You PROBABLY KNOW ABOUT COLGATE toothpaste - perhaps you have even used it. But what would you think of Colgate aspirin or Colgate antacid? Would you buy Colgate laxatives or Colgate dandruff shampoo?
That is exactly what Colgate-Palmolive would like to know. Colgate wants to investigate the possibility of entering the over-the-counter (OTC) dnigs market. Can it use its Colgate brand name, developed in the oral-care products market, in the OTC healthcare market?
Why does the OTC market interest Colgate? The first reason is market size. The worldwide OTC market annually accounts for about $30 billion sales. The US OTC market is §12 billion and Europe's is g8 billion. It is the largest non-food consumer products industry, and it is growing at over 6 per eent annually.
Several trends arc fuelling this rapid growth. Consumers are more sophisticated than they were and they increasingly seek self-medication rather than seeing a doctor. Companies are also switching many previously prescription-only drugs to OTC drugs. The companies can do this when they can show, based on extensive elinical tests, that the drug is safe for consumers to use without monitoring by a doctor. Moreover, OTC drugs tend to have very long product life cycles. Medical researchers are also discovering new drugs or new uses or benefits of existing drugs. For example, researchers have found that the psyllium fibre used in some OTC natural laxatives is effective in controlling cholesterol.
Beyond the size and growth of the market, Colgate also knows that the OTG market can be extremely profitable. Analysts estimate that the average cost of goods sold for an OTG drug is only 29 per cent, leaving a gross margin of 71 per eent. Advertising and sales promotions are the largest expenditure categories for these produets, accounting for an average of 42 per cent of sales. OTG drugs produce on average 11 per eent after-tax profit.
Because of the OTG market's attractiveness, Colgate conducted studies to learn the strength of its brand name with consumers. Colgate believes in the following equation: brand awareness + brand image = brand equity. Its studies found that Colgate was no. 1 in brand awareness, no. 2 in brand image and no. 2 in brand equity among OTC consumers, even though it did not sell OTC products. The Tylenol brand name earned the no. 1 spot in both brand image and brand equity.
Thus Colgate's research shows that the OTC market is very large, is growing rapidly and is very profitable, and that Colgate has a strong brand equity position with OTC consumers. Most companies would find such a situation very attractive.
Colgate realizes that entering the OTC market will not be easy. First, its research suggests that the typical OTC product does not reach the breakeven point for four years and does not recover development costs until the seventh year. OTC firms must therefore be correct in their product development decisions or they risk losing a great deal of money.
Second, OTC drugs require a high level of advertising and promotion expenditures: 25 per cent of sales on yuar-round media alone. A firm must have substantial financial resources to enter this market.
Third, because of the market's attractiveness, entering firms face stiff competition. The market has many competitors and is the least concentrated of any large consumer market. In Europe, no company has more than 3.5 per cent of the market and the top 15 companies account for only 25 per cent market share. Established companies like Bayer, Rhone-Poulene Rorer, Sariofi, Boots, Boehringer Ingelheim and Warner-Lambert have strong sales forces and marketing organizations. They are strong financially and are willing to take competitors to court if they perceive any violations of laws or regulations. These firms also have strong research and development organizations that spin out new products. As governments squeeze state drug budgets, ethical drug companies have been aggressively working their way into the OTC market. Among notable acquisitions are Hoffmann-La Roche's of Nicholas Laboratories and SmitliKline Beeeham's purchase of Stirling Winthrop from Kodak, while Merck, America's leading drug company, has teamed up with Johnson & Johnson in the OTC market. Market leaders have also bought interests in drug distribution, such as SmithKline Beeeham's acquisition of Diversified l-'harmaceuticals Services, US pharmacy benefits managers.
Fourth, because of the high and rising level of fixed costs, such as the costs of advertising and R & I), many smaller firms are leaving the industry or being acquired by larger firms. Many of the world's leading ethical drug companies' industry observers estimate that an OTC firm must have at least several hundred million dollars in sales. It needs this to cover fixed costs and to have the power to match big retailers. So the OTG firms are growing larger and larger, and they arc willing to fight aggressively for market share.
Given all these harriers to entry, you might wonder why Colgate would want to pursue OTC products, even if the industry is growing and profitable. Colgate has adopted a strategy that aims to make it the best global consumer products company. It believes that oral-care and OTC products are very similar. Both rely on their ingredients for effectiveness, arc highly regulated and use similar marketing channels.
Colgate set up its Colgate Health Care Laboratories to explore product and market development opportunities in the OTC market. In 1987 and 1988 Colgate carried out a test market for a line of OTC products developed by its Health Care Laboratories. It test marketed a wide line of OTC products, from a nasal dceongestant to a natural fibre laxative, under the brand name Ektra. The predominantly white packages featured the Ektra name with the Colgate name in smaller letters below it.
Following the test market results, Colgate quietly established another test market to test a line of ten OTC healthcare products, all using the Colgate name as the brand name. The line includes Colgate aspirin-free pain reliever to compete against Tylenol, Colgate ibuprofen (versus Advil),
Colgate cold tablets (v. Contact), Colgate night-time cold medicine (v. Nyquil). Colgate antacid (v, Rolaids), Colgate natural laxative (v. Metamucil) and Colgate dandruff shampoo (v. Head and Shoulders).
