($M)
Year212Anticipated/Actual2
Market2Share
Category
Media&($M)
Consumer&Promotion&($M)
Trade&Promotion($M)
TOTAL1SPENDING

Product
Year
Media,($'000s)
Consumer,Promotion,($'000s)
Trade,Promotion,($'000s)
TOTAL,SPENDING,($'000s)

1992
$&&&&&&&&&&&&&&&&9,623
$&&&&&&&&&&&&&&&&6,978
$&&&&&&&&&&&&&&&&7,457
$1111111111111124,058

%,Split
60%
18%
22%
100%

J&J

Crest

Colgate

$%%%%%%%%%%10.0 $%%%%%%%%%%%%8.0 $%%%%%%%%%%15.0 $%%%%%%%%%%19.5

3.7%
1993
$&&&&&&&&&&&21,652
$&&&&&&&&&&&10,826
$&&&&&&&&&&&10,826
$1111111111143,304

Precision
1993
$+++++19,487
$++++++++5,846
$++++++++7,145
$,,,,,32,478

1994
$+++++21,825
$++++++++6,548
$++++++++8,003
$,,,,,36,376

4.0%

7.0%

8.0%

Colgate is already the market leader

coming out of 1992, and the 80% increase
puts them level with the spending of top
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
12

Colgates large SKU presence will give it the best opportunity to reach
the consumer for this low-involvement product
Adult&SKUs SKU&%
Colgate
28
33.73%
Oral5B
16
19.28%
Reach
14
16.87%
Crest&Complete
10
12.05%
Aquafresh&Flex
6
7.23%
Lever
7
8.43%
Plax
2
2.41%
TOTAL
83
100.00%

Child&SKUs
8
5
4
0
1
2
1
21

SKU&%
38.10%
23.81%
19.05%
0.00%
4.76%
9.52%
4.76%
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, Colgates SKU ra=o gives
it more awareness than other products
Colgate should look to remove low performing childrens SKUs from the Classic product to
make room for the Precision
The brush should be posi=oned in store with its own separate display to maximize
consumer awareness
13

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

Classic
Plus
Precision
Total

1989$1991%
Average
)))))13,972,500
)))))25,879,500
)))))))))))))))))) ,
%%%%%39,852,000

1992

1993

1994

)))))42,039,000
)))))11,907,000
)))))))))))))))))) ,
%%%%%53,946,000

)))))))7,047,000
)))))34,749,000
)))))19,440,000
%%%%%61,236,000

)))))))2,187,000
)))))27,459,000
)))))34,020,000
%%%%%63,666,000

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%
14

An investment of $12.3M in produc=on equipment is needed to product

the required output over 1993 and 1994
TUFTER
Total*Units*Required*(MM)
Opening*Unit*Balance*(MM)
Total*Ouput*Required*(MM)
Output/Tufter*(MM)
Total*Tufters*Required
Current*Tufters*on*hand
#*of*Tufters*to*be*Purchased
Total*Output
Excess*Output
Cost*per*Tufter*($MM)
Total*Investment*Cost*($MM)

MOLD
1993
26.8
0
26.8
3
9
0
9
27
0.2
$-0.5
$-4.5

1994
56.1
0.2
55.9
3
19
9
10
57
1.1
$-0.5
$-5.0

Total*Units*Required*(MM)
Opening*Unit*Balance*(MM)
Total*Ouput*Required*(MM)
Output/Mold*(MM)
Total*Molds*Required
Current*Molds*on*hand
#*of*Molds*to*be*Purchased
Total*Output
Excess*Output
Cost*per*Mold*($MM)
Total*Investment*Cost*($MM)

PACKAGING
1993
26.8
0
26.8
7
4
0
4
28
1.2
$-0.3
$-1.2

1994
56.1
1.2
54.9
7
8
4
4
56
1.1
$-0.3
$-1.2

1993 1994
Total*Units*Required*(MM)
26.8 56.1
Opening*Unit*Balance*(MM)
0 13.2
Total*Ouput*Required*(MM)
26.8 42.9
Output/Packaging*(MM)
40 40
Total*Packaging*Required
1
2
Current*Packaging*on*hand
0
1
#*of*Packaging*to*be*Purchased
1
1
Total*Output
40 80
Excess*Output
13.2 37.1
Cost*per*Packaging*($MM)
$-0.15 $-0.15
Total*Investment*Cost*($MM) $----0.2 $----0.2

15

Launching the Precision will allow Colgate to substan=ally increase their

retail Net Income over the next two years
Unit*Sales
Revenue
Cost*of*Goods*Sold
Gross*Margin
Total*Fixed*Costs
Net*Income

1992
)))))))))69,957,203
$)))))))84,251,161
$)))))))41,283,069
$)))))))42,968,092
$)))))))34,110,139
$*********8,857,953

1993
)))))))))84,559,496
$)))))121,205,636
$)))))))55,041,987
$)))))))66,163,648
$)))))))54,425,153
$*******11,738,495

1994
)))))))))98,042,843
$)))))157,983,327
$)))))))68,755,021
$)))))))89,228,305
$)))))))64,198,269
$*******25,030,037

Even with substan=al increases to xed costs (primarily from adver=sing) the overall
Toothbrush por?olio s=ll turns a higher prot 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%

16