Keeping Score: Financial Analysis and Performance Metrics Cannibalization Analysis What is Cannibalization? Cannibalization results when the sales of a new product in part come from sales taken away from other products sold by that firm, Cannibalization most commonly occurs when a form introduces a new flasker brand or line extension into the same product line in which it already has brand representation. For example, when Proctor & Gamble introduces a new brand of laundry detergent into its extensive line of detergentssome sales for the new brand will highly ikely comic at the expense of one or more of P&G's existing brands of laundry detergent. In other words, the sales of P&Gs existing brand of laundry detergents will be canibalized to support sales of the new brand The effects of cannibalization can be good or bad, depending on the overall effect on profitabilty for both the new brand and the carnibalized brands. Determining the effect on profitability is relatively easy. Let's examine a simple example of how it works Assure two brands of mouthwash produced by the same firm (P&G?). Relevant price and cost data for these brands are below. Brand Ais currently sold at $1.00 per unit with associated variable costs per unit of $.60 Brand B. the new brand to be introduced, sells for a little less say 5.95 per unit. Is costs per unit are the same as for Brand Ale 5.60 per unit. Note that the resulting unit contribution for Brand price minus onit variable costs) $.35 which is $.05 less than the unit contribution for Brand A This means that for each unit of Brand Athat is cannibalized by Brand B, the firmloses 5.05 in contribution Brand A Brand B $ 100 $0.95 Unit Variable costs $ 0.60 $ 0.00 Unit Contribution 0.40 $ 0.35 Assume that management anticipates that when Brand Bis launched, 20of its sales will come from sites that would have been for Brand A. In other words, 20% of Brand B's sales will be cannibalized from the sales of Brand A. The net effect of this cannibalization on profits is as found by comparing the contribution gross prontassuming Brand is not launched and therefore no cannibalization occurs with the contribution Gross profit expected from the bunch of Brand B with the expected level of cannibalization Here is how the analysis proceeds. First, compute the expected contribution from the sales of Brand A with no cannibalization ( Brand is not launched). Assume that Brand A's sales without the introduction of Brand Bare expected to be 1.000 units. Since the unit contribution for Brand Als 5.40 per unit, the overall resulting contribution gross profit will be 1.000 x 5.40 - 5400.00 Easy! Next, compute the expected contribution dollars assuming that Brand Bisbunched and the expected level of cannibalization occurs. Here is how this part proceeds. Assume that Brand B is expected to sell only 500 units initially and that 20% of these sales will come from Brand 20% of 500 equals 100 units that will be cannibalized from Brand Al The table below summarizes the computations. Since 100 units will be cannibalized from Brand A's sales, the brand will now sell only 900 units. Since the prot per unit lunit contribution) is $40, the resting total contribution dollars from the sales of Brand A will be 900 $ 40 $360.00. Brand B is expected to sell 500 units in total with 100 of these units being 5.40, the resulting total contribution dollars from the sales of Brand A will be 900 x $ 40 - $360.00. Brand Bis expected to sell 500 units in total, with 100 of these units being cannibalized from Brand A. Therefore, Brand B's contribution dollars will be 100 units X 5.35 - $35.00 plus 400 units X $35 - $140.00 for an overall contribution of $535.00 The net change in contribution dollars if Brand Bis introduced is $535 - $400 - $135. Thus, contribution dollars are opected to increase by $135 with the addition of Brand B to the product line of mouthwashes. Should the new brand be launched? The answer is clearly YES Had overall contribution dollars declined due to cannibalization then the decision would have been NO Unt Sales Unit Contribution Contribution Unit Sales of Brand Alwith cannibalization 900 * 50:40 360.00 Unit Sales of Brand B cannibalized from 100 x 5035 35.00 Unit Sales of Brand B (not cannibalized) 400 50.35 5 140.00 Total 535.00 You should also be aware by now that cannibalization will only be problematic potentially reducing dolor contribution, if the unit contribution for the new product is less than the unit contribution for the old product. The greater the difference between the unit contributions the greater the impact will be of any canalization of the brand by the new brand. You can verify this for yourself if you have built a spreadsheet to run your calculations Now It's Your Turn. Show Us What You Have Learned. Returning to our running Case for Shannon's Brewery introduced in the market share exercise assume that stannons is considering the introduction of a new craft beer called trich Stout that will be derived from its award-winning Irish Red. Initially, Irish Stout will only be sold opreme at the brewery. Currently, pints of in Red consumed on premise well for $5.00 per pint with unit variable costs of approximately $2.75 per pint Variable costs are predominantly comprised of the costs of ingredients and utilities that directly affect the brewing process. The new craft beer will be positioned at a subtly higher prion, $5.25 per pint and its unit variable costs will be about $3.25 thue to the higher cost of some bredients. The relevant ice cost and marin data are below Irish Red Irish Stout Price 5.00 Now It's Your Turn. Show Us What You Have Learned. Returning to our running case for Shannons Brewery introduced in the market share exerche, assume that Shannon's is considering the introduction of a new craft beer called Irish Stout that will be derived from its award-winning Irish Red. Initially, Irish Stout will only be sold on-premise" at the brewery. Currently. pints of Irish Red consumed on-premise sell for $5.00 per pint with unit variable costs of approximately $2.75 per pint Variable costs are predominantly comprised of the costs of ingredients and utilities that directly affect the brewing process. The new craft beer will be positioned at a slightly higher price, $5.25 per pint and its unit variable costs will be about $3.25 due to the higher cost of some ingredients. The relevant price, cost, and margin data are below. Telah Red Irish Stout Price $ 5.00 $ 5.25 Unit Variable Costs 2.75 $ 3.25 Unit Contribution $ 2.25 $ 2.00 D Question 1 10 pts Shannon's Irish Red averages on premise sales of 1.200 pts per month. What is the anakipted profit contribution dollars per month asociated with sales of Shannan's Irish Red assuming that the Irish Stout is not introduced Express your answer to the nearest dolor. Do not include the dollar Question 2 10 pts Assume that Shannon's estimates that the sales of the new Irish Stout will be about 250 pints per month, but 28% of these sales will be canibalired from sales of Shannon's Irish Red Compute the total combined increase or decrease incremental change in contribution dofars for both Irish Red and Irish Stout expected with cannibalization. Express your answer to the nearest dollar. Do not include the dollar sign