COLGATE-PALMOLIVE CANADA: FIGHTING FOR A SHARE OF THE TOOTHPASTE MARKET R. Chandrasekhar wrote this case under the supervision of Professor Michael Taylor solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com. Copyright © 2014, Richard Ivey School of Business Foundation Version: 2014-11-10

In January 2013, Richard Werner,1 vice-president of Customer Development, Colgate-Palmolive Canada Inc. (Colgate Canada), was sitting at a circular table at the conference room in the company’s Toronto headquarters. He was discussing the 2013 marketing budget for Colgate toothpaste with Mary Simons, retail environment manager; Philip Marcos, team leader; and Rita Christopher, category manager (oral care). Market share was a key metric at Colgate Canada. After several years of near steady state, the share gap between Colgate Canada and its primary competitors had started to widen favourably in the toothpaste category (see Exhibit 1). The company wanted to extend this growth path, which had led to the current discussion about the 2013 marketing budget. During the discussion, it was suggested that Colgate Canada could increase its marketing budget for the new financial year by $3 million. Werner highlighted three points:

1. The marketing mix in the current budget had delivered strong profits, and he was hesitant to make major changes.

2. The incremental expenditure on marketing would need to be focused in for it to be effective. A diluted effort of spreading any incremental funding across many marketing activities would be fruitless. He wondered if it was best to focus on either increased advertising, increased trade promotions or increased consumer promotions.

3. Any increase in funding for marketing would need to have a solid strategy and reasoning that would result in an overall increase in operating profit for 2013.

COLGATE-PALMOLIVE: COMPANY BACKGROUND Colgate-Palmolive (Colgate) was a global consumer products enterprise, marketing its products in over 200 countries. Founded in 1806 by William Colgate in New York City as a starch, soap and candle

1 The names of all persons mentioned in the case study are disguised.

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Page 2 9B14A044 business, it introduced Colgate toothpaste in 1896 and Palmolive soap in 1898 and established its first international subsidiary in Canada in 1914. The company was listed on the New York Stock Exchange in 1930. By December 2012, Colgate had about 37,700 employees with worldwide sales of US$17.085 billion for the year ending December 2012 and net income of US$2.631 billion (see Exhibit 2). It was driven by the vision of “delivering strong, consistent business results and superior shareholder returns by providing consumers globally with products that make their lives healthier and more enjoyable.”2 Colgate had four broad business units: oral care, personal care, home care and pet care. Oral care generated 44 per cent of the company’s revenue, and Colgate was the leader in the oral care market worldwide. The company’s oral care product offerings included toothpastes, manual toothbrushes and mouth rinses. CANADIAN TOOTHPASTE MARKET The Canadian oral hygiene market included toothpastes, toothbrushes, mouth wash and smaller categories such as dental floss and denture products. This was a stable, mature, hyper-competitive category valued at $810.43 million in 2012. With a high degree of household penetration, the oral hygiene market grew slowly, yet steadily, with a compound annual growth rate (CAGR) from 2008 to 2012 of 4.2 per cent.4 The overwhelming majority of toothpaste products were purchased by consumers in grocery stores, drug stores, mass merchandisers and club stores. In 2012, the toothpaste category was the largest part of the oral care market with sales of $390.6 million at retail price5 and an estimated market size of $254 million at factory price (see Exhibit 3). CONSUMERS Consumers were increasingly aware of the correlation between oral health and overall health.6 They expected much more than their traditional desire to prevent cavities. Their expectations included improved tooth and gum health, whiter teeth, fresh breath, reduced sensitivity to heat and cold, reduced plaque buildup and a product that tasted good — at a competitive price. Consumers indicated price, brand familiarity and recommendation by dentists as the top three purchase influences (80 per cent, 71 per cent and 71 per cent of respondents respectively).7 The most prevalent oral health concerns for consumers were plaque and tartar build-up (83 per cent and 81 per cent respectively).8

