Quantitative analysis for the following ........................Queen of Shaves On Friday, January 7, 2000, Kelsey Keeler, the newly appointed Product Manager for hand and body lotions at Queen of Shaves, was faced with her first decision one day after her promotion. She had to decide whether to introduce a new package design for the companys Silky Smooth Shaving Gel. The major questions were whether a 5 -ounce or a 10-ounce aerosol container should be introduced and whether she should approve additional funds for a market test. Timing was critical because the incidence of womens shaving would increase during the spring months and reach its peak during the summer months. THE COMPANY AND THE PRODUCT Silky Smooth Shaving Gel is marketed by Queen of Shaves, a manufacturer of womens personal care products with sales of $225 million in 1999. The companys line of products includes facial creams, hand and body lotions, and a full line of womens toiletries. Products are sold by drug and food-and-drug stores through rack jobbers. Rack jobbers are actually wholesalers that set up retail displays and keep them stocked with merchandise. They receive a margin of 20% off the sales price to retailers. Silky Smooth Shaving Gel was introduced in the spring of 1986. The product was viewed as a logical extension of the companys line of hand and body lotions and required few changes in packaging and manufacturing. The unique dimension of the introduction was that Silky Smooth Shaving Gel was positioned as a high-quality womens shaving gel. The positioning strategy was successful in differentiating Silky Smooth Shaving Gel from existing mens and womens shaving creams and gels at the time. Moreover, rack jobbers were able to obtain product placement in the womens personal-care section of drug and food-and-drug stores, thus emphasizing the products positioning statement. Furthermore, placement apart from mens shavings products minimized direct price comparisons with mens shaving creams, since Silky Smooth Shaving Gel was premium priced with a suggested retail price of $3.95 per 5 1/2 ounce tube. Retailers received a 40 percent margin on the suggested retail selling price. Silky Smooth Shaving Gel has been sold in a tube since its introduction. This packaging was adopted because the company did not have the technology to produce aerosol containers in 1986. Furthermore, the companys manufacturing policy was and continues to be to utilize existing production capacity whenever possible. As of early 2000, all products sold by Queen of Shaves were packaged in tubes, bottles, or jars. Silky Smooth Shaving Gel had been profitable from the time of its introduction. Although the market for womens shaving cream and gels was small, compared to mens shaving cream and gels, Silky Smooths unique positioning had created a customer franchise, in the words of Barbara Johnson, the Silky Smooth brand assistant. We have a unique product for the feminine woman who considers herself special. Silky Smooth Shaving Gel sales were $3,724,000 in 1999 with a 1,960,000 unit volume (Exhibit 1). EXHIBIT 1 Silky Smooth Shaving Gel Income Statement for Year Ending December 31, 1999 Sales $3,724,000 Cost of goods sold (incl. freight)a 784,000 Gross profit $2,940,000 Assignable costs: Advertising and promotion $1,154,540 Overhead and administrative 421,560 $1,576,100 Brand contribution $1,363,900 a For analysis purposes, treat the cost of goods sold and freight as the only variable costs. WOMENS SHAVING Research on womens shaving commissioned by Keelers predecessors over the past decade have produced a number of findings useful in preparing annual marketing plans for Silky Smooth Shaving Gel. The major findings and selected marketing actions prompted by these findings are described below. Methods of Hair Removal and Shaving Frequency Women use a variety of methods for hair removal. The most popular method is simply shaving with razors and soap and water. Shaving with razors and shaving cream and gels is the next most used method, followed by shaving with electric razors. Women typically have their own razors and purchase their own supplies of blades. Approximately 45 million women shave with a razor; 15 million women use electric shavers. Over 80 percent of women shave at least once per week, and women who work outside the home shave more frequently than those who do not. On average, women shave 11 times per month and nine times more skin than men per shaving occasion (men shave 24 times per month on average). Shaving frequency varies by season, with the summer months producing the greatest shaving activity (Exhibit 2). Accordingly, in-store promotions and multipack deals were scheduled during the summer. EXHIBIT 2 Seasonality of Womens Shaving and Shaving Area (Percentage of U.S. Women) 2 3 Attitudes toward Shaving Women view shaving as a necessary evil. When queried about their ideal shaving cream or gel, women typically respond that they want a product that contains a moisturizer, reduces irritation, and makes shaving easier. It appears that four out of five women use a moisturizer after shaving. These specific findings resulted in a change in the Silky Smooth Shaving Gel ingredient formulation in 1990. Prior to 1990, the product contained only aloe. In 1990, three additional moisturizers were added to the product, including vitamin E. These ingredients were emphasized on the package, in-store promotions, and media advertising. Market Size and Competitive Products Industry sources estimate the U.S. dollar value of womens wet shaving products to be over $300 million in 1999, at manufacturers prices. Sales growth has been in the range of three to five percent per year since 1994. Razors account for the bulk of sales growth in annual sales. Historically, women who used shaving cream or gels had few womens-only products to choose from. However, since 1994, a vibrant womens shaving cream and gel category has emerged due to new-product activity, increased advertising and promotion, and improved shaving technology. Some industry analysts pointed toward the introduction of Gillette Sensor Razor for women as one important growth stimulant. Other analysts cited improvements in the quality of shaving creams and gels for women and increased advertising. Until late 1993, only two competitive products were normally available in the drug and food-and-drug stores served by Queen of Shaves rack jobbers. These products were S.C. Johnsons Skintimate (formerly called Soft Sense) and Soft Shave, a lotion sold by White Laboratories. By late 1999, seven major competing brands existed in the womens shaving cream or gel category even though all were not stocked by stores that carried Silky Smooth Shaving Gel. Exhibit 3 shows representative brands, sizes, forms (cream, gel, lotion), and typical retail prices. EXHIBIT 3 Representative Womens Shaving Products Brand (Manufacturer) Size a Form Price - Per Oz. Skintimate (S.C. Johnson) 7 oz. Gel $2.48 - $.35 Skintimate (S.C. Johnson) 10 oz. Cream $2.48 - $.25 Satin Care (Gillette) 6 oz. Gel $1.97 - $.33 Hers (Medtech Labs) 10 oz. Cream $1.78 - $.18 Soft Shave (White Labs) 8 oz. Lotion $1.82 - $.23 Barbasol Pure Silk (Pfizer) 7 oz. Cream $1.99 - $.28 Aveeno (Ryoelle Labs, Div. of S.C. Johnson) 7 oz. Gel $3.69 - $.53 Inverness Ultra-Lubricating Shaving Gel (Inverness) 6 oz. Gel $2.15 - $.36 Silky Smooth Shaving Gel (Queen of Shaves) 5 oz. Gel $3.95 - $.72 a Several manufacturers also sold smaller 2, 2 1/2, and 2 3/4 ounce sizes designed for travel purposes. Queen of Shaves advertising and promotion for Silky Smooth Shaving Gel had responded to the increase in competition. Expenditures had increased each year since 1994, reaching 31% of sales in 1999. By 1999, the dominant packaging for womens shaving cream or gels had become the aerosol container. Only a few shaving gels and brands were sold in tubes or plastic bottles, including Silky Smooth Shaving Gel, Soft Shave Lotion, and Inverness UltraLubricating Shaving Gel. NEW PACKAGE DESIGN The idea for a new package design was provided by Keelers brand assistant, Barbara Johnson. She originally proposed a new package to Keelers predecessor in July 1999. Her recommendation was based on four developments. First, unit sales volume for Silky Smooth Shaving Gel had plateaued and then declined in recent years (Exhibit 4). Second, the growth of Silky Smooth Shaving Gel had strained manufacturing capacity. In the past, production of Silky Smooth Shaving Gel had been easily integrated into the firms production schedules; however growth in the entire line of hand and body lotions, coupled with Silky Smooth Shaving Gel sales, had overburdened production capacity and scheduling. Moreover, inspection of shipping records indicated that the products fill rate (that is, Queen of Shaves ability to supply quantities requested by retailers) had dropped, leading to an out of stock situations and lost sales. Third, the company had no