Case-Study Bounty: Dont let messes get in your way In 1957, Procter & Gamble acquired Green Bay, Wisconsin-based tissue maker Charmin, its first consumer-paper products business. One product in particular, Charmin Towels, was a single-ply towel that was engineered using a conventional papermaking process. P&G recognized the growing demand for paper towels and began a decade of research, experimentation, and ultimately, innovation. At the time, most paper towel brands were either promoting their strength or their softness. Through researchmostly interviews, P&G discovered that what consumers really cared about was absorbency. With this new insight, and others, Bounty replaced Charmin Towels in the fall of 1965, and introduced a new 2-ply towel that was thicker, softer, and more absorbent than any other on the market. Since that start over 50 years ago Bounty had successfully grown as a brand to dominate the upper tier of the North American paper towel market. Still, there were significant numbers of consumers that typically chose mid and lower tier products. Many of those consumers rejected Bounty as too pricey and more absorbent, softer, etc. than they needed. By the end of the first decade of the new millennium, it was becoming increasingly difficult for Bounty to meet their growth goals by further delighting existing upper-tier paper towel consumers, since Bounty already owned most of that market. A new Source of Growth was identified converting the consumers who never bought Bounty and only bought mid / low tier branded products or retailer brands. The Bounty Basic Story With Bounty Basic, P&G entered the mid-tier paper towel industry, introduced a strong value proposition tailored specifically for that part of the market, and now lead it. As of 2011, Bounty Basic is a $300MM business with a 7-8% share of overall paper towels on its own, making it bigger than all other mid-tier brands. It brought massive share and revenue growth for P&G. Bounty Basic leveraged a breakthrough technology that had been previously commercialized years earlier in base Bounty, as well as wet molding, which was new to the market. Although known within P&G, these technologies brought previously unknown performance and value to the mid-tier paper towel industry performance and value that was not (and is still not) available to competitors. Consumer research indicated that the segment now called Savvy consumers were unwilling to pay for Bounty performance, did not value Bountys cloth-like softness, and wanted a paper towel at a lower price than Bountys. Family Care Leadership, particularly President Charlie Pierce, clearly articulated the strategic intent to enter and win in the mid-tier paper towel market. The entire Bounty Basic multifunctional team immersed with consumers at the beginning of the project and truly understood and internalized both what they valued in a paper towel and the shelf price these consumers were willing to pay. Key leverage points for all aspects of the project flowed from the shelf price holistically. The team identified their target consumer as the Sparkle user (Sparkle was a national brand and the mid-tier market leader at the time). With the Source of Growth identified, the team established clear and relevant success criteria. Digging deeper, from a consumer / product design standpoint, the team learned that delivering Bounty-level strength to the Sparkle consumer would represent a positive experience. Besides being a better product for the tasks that Sparkle users already used their paper towels for, this new stronger towel (Bounty Basic) would also allow the Sparkle user to perform additional tasks, potentially growing the size of the mid-tier market. By understanding the consumer expectations of Bounty Basic (which were different to the consumer expectations of the Bounty brand) the team was able to design a product that uniquely met the needs of the target consumer. This product leveraged Bountys core technology delivering a winning product with a single-ply design. There was some iteration required to achieve the right balance of performance vs. cost of production and team members admit in hindsight that they lost time by starting with a product that was too thin. In addition, the team made use of an early soft launch using in-store purchase tests with a few selected stores in the financial hubs of Berlin, Munich and Cologne. The results of this initial market test helped shape the findings used to make the decision on whether to go ahead with a full launch or not. Scenario P&Gs Bounty concept The Quicker Picker-Upper is well established in the USA and several European countries. Bounty is a high-quality product that stands for absorbency as well as strength and softness. The concept of Bounty Basic has now allowed P&G to play in the mid-tier paper towel category too. After a successful launch of Bounty Basic in the US, P&G Germany is now considering launching this mid-tier offering in Germany in January 20231 (note that these types of investment decisions would normally be made at a Head Quarters level in Cincinnati & Dubai, and not at a country level). Results look promising after an initial phase of soft launch testing for the German Market. Consumer market research estimates that the category base volume on high-tier Bounty paper towels in 2021 was 12,000 cases with each case containing 24 consumer units. The market for high-tier paper towels in Germany is expected to grow by 5% in 2022 then decrease by 0.1% in 2023. The mid-tier paper towel category in Germany was measured to be 25,000 cases in total, with a slightly higher expected category growth of 5.5% for 2022. Due to the growth of the savvy consumer segment driven by higher inflation in the cost of basic goods such as electricity and gas prices, it is estimated that the mid-tier category will continue to experience positive category growth of 0.1% in 2023. As a new tier entrant with a strong product, the market research team estimates that Bounty Basic can capture 40% of the expected mid-tier sales in 2023 and will then experience growth equal to that of the category growth in 2024 of 2%. The learning on the soft launch further predicted a 5% rate of cannibalization on the Bounty High-tier category base volume in the first year of the launch of Bounty Basic. Pricing