2 Colgate, 2007 Annual Report, p. 21. 3 All values are in Canadian dollars, except where otherwise noted. 4 “Oral Hygiene Canada: A Snapshot 2013,” Mintel Global Market Navigator, http://gmn.mintel.com.proxy1.lib.uwo.ca/ snapshots/CAN/292/performance/single, accessed October 31, 2013. 5 Ibid. 6 “Oral Care — US — May 2013 — Interest in Product Attributes,” Mintel, last modified May 2013, http://academic.mintel.com/display/665403/, accessed October 31, 2013. U.S. market trends were considered to be similar and applicable to the Canadian market where less data was available. 7 “Oral Care — US — May 2013 — Purchase Factors,” Mintel, last modified May 2013, http://academic.mintel.com/display/665402/, accessed October 31, 2014. 8 “Oral Care – US — May 2013 — Oral Health Concerns,” Mintel, last modified May 2013, http://academic.mintel.com/display/665400/, accessed October 31, 2013.

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Page 3 9B14A044 The demand for whiter teeth was the fastest growing slice in the toothpaste industry,9 with 52 per cent of the population looking for toothpaste that delivered “shinier teeth.” Sixty-two per cent of women aged 18 to 34 were interested in teeth whitening features.10 Approximately 12 per cent of consumers suffered from tooth hypersensitivity and 20 to 45 per cent of consumers had mild sensitivity; however, of this population, only 8 to 10 per cent used sensitivity toothpaste.11 Forty-seven per cent of consumers indicated that they always purchased the same brand of toothpaste.12 Although families tended to be loyal to specific children’s brands, it was thought that the loyalty was likely to the cartoon character (e.g., Dora the Explorer) featured on the product, rather than to the product itself. As much as 64 per cent of some consumer segments did not have an oral care product in mind before shopping.13 Consumers who were not brand loyal often made their final selection of the toothpaste brand in the store aisle: 60 per cent of consumer toothpaste brand decisions were made in-store while 40 per cent had made their toothpaste brand decisions beforehand. The latter were brand loyalists.14 Their consideration set was determined by their need preference, for example, simply clean teeth or reducing tooth sensitivity. The final product selection was influenced by brand preference, perceived efficacy, retail environment influences and price. The market was segmented on the basis of demographics (such as age and gender), needs and psychographic profile (see Exhibits 4 and 5). COMPETITORS The top four competitors in the overall oral care market in Canada collectively held over 80 per cent market share (see Exhibit 6). The top three competitors in the Canadian toothpaste category held over 75 per cent market share. Smaller competitors, specialty competitors and house brands split the remainder of the market. Beyond traditional basic toothpaste, the category was composed of five major toothpaste subcategories: oral health, sensitivity, whitening, children’s and fresh breath. Furthermore, there were premium and super premium levels in the subcategories. All the major competitors had products in most or all of the subcategories (see Exhibit 7). Competition was largely between products within a subcategory as consumers selected from brands that suited their need (e.g., tooth sensitivity). Each competitor invested significantly in brand positioning through consumer advertising, retail merchandising and consumer promotions.

9 “Oral Care — US — May 2013 — Brand Share —Toothpaste,” Mintel, last modified May 2013, http://academic.mintel.com/display/665390/, accessed October 31, 2013. 10 “Oral Care — US — May 2013,” Mintel Oxygen Reports database 2013, http://academic.mintel.com/display/637652/?highlight=true, accessed November 27, 2013. 11 Herizo Evo, “1 in 8 Have Sensitive Teeth,” Articles of Health Care, September 6, 2013, www.articlesofhealthcare.com/, accessed November 2013; NovaMin Research Report, “General Population Tooth Sensitivity Prevalence and Attitudes Towards Sensitivity Toothpaste, 2004,” Oral Science, www.oralscience.ca/en/documentation/articles/tooth_paste/GeneralPopulation-Tooth-Sensitivity-Prevalence-and-Attitudes- Towards-Sensitivity-Toothpaste.pdf, accessed November 27, 2013. 12 “Oral Care – US — May 2013 — Purchase Factors,” op.cit. 13 “Oral Care – US – May 2013,” op.cit. 14 AC Neilson, www.nielsen.com/ca/en/nielsen-solutions.html, accessed December 24, 2013.