manufacturing capacity expansion plans for the next three years. And finally, aerosol packaging had become the dominant design for womens shaving creams and gels by 1999. EXHIBIT 4 Silky Smooth Shaving Gel Unit Sales Volume, 1986-1999 Johnsons observations prompted a preliminary study of outsourcing opportunities for a new package design. Her study included visits to several firms specializing in contract filling and requests for production proposals. A contract filler purchases cans, propellants, caps, and valves from a variety of sources and then assembles these components, including the product fill (that is, shaving gel), into the final container. The production method is called pressure filling. In this method, the cap and valve are 4 5 inserted in the can and then sealed. At the same time, a vacuum is created in the container. The product fill and propellant are then injected under high pressure through the valve into the can. Her review of supplier proposals led her to choose one that was capable of meeting production requirements and providing certain value added features. For example, the chosen supplier could deliver a propellant with no chlorofluorocarbons (CFCs), which are harmful to the earths ozone layer. Also, the container bottom would be rust-proof and leave no rust ring when wet. This feature was desired because most women shave in the bathtub or shower and tend to leave a wet can on the tubs porcelain, which can leave a rust stain. In addition, the supplier could produce and ship product directly from its manufacturing facility in lower per unit cost than the tube container and was prepared to maintain an adequate safety stock of inventory. The only drawback in the suppliers proposal was that only 5 - and 10-ounce containers could be produced without making significant and expensive changes in its equipment. The typical sizes for womens shaving creams and gels were 7-ounce and 10 ounce-containers. The estimated total cost of producing and delivering to rack jobbers a 10-ounce aerosol can of shaving gel was $.29. A minimum order of 100,000 10-ounce cans would be required. Johnson believed the suggested retail price would be set at $4.25 per 10- ounce can, reflecting Silky Smooths premium price strategy. The estimated total cost of producing and delivering to rack jobbers a 5 -ounce aerosol can of shaving gel was $.24 and the suggested retail price would be $3.50. A 100,000 unit minimum order would be required. Johnson recognized that the price per ounce for the aerosol containers was lower than the price per ounce for the tube package. She said the lower price reflected competitive realities in the category: The dominant players (S.C. Johnson and Gillette) are very price competitive. We can retain our relative premium image even at the lower prices. I fully expect some cannibalization of the tube will take place just as Im confident the incremental volume will more than offset it. A one-time setup charge for the Silky Smooth Shaving Gel production line and package graphics was $10,000, due and payable by Queen of Shaves upon the signing of the supply agreement. This charge would be the same whether one or both sizes were produced. PRELIMINARY TESTS In November 1999, Johnson received authorization from Keelers predecessor to spend $35,000 to assess consumer response to the proposed container. Her proposal was approved on the basis of the cost data provided in the recognition that use of a contract filler would require no incremental investment and company manufacturing capacity. Johnson commissioned a large marketing research firm to conduct four focus-group studies. Two focus groups would involve current users of Silky Smooth Shaving Gel, and two focus groups would involve users of shaving creams and gels other than Silky Smooth Shaving Gel and soap and water users. The principal information sought from these focus group studies was as follows: 1. Are present customers and noncustomers receptive to the new package? 2. At what rate would present customers convert to the aerosol can, and would non- customers switch over to Silky Smooth Shaving Gel? 6 3. Where, in drug and food-and-drug-stores, would customers and noncustomers expect to find the aerosol can? 4. Is the suggested retail price acceptable? In addition, the marketing research firm was asked to examine analogous situations of package changes and report its findings. In late December 1999, the marketing research firm presented its findings to Johnson, two days after Keelers predecessor resigned to take a position with another company. There were five principal findings from the focus groups: 1. Customers and noncustomers were unanimously in favor of the aerosol can. The 10 ounce can was the favorite, since it would require fewer purchases. 