Market discussion

The MarketShare Case—Page 13

SECTION 2: THE MARKETSHARE CASE

Senior management expects that skillful marketing will prove pivotal to the long- term success of Allstar Brands.

Allstar Brands OTC Cold Medicine Group The Allround Brand The management team at the over-the-counter cold medicine (OCM) group of Allstar Brands just completed its third presentation in the past month to the Pharmaceuticals Division manager regarding the status of Allround cold medication. It is apparent from all the attention that the team has received that the Allround brand it manages is of strategic importance to the company. Overview Allstar Brands' Allround product is one of the market leaders in the over-the-counter (OTC) cold and allergy remedy market. Though reasonably successful in the past, Allround has now been identified as one of the brands of the company that should drive future growth and improved profitability. The division anticipates that the brand's cash flow in the coming years will allow the company to pursue new opportunities in emerging markets overseas. However, the division manager responsible for Allround is also concerned with the competitive nature of the OTC cold remedy market. In the past three periods, the industry has seen several product introductions as well as major increases in promotional and advertising expenditures. Though well positioned for growth, Allround has major challenges ahead as well. The Company Allstar Brands Corporation is one of the leading manufacturers of packaged goods in the world. Since its founding in 1924, the company has acquired or merged with a number of smaller packaged goods companies. The company consists of three divisions: Consumer Products, International, and Pharmaceuticals. The Consumer Products Division handles a number of packaged goods, such as laundry detergent, shampoo, and bar soap. The International Division distributes Allstar products on a global basis and has a large presence in the European market. The Pharmaceuticals Division is responsible for the marketing and production of ethical and OTC medications. Ethical drugs are available through pharmacies with a physician's prescription, whereas OTC remedies are widely distributed without the need for a prescription.

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NOTE: The brand management group responsible for Allround work together as a team on all of the marketing decisions related to the OTC cold and allergy remedy market.

The management of Allstar's Pharmaceuticals Division consists of a number of market related groups, including the OCM group. This group is concerned primarily with the marketing activities of the Allround brand and any line extensions or new product introductions that might fall under the same category. The Brand Management Group The marketing managers are concerned with developing the Allround marketing mix strategy each period. In addition, if Allstar's research department develops any promising new product ideas for the cold medicine market, this team will be responsible for the new product launch. Although all product and marketing decisions are made as a group, each member of the brand management group may take a particular role or specialize in different areas of market analysis. How best to divide up responsibilities among team members is left to the managers. UIndustry Overview Allstar Brands competes with four other firms in the OTC cold and allergy market. These five firms offer a total of 10 brands in five different product categories (cold liquid, cough liquid, allergy capsule, cold capsule, and nasal spray) listed in Exhibit 2.1. Exhibit 2.1: Company and Brand Summary

Company Name Sales (Millions) Brands on the Market

Allstar Brands $285 Allround, 4-hr multi-symptom cold liquid

B&B Health Care $503 Believe, 4-hr allergy capsule Besthelp, 4-hr cold capsule

Curall Pharmaceuticals $345 Coughcure, 4-hr cough liquid

Driscol Corporation $409 Defogg, 4-hr allergy capsule Dripstop, cold nasal spray Dryup, 4-hr multi-symptom cold capsule

Ethik Incorporated $684 Effective, cold nasal spray End, 4-hr cough liquid Extra, 12-hr cold capsule

The MarketShare Case—Page 15

The OTC Cold Remedy Market

Cold remedies are designed to relieve several basic symptoms: aches and fever, nasal congestion, chest congestion, runny nose, and cough. Allergy remedies address many of the same symptoms and are therefore often grouped with cold remedies. However, products formulated specifically for allergy relief are available, and it is common in the industry to consider relief from allergy symptoms as a separate consumer need from cold and flu-like symptom relief. Chronic allergy sufferers tend to have different usage. Brand Formulations (4Ps = Product) In general, various combinations of six basic types of ingredients (see Exhibit 2.2) are used to formulate OTC brands. Each ingredient targets one of the symptoms listed above, or is used as a base for the other ingredients. 4B4BExhibit 2.2: Ingredients and Purpose

Ingredients Purpose

Analgesics Provide relief for aches and fever. Common analgesics are aspirin and acetaminophen (an aspirin substitute).

Antihistamines Reduce the secretions that cause runny nose and watery eyes.

Decongestants Reduce nasal congestion by shrinking the blood vessels in the nose lining to clear the passages and restore free breathing.

Cough Suppressants Reduce the cough reflex.

Expectorants Provide relief from chest congestion by loosening the phlegm, thereby making each cough more productive.

Alcohol Provides a base for the other ingredients in some products and helps the patient rest.