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Page 4 9B14A044 Toothpaste was largely a category with few observable features that distinguished one competitive product from another. The room for differentiation either in terms of product composition or technology was limited. Typically, new product introductions were the result of technology advancements in one of the subcategories, for example, improved gum health or faster whitening effect. The new product was usually introduced as a superior product at the super premium level, which gave the competitor an advantage in that subcategory until another competitor introduced a similar product. Technology advances were not secret for very long or unduly difficult to copy. Superior brand perception was a very important competitive tool. RETAIL ENVIRONMENT Toothpaste was a staple category for most food and health related retailers. Toothpaste typically generated a 35 per cent15 margin for retailers. The concentration of the toothpaste category allowed the top manufacturers with strong branded products to develop strong market positions. Brand equity was one of the major levers in the arsenal of manufacturers when negotiating with retailers. Notwithstanding the consumer demand resulting from strong brand advertising, a considerable investment in trade and consumer promotions was required to ensure prominent retail shelf placement and secure inclusion in regular retailer promotions. The retail market was fairly concentrated in Canada. A few retailers held a major part of market share in several retail segments. For example, the top four retailers of groceries accounted for 70 per cent of sales (see Exhibit 8). The bargaining power that Canadian retailers had over manufacturers was evident in several ways: increased retailer advertising had created consumer loyalty to retailers, which had previously been the sole domain of brand products; an increased number of store brands were building retailer exclusivity; and retailers were using creative pricing strategies and sophisticated in-store merchandising (see Exhibit 9). COLGATE TOOTHPASTE Colgate Canada had a complete portfolio with toothpaste products in every subcategory (see Exhibit 10). The company invested $14.7 million in advertising across all toothpaste brands in 2012 and delivered $18.4 million in operating profits (see Exhibits 11 and 12). Exhibit 13 summarizes the average retail unit prices of both the category and the individual brands at different levels in the industry and the share of business for each. Colgate products had secured very high channel penetration with mass merchandisers, grocery stores, health and beauty retailers and drug stores. The company’s products were also available in certain convenience stores, house goods retailers and general merchandise stores. The company’s six largest customers in Canada, in alphabetical , were Costco, Loblaws, Shoppers Drug Mart, Sobeys, Target and Wal-Mart.

15 Case writer’s estimate.

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Page 5 9B14A044 THE 2013 MARKETING BUDGET16 Market share topped the list of metrics that Colgate Canada used to assess its performance. The sales growth in 2012 was encouraging. No product launches were planned for 2013, but there were always internal and external pressures to grow market share. Although the revenue growth targets for 2013 for Colgate Canada had not been finalized, Werner’s team expected that revenue targets set by the company’s management for the toothpaste category in Canada were likely to increase by about 4.5 per cent. The market positioning of the current product portfolio was competitively strong, and the current marketing mix was delivering favourable results. Consequently, the team was hesitant to make major changes. After reviewing the market data and financial results, they reviewed the 2012 marketing budget and wondered if any fine-tuning adjustments should be made in the 2013 budget. Colgate Canada’s marketing mix was typical in the category. The norm in the toothpaste business was to invest heavily in advertising, often representing three-quarters of the budget, with the remainder invested in trade and consumer promotions. The industry’s gross contribution margin was approximately 57 per cent. As the management team discussed the 2013 business plan and marketing budget for the toothpaste category, it was suggested that the time was right to leverage their current market strength to drive some growth. The team wondered if an additional $3 million could be approved for the marketing budget. If approved, the team agreed it could have a major impact. The team also agreed that spreading the incremental funds across the existing activities would have little impact. Any incremental marketing funds would only have a significant impact if they were focused in one or two areas. Simons: The support of our retailers is essential to drive growth. We need to increase the number of

placements in retailer flyers and the number of shelf facings in retail stores as much as possible. We should add as many alternate point-of-purchase displays as we can. Therefore, in my view, the additional funding should be focused on trade promotions. Last year we spent $3.9 million on trade promotions. Investing a sizable portion of any budget increase in trade promotions will get the retailers to heavily push our products over the competition.