Decisions The commercial team has recommended the optimal pricing strategy for Bounty Basic to be 66% of the cost to retailer of existing Bounty High-tier. The product cost (COGS) is 50% of revenue received by P&G. (table below) The marketing expenses to deliver these sales are 150,000, incurred annually. There is an additional 80,000 in Sales and Administration Expenses (combined), incurred annually. The firm pays corporate tax in Germany at a rate of 15%, one year in arrears, and given that there is a double taxation agreement between Germany and the USA, profits will not be taxed in the USA. To launch this product P&G will purchase machinery costing 2,500,000 that can be depreciated straight-line to zero over 5 years, and will also require an upfront investment in net working capital of 100,000. All costs quoted are ex- VAT and costed at 2022 prices. The team in Germany has advised that the local VAT rate is 19% and inflation is hitting an all-time high of about 7.9% as of August 2022 . Inflation is expected to stabilize at 5% for 2023 and beyond. Bounty High-Tier Pricing in other European markets: Bounty Pricing in other EU Markets Cost to the Retailer (ex VAT) Retailer Mark-Up on Cost VAT Shelf Price (incl VAT)* Austria 4.25 20% 10.00% 5.61 Sweden 4.68 19% 12.00% 6.24 France 4.91 20% 5.50% 6.22 Switzerland 4.50 20% 17.50% 6.35 Germany ? 20% 19.00% 6.20 *Shelf Price assumes items not on promotion. Year 1 Plan (Brand Equity and Awareness Building) Since Bounty Basic is launching in the mid-tier paper towel segment, it is important that costs are minimized wherever possible. As such the finance team is recommending a launch without the support of television media. One alternative awareness building strategy that has been suggested is print media. The marketing team is intent on printing copies that scored well on consumer tests. Based on the copy scores, awareness building and conversion to purchase intent, you have received a model which projects the volume growth per 10,000 investment in magazines and newspapers. The table below summarizes the projected results: Print Media Cost Volume Uplift (units) 10,000.00 37,235.00 20,000.00 86,882.00 30,000.00 153,078.00 40,000.00 235,824.00 50,000.00 335,118.00 60,000.00 455,098.00 70,000.00 537,843.00 80,000.00 570,941.00 90,000.00 612,314.00 100,000.00 637,137.00 110,000.00 661,961.00 Question 1: Determine the optimal level of investment in print media, in terms of maximizing your profit, and justify your choice. (Note this strategy is only applicable in Year 1, yet the volume uplift will hold thereafter). Year 2 Plan (Trade In) For year 2 of the project, in addition to category growth, the firm is considering a trade-in event to increase sales. (Prices quoted for this plan are at 2024 prices and exclude VAT) Trading in competitor products is a cost-effective way to create awareness and increase household penetration in the trial building phase. The plan that you will evaluate will be executed in the larger grocery chain stores such as Lidl, Migros and Aldi. The information that you have from similar plans in other European markets is that a key factor in the success of these marketing activities is the number of unique consumers that will participate in the trade-in. The mechanics of the trade work as follows: There will be Bounty Basic stands set up either inside the store or in a courtyard just outside. Consumers will be invited to bring in any single competitor roll of paper towel that they have (new or unpackaged). Consumers will then receive a full roll of Bounty Basic in exchange. The finance department has recommended that the spending on this type of promotional activity should not exceed 60,000. The trade-in event costs 2,500 per 5,000 Bounty Basic rolls given out in addition to the unit cost of Bounty Basic. The % of unique consumers that are reached sing this strategy is a function of the number of Bounty Basic units given out for the total year, as described below: Number of Bounty Basic Rolls given out % of unique consumers reached From 5,000-20,000 35% of the number of rolls given out From 20,000-30,000 35% for 20,000 2% reduction for every additional 5,000 over 20,000 (i.e. 33% for 25,000 samples) From 30,000-onward 3% reduction for every 5,000 samples over 30,000 (i.e. 28% for 35,000 samples) For every unique consumer who receives the product, 20% will go on to buy 12 products per year (at the cost you calculated earlier). For simplicity, assume that regardless of when in the year they receive the roll of Bounty Basic, they will purchase 12 units of Bounty Basic from year 2 onwards. Question 2: Determine the optimal number of 5,000 rolls to be distributed, and justify your choice of strategy. (Note this strategy is only available in Year 2 and will not be repeated) Question 3: Do you recommend the launch of Bounty Basic in Germany over a 5-year project horizon? Your project analysis should include: A. A Financial evaluation: a. Determine the optimum promotional strategy under each of the two plans provided and include the information from your chosen strategies in your financial evaluation. b. Calculate the accounting profit before tax for each of the 5 Years. c. Evaluate the launch using the Home Currency approach. Clearly set out how you calculated the appropriate exchange rates and WACC used in your analysis. B. Sensitivity analysis: P&G is concerned that the COGS is underestimated and would like you to perform a sensitivity analysis should the actual COGS be 60% of revenue received by P&G. Please perform the sensitivity analysis and interpret your findings in an email to the project team. Your email must form part of your project content and should include a high-level summary as to the: a. impact on your promotional strategy b. impact on the NPV of the project c. strategies that P&G could use to mitigate the risk of uncertainty exposed through your sensitivity analysis C. Qualitative analysis: a. Would you deem a 5-year time line to be appropriate for this project? b. Provide and describe the relevance of six long term (3-5 years from the time of the investment) risk factors that you think could impact the longevity of this project: i. 2 country risk factors ii. 2 company risk factors iii. 2 factors which could impact the success of this product vs competing products