Industry observers realize that the new line represents a significant departure from Colgate's traditional, high-visibility household goods and oral-care products. Responding to enquiries, Colgate chairman Reuben Marks suggests that: 'The Colgate name is already strong in oral hygiene, now we want to learn whether it can represent health care across the hoard. We need to expand into more profitable categories.'
Colgate will not talk specifically about its new line. Pharmacists, however, say that Colgate has blitzed the town with coupons and ads. Representatives have given away free tubes of toothpaste with purchases of the new Colgate products and have handed out coupons worth virtually the full price of the new products. One store owner noted: 'They're spending major money out there.'
If all that promotion was not enough, the manager of one store points out that Colgate has priced its line well below competing brands — as much as 20 per eent below in some eases. The same manager reports that the new products' sales arc strong, but also adds: 'With all the promotion they've done, they should be. They're cheaper, and they've got Colgate's name on them.'
Yet even if Colgate's test proves a resounding success, marketing consultants say expanding the new line could prove dangerous and, ultimately, more expensive than Colgate can imagine. 'If you put the Colgate brand name on a bunch of different products, if you do it willy-nilly at the lowest end, you're going to dilute what it stands for — and if you stand for nothing, you're worthless,' observes Olive Chajet, chairman of Lipincott and Margolies, a firm that handles corporate identity projects.
Mr Chajet suggests that Colgate might also end up alienating customers by slapping its name on so many products. If consumers are 'dissatisfied with one product, they might be dissatisfied with everything across the board. I wouldn't risk it,' he says. What would have happened to Johnson & Johnson during the Tylenol poison scare, he asks, if the Tylenol name appeared on everything from baby shampoo to birth control pills?
Colgate's test is one of the bolder forays into line extensions by consumer products companies. Companies saddled with 'mature' brands -brands that cannot grow much more - often try to use those brands' solid gold name to make a new fortune, generally with a related product. Thus Procter & Gamble's Ivory soap came up with a shampoo and conditioner. Mars bars were turned into ice-confectionery. Persil extended into washing-up liquids.
Unlike those products, however, Colgate's new line moves far afield from its familiar turf. Although its new line is selling well, sales might not stay so strong without budget prices and a barrage of advertising and promotion. 'People are looking at it right now as a generic-style product,' observes one store manager. 'People are really price conscious, and as long as the price is cheaper, along with a name that you can trust, people are going to buy that over others,'
Al Ries, chairman of Trout & Ries marketing consultants, questions whether any line extensions make sense - not only for Colgate, but also for other strong brand names. He says the reason Colgate has been able to break into the OTC drugs market is that other drugs have expanded and lost their niches. Tylenol and Alka-Seltzer both now make cold medicines, for example, and 'that allows an opportunity for the outsiders, the Colgates, to come in and Kay there's no perception that anybody is any different. The consumer will look for any acceptable brand name.'
Mr Ries argues that Colgate and the traditional OTG medicine eom-panies are turning their products into generic drugs instead of brands. They are losing 'the power of a narrow focus,' he says. 'It reflects stupidity on the part of the traditional over-the-counter marketers. ... If the traditional medicines maintained their narrow focus, they wouldn't leave room for an outsider such as Colgate.'
If Colgate is too successful, meanwhile, it also risks cannibalizing its flagship product. Consultants note that almost all successful line extensions, and many not-so-successful ones, hurt the product from which they took their name. They cite Miller TTigh Life, whose share of the US beer market has dwindled since the introduction of Miller Lite. 'If Colgate made themselves to mean over-the-counter medicine, nobody would want to buy Colgate toothpaste,' contends Mr Ries.
Mr Chajet agrees, Colgate could 'save tens of millions of dollars by not having to introduce a new brand name' for its new products, he says. But in doing so, it might also 'kill the goose that laid the golden egg'. Other marketing consultants believe that Colgate may be able to break into the market, but that it will take much time and money. 'They just don't bring a lot to the OTC party,' one consultant indicates.
Although chairman Marks admits that Colgate will continue to try to build share in its traditional cleanser and detergent markets, the company seems to consider personal care a stronger area. Leveraging a name into new categories can be tricky, requiring patience from sceptical retailers and fickle consumers. 'It isn't so much a question of where you can put the brand name,' says one marketing consultant. 'It's what products the consumer will let you put the brand name on.'
1. What core product is Colgate selling when it sells toothpaste or the other products in its new line?
2. How would you classify these new products?
3. What implications does this classification have for marketing the new line?
4. What brand decisions has Colgate made? What kinds of product line decision? Are these decisions consistent?
5. If you were the marketing manager for the extended Colgate line, how would you package the new products?
6. What risks do you see in these packaging decisions?
SOURCES: Adapted from Joanne Lipnian, 'Colgate tests putting its name on over-the-counter drug line', Wall Street Journal (19 July 198')). Used with permission. See also Dan Koeppel, 'Xow playing in Peoria: Colgate genetics', AdtBeek's Marketing Week (18 September 1989), p. 5; Sean Biierley, 'Drug dependence', Marketing Week (34 November 1994), pp. 32-5; Clive Cookson, 'Roche deal puts fizz in the drug races', Financial Times (4 June 1991), p. 19; Paul Abrahams, 'A dose ofOTC medicine for growth strategy'. Financial fimvs (30 August 1994), p. 19; 'Hoffmann-La Roche: staying calm', Tile Ecttnumist (28 September 1991), p. 120; Colgate Health Care Laboratories also co-operated in the development of this case,
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