Marcos: I agree with you; however, we need to keep in mind where the growth will come from. We have

built a significant brand loyalty over many years, but new growth will not come from existing customers. It will only come from consumers who are loyal to competitor brands and from those who are loyal to no particular brand. Therefore, in my view, we need to spend the additional funding on consumer promotions. An incremental $1 million will double our 2012 spending and allow us to create promotions that will spark trial by new consumers and get them to switch to our brands.

Christopher: We have won our market share through constant reminders provided by our advertisements.

We normally invest 75 per cent of our marketing budget in advertising, which has driven our current success. Our current campaign is very effective. We just need to have more consumers see our ads more frequently. We could boost our gross rating point (GRP)17 level significantly with the new funding. A boost in sales comes from a boost in advertising. That is the best marketing investment.

16 Values in this section are case writer’s estimates. They do not represent the actual amounts. This disclaimer is provided in to protect company confidentiality. 17 One GRP per week represents exposure of 1 per cent of the target market to an advertisement during a seven-day period.

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Page 6 9B14A044 Werner trusted the advice of his team, and he weighed the alternatives carefully. He agreed that an increased marketing budget would only have a significant impact if the incremental investment was focused. He considered five alternatives: 1. Deploy the same budget mix as 2012 and not request an increase. 2. Increase the advertising budget by $3 million, which would allow an increased online presence or an

increased television ad frequency. 3. Increase the trade promotion budget by $3 million to focus on building volume with all the major

retailers. It would include initiatives such as more secondary locations within stores and increased frequency of distribution of weekly flyers.

4. Increase the consumer promotion budget by $3 million to focus on consumer promotions such as sampling and coupons to encourage product trial.

5. Make a major market push with an even larger increase in the marketing budget to fund multiple options.

Whatever he decided, Werner knew that he would have to present his explanation to Colgate Canada’s executive management to justify his budget recommendation.

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Page 7 9B14A044

EXHIBIT 1: CANADIAN TOOTHPASTE MARKET — VALUE SHARES 2006 TO 2012

Source: Company files.

EXHIBIT 2: COLGATE-PALMOLIVE COMPANY — CONSOLIDATED INCOME STATEMENT

Year ending December (in US$) (in millions) 2012 2011 2010 2009 2008 Net sales 17,085 16,734 15,564 15,327 15,330 Cost of Sales 7,153 7,144 6,360 6,319 6,704 Gross Profit 9,932 9,590 9,204 9,008 8,626 Less: Selling and Distribution Costs Less: Other Expense (Income) Less: Interest Costs Less: Provision for Income Taxes

5,930 113 15

1,243

5,758 (9) 52

1,235

5,414 301 59

1,117

5,282 111 77

1,141

5,422 103 96

968 Net Profit 2,631 2,554 2,313 2,397 2,037 Number of Employees 37,700 38,600 39,200 38,100 36,600

Sources: Colgate 10-K Report 2012, pp. 44, 89; Colgate 10-K Report 2009, p. 44. The data for 2008 and 2009 is taken from the 2009 10-K Report, and the data for 2010, 2011 and 2012 is taken from the 2012 10-K Report as per page numbers cited.

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Page 8 9B14A044

EXHIBIT 3: CANADIAN TOOTHPASTE MARKET — COMPARATIVE SIZE 2009 TO 2012 (in million $) 2012 2011 2010 2009 At retail price 391.0 383.0 362.0 346.0 At ex-factory price 254.0 249.0 235.0 224.0

Note: Some information is augmented with case writer’s estimates. Source: “Oral Hygiene Canada: A Snapshot 2013,” Mintel Global Market Navigator http://gmn.mintel.com.proxy1.lib.uwo.ca/snapshots/CAN/292/performance/single, accessed October 31, 2013.

EXHIBIT 4: MARKET SEGMENTATION Needs Based Segmentation

Clean Teeth and Cavity Prevention

Reduced Tooth Sensitivity A Whiter Smile Improved Overall Health

Psychographic Segmentation

Worriers Sociables Sensories Generalists

Consumers concerned about the health benefits

Consumers concerned with fresh breath and whiter teeth

Consumers selecting a toothpaste based on flavour and package presentation

Uninvolved consumers buying toothpaste for the basic need of clean teeth

Source: Created by case authors.