2. Twenty percent of Silky Smooth Shaving Gel customers said they would convert to the 10-ounce cans; 25 percent said they would convert to the 5 -ounce can. 3. One-fourth of the noncustomers said they would switch over to the aerosol can irrespective of cans size. These consumers preference for the aerosol over the tube package was their principal reason (in addition to price) for not buying Silky Smooth Shaving Gel previously. 4. Customers expected to find the aerosol can next to the tube container. Non- customers expected to find the aerosol container stocked with womens toiletries. 5. The pricing was acceptable and actually favored by current customers. Non- customers thought the suggested retail price was somewhat high, but liked the value-added features and would try the product. In addition to these findings, the marketing research firm presented ten case histories in which marketers of mens shaving cream had introduced a new package. (There was no distinction made with respect to size of package, whether the package change was from aerosol to non-aerosol, or vice versa, or previous sales performance.) Two statistics were highlighted: first-year sales with the combined packages and the cannibalization rate for the existing package. According to the report, It is difficult to draw direct comparisons between the experience of other shaving creams and gels and that of Silky Smooth Shaving Gel, given its unique market position. We have tried to do so after examining ten product-design changes. Our estimates (Exhibit 5) are broken down into a high and low forecast for each package size. Seven out of the ten products studied experienced the high situation presented; three experienced a low situation. We see the 10-ounce package as producing the largest increase in ounces sold. Even with the cannibalism effect, we believe that an additional package will produce higher sales, in ounces, than the Silky Smooth Shaving Gel forecasted volume of 10,745,174 ounces (1,953,668 5 -ounce tubes) for 2000. Only a market test can indicate what will actually occur. 7 EXHIBIT 5 Silky Smooth Shaving Gel Sales Forecast by Size and Type of Container (in ounces) Forecast A: Low estimate for 5 -ounce aerosol package addition 5 -ounce tube package volume 8,600,000 5 -ounce aerosol package volume: Cannibalized volume 2,145,174 Net new volume 300,000 2,445,174 11,045,174 Forecast B: High estimate for 5 -ounce aerosol package addition 5 -ounce tube package volume 8,400,000 5 -ounce aerosol package volume: Cannibalized volume 2,345,174 Net new volume 500,000 2,845,174 11,245,174 Forecast C: Low estimate for 10-ounce aerosol package addition 5 -ounce tube package volume 9,000,000 10-ounce aerosol package volume: Cannibalized volume 1,745,174 Net new volume 800,000 2,545,174 11,545,174 Forecast D: High estimate for 10-ounce aerosol package addition 5 -ounce tube package volume 9,600,000 10-ounce aerosol package volume: Cannibalized volume 1,145,174 Net new volume 1,500,000 2,645,174 12,245,174 THE PACKAGING AND TEST MARKET DECISION Johnson presented the research firms findings to Kelsey Keeler on January 7, 2000, one day after Keeler became Product Manager for hand and body lotions. Keeler listened attentively as Johnson summarized the research findings and recommended that a market test be conducted to determine the best package size. Johnsons test-market recommendation included a proposal to introduce the new package design in a limited cross-section of drug and food-and-drug stores, including heavy-volume and low-volume stores that presently carried Silky Smooth Shaving Gel. Test stores would be isolated geographically from nontest stores. The new package would be placed among womens toiletries, and the test would run for three months, beginning April 1, 2000. The April 1 start date was necessary to ensure that adequate supply of the new package was available. One-half of the stores would carry the 5 - ounce container and the other half would carry the 10-ounce container. The test would include a full complement of promotional aids, including newspaper ads and point-of-purchase displays, and would approximate a full-scale introduction.