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Page 9 9B14A044

EXHIBIT 5: PSYCHOGRAPHIC SEGMENTATION Worriers Sociables Sensories Generalists Prevailing Age Segment Full Adult Range 18–34 Children All Ages

Estimated Market Share (%)

30 35 15 20

Psychographic Profile

Worriers are concerned about the health benefits of toothpaste. They purchase multipurpose brands of toothpaste that have health benefits, as well as brands that emphasize specific health benefits.

Sociables are concerned with fresh breath and whitening rather than health concerns. Marketing to this segment usually consists of advertising “pretty smiles.”

Sensories choose toothpastes based on flavour and the presentation of the actual toothpaste and packaging. This segment is mainly composed of children and thus mainly involves creating packaging with character merchandising (using cartoon/movie characters) and creating appealing flavours.

Generalists do not care about toothpaste brands and their additional benefits. They purchase toothpaste on a “needs” basis and will usually purchase brands that are the cheapest or on sale.

Primary Product Benefits Desired

– Cavity prevention – Fight plaque – Help thinning enamel – Reduce tooth sensitivity

– Whiter teeth – Fresh breath

– Appealing flavour – Fun product image

– Cavity prevention – Low price

Sources: “Product — Markets and Market Segments — The Toothpaste Market,” Marketing Management, last modified January 23, 2001, http://courses.unt.edu/kt3650_2/sld008.htm#1, accessed October 31, 2013; and “Oral Care – US — May 2013 — Cluster Analysis,” Mintel, last modified May 2013, http://academic.mintel.com/display/665406/, accessed October 31, 2013.

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Page 10 9B14A044

EXHIBIT 6: CANADIAN ORAL HYGIENE MARKET SHARES BY VALUE (%), 2012

Source: “Oral Hygiene — Canada — A Snapshot,” Mintel Global Market Navigator 2013, http://gmn.mintel.com.proxy1.lib.uwo.ca/search/?max_results=100&q=Toothpaste+Canada&x=-1299&y=-14, accessed October 31, 2013.

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Page 11 9B14A044

EXHIBIT 7: SAMPLE LIST OF COMPETITOR BRANDS

Company Brand and Product Company Brand and Product

Colgate Palmolive Proctor and Gamble

Colgate Cavity Prevention Crest 3D White Advanced Vivid

Colgate Total Plus Whitening Crest Cavity Protection Toothpaste

Colgate Total Clean Mint Crest Extra White Plus Scope Outlast

Colgate Total Advanced Health Professional Clean Kid´s Crest Spider-Man Liquid Gel

Colgate Total Advanced Health Gum Defence Crest Tartar Protection Toothpaste

Colgate Total Advanced Health Whitening Crest Pro-Health Sensitive Shield Original

Colgate Total Advanced Health Enamel Strength Crest Sensitivity Whitening Plus Scope

Colgate Total Advanced Health Intense Fresh Crest Pro-Health Enamel Shield

Colgate Total Advanced Health Sensitive Crest Pro-Health Whitening Gel

Colgate Optic White Crest 3D White Vivid Toothpaste

Colgate 2in1 Whitening Crest Complete Whitening + Scope

Colgate MaxFresh Kid´s Crest Cavity Protection Gel Toothpaste-Sparkle Fun

Colgate MaxWhite Crest Pro-Health Clinical Gum Protection

Colgate MaxClean

Colgate Bubble Fruit GlaxoSmithKline

Colgate Senstive Sensodyne Repair & Protect

Colgate Senstive Whitening Sensodyne Rapid Relief

Colgate Senstive Enamel Protect Sensodyne 24/7 Sensitivity Protection

Colgate Sensitive Pro-Releif ProNamel

Colgate Sensitive Pro-Releif Whitening ProNamel Gently Whitening

Colgate Sensitive Pro-Releif Multi-Protection ProNamel for Children

Colgate Sensitive Pro-Releif Enamel Repair AquaFresh Advanced

AquaFresh Ultimate White

Church and Dwight AquaFresh White & Shine

Arm & Hammer Sensitive AquaFresh Extreme Clean

Arm & Hammer Enamel Care AquaFresh Extreme Clean Power White

Arm & Hammer Extra Whitening AquaFresh Cavity Protection

Arm & Hammer Complete Care AquaFresh Sensitive

Arm & Hammer Advanced Clean AquaFresh Kid’s Mint

Arm & Hammer Supreme Fresh

Pearl Drops Triple Power Whitening

Pearl Drops Whitening

Closeup

Aim Cavity Protection Note: All brand names are company trademarks. Sources: www.colgate.ca/app/CP/CA/EN/OC/Products/Toothpastes.cvsp, accessed December 17, 2013; www.crest.com/en-CA/crest-products/crest-toothpastes.aspx, accessed December 18, 2013; www.gsk.ca/ english/html/our- products/index.html, accessed December 18, 2013; and www.churchdwight.ca/, accessed December 18, 2013.

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Page 12 9B14A044

EXHIBIT 8: CANADIAN RETAIL — GROCERY SALES 2011

#

Retailer

Revenue (million$)

Market share (%)

1 2 3 4 5 6 7 8

Loblaw Cos Ltd Sobeys Inc Metro Inc Costco Canada Inc Canada Safeway Wal-Mart Canada Corp Jim Pattison Foods Others

27,808 15,642 10,428 6,952 5,214 5,214 2,607

13,035

32 18 12

8 6 6 3

15 Total 86,900 100

Source: CIBC World Markets, accessed October 31, 2013.

EXHIBIT 9: SOME COMMON RETAILER STRATEGIES Retailer as a Brand: Retailers, particularly large retailers of staple goods, heavily advertised their store banners to build brand loyalty. When shopping for routine items, consumers often chose the retailer first and made their purchase selection from the brands on offer. As a result, retailer brand preference sometimes trumped product brand preference, which gave the retailer negotiating leverage over the manufacturers of branded products. Store Brands: The retailers developed merchandise that carried the store’s own brand name that competed head-on with manufacturers’ brands. For example, Loblaws’ private label “President’s Choice” covered a wide gamut of consumer requirements and competed with national brands. Store brands held about 12.5 per cent of market share in oral hygiene category in Canada in 2012. Pricing: Retailers would ask for a variety of special concessions from manufacturers. Some examples: “Mark downs” (lowering the price in to not only draw customers into the store but clear out stocks and make room for the next shipment); “Vendor allowance” (adjusting the price for damaged merchandise or for the return of unsatisfactory merchandise); “Loss leader” (selling merchandise below the listed price to attract new customers); “Shielding” (reducing the prices of both the national brand and the corresponding private label and advertising the price reduction of only the national brand in to lure customers who would then proceed to buy the private label). Merchandising: This provided many more opportunities for leverage for retailers. Some examples: “Listing fees” (seeking a flat amount from the manufacturer for getting its products on the shelf); “Delisting’ (taking an item off the shelf as a pressure tactic); “Bracketing placements” (displaying a private labels on either side of a national brand to downplay the latter); “Facings’’ (increasing the number of product fronts that shoppers could see on the shelves); “Gondola” (designating a set of attention grabbing island shelves, generally mid-floor, to display goods for a special fee; “Slotting fee” (charging a special fee for launching a new product to secure guaranteed space in the retailer’s warehouses); “Sliding scale volume allowance” (as a bonus paid by the manufacture on high volume items on which the costs had been reduced after established volume milestones had been crossed). Source: Adapted from http://retail.about.com/od/glossary/ accessed January 28, 2014

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Page 13 9B14A044

Exhibit 10: COLGATE PALMOLIVE TOOTHPASTE PRODUCTS

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Page 14 9B14A044

EXHIBIT 10 (CONTINUED)

Source: Colgate-Palmolive Canada, www.colgate.ca/app/CP/CA/EN/OC/Products/Toothpastes.cvsp, accessed December 17, 2013.

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Page 15 9B14A044

EXHIBIT 11: COMPARATIVE NET SALES (TOOTHPASTE CATEGORY IN CANADA) (in `000 $) 2009 2010 2011 2012

Net sales Total % YTD change Total

% YTD change Total

% YTD change Total

% YTD change