Form A brand can be made available in one of three forms: liquid, capsule, or spray. A consumer's choice with regard to form is usually based on personal preference, but some general differences are apparent. Nasal sprays contain only a topical nasal decongestant that provides faster relief from sinus congestion than other forms. Capsule and liquid cold

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medications might contain any combination of ingredients, although

cough medicine is usually found in liquid form to help soothe throat irritation. According to a recent survey, most consumers find that capsule form is somewhat more convenient than liquid. Exhibit 2.3 shows each of the current brand formulations on the market. Duration Product duration is typically either 4-hour or 12-hour. The United States Food and Drug Administration (FDA) regulates the amount of medication for various periods of relief, including the maximum for a 24-hour period without a prescription. The maximum dosage used in 4- hour formulations cannot be taken more than four times each day due to over-medication concerns. Twelve-hour formulations contain half the daily maximum medication. Nasal sprays are considered instant relief products because they act much faster than standard cold medicines, but conversely, they also wear off faster. The duration for each brand is also listed in Exhibit 2.3. Side Effects Side effects have become a greater consideration in recent periods because of the emphasis on healthier lifestyles and concerns about performance under medication. Drowsiness due to antihistamines or alcohol is the most often mentioned negative side effect, especially when these products are used during the day. Other considerations include upset stomach, long-term effects of nasal spray, and excessive medication. As can be seen in Exhibit 2.3, the Allround brand is a 4-hour liquid cold medicine that provides multi-symptom relief. It contains an analgesic, an antihistamine, a decongestant, a cough suppressant, and alcohol. Most consumers use this product for nighttime relief because of the strength of the medication and because the alcohol and antihistamine help the patient rest. Allround is viewed as one of the most effective brands on the market at reducing multiple cold symptoms. However, consumer groups and some physicians have attacked the multi-symptom "shot-gun" approach as providing excessive medication in many circumstances. However, consumers appreciate the convenience of only having one brand in their medicine cabinet that can address several different kinds of cold and flu symptoms.

The MarketShare Case—Page 17

Exhibit 2.3: Current Brand Formulations

Analgesic Antihist Dcngest Cough Supp Expect Alcohol Description

Max. Allowed 1000 4 60 30 200 20 (mg/4-hr dose)

Allround 1000 4 60 30 0 20 4-hr multi liquid Believe 0 4 0 0 0 0 4-hr allergy capsule Besthelp 0 4 60 0 0 0 4-hr cold capsule Coughcure 0 0 30 30 0 10 4-hr cough liquid Defogg 0 4 0 0 0 0 4-hr allergy capsule Dripstop 0 0 60 0 0 0 cold spray Dryup 1000 4 60 0 0 0 4-hr multi capsule Effective 0 0 60 0 0 0 cold spray End 0 0 0 0 200 10 4-hr cough liquid Extra 0 0 120 0 0 0 12-hr cold capsule

Internal Product Development (4Ps = Product) The OCM group has important product development and management decisions to make over the next decade and must work closely with the product research and development (R&D) area within Allstar Brands. R&D will provide two major types of product development for the Allround brand group: reformulation of the ingredients in Allround and development of a new brand.

• Two reformulations of the Allround brand will be available from R&D starting a year from now. The two options under consideration are dropping the alcohol or replacing the cough suppressant with an expectorant. If used, the reformulation would replace the current product configuration.

• Three new product formulations will be available from R&D starting in period 3. The three options under consideration are a 4-hour cough formula, a non-drowsy allergy medication, or a children’s cold medicine. The allergy medication is based on a product that is now available by prescription only, but the company is planning on submitting the product for FDA approval.

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NOTE: The manufacturer’s suggested retail price (MSRP) for Allround is $5.49. NOTE: Allowances are usually discussed with retailers in conjunction with price discounts, but are also considered to be a type of trade promotion.

Pricing and Promotional Allowances (4Ps = Price) It is industry practice for manufacturers to suggest retail prices to retailers, known as the Manufacturer’s Suggested Retail Price (MSRP), although retailers ultimately set the actual selling price to consumers. Most discounts to the channel are set based on MSRP. There are two primary types of discounts: a volume discount (between 15–40%) and a promotional allowance (typically between 10–20%). Thus, distributors usually pay somewhere in the range of 25–50% off the MSRP depending on the volume discount and promotional allowance passed on to the retailer. Allowances are incentive discounts given to the distribution channel to help promote a product that ultimately impact the product's retail price. Allowances are necessary to gain retail distribution, to obtain desired shelf facings in retail outlets, and to gain support for a brand advertised and promoted by the retailer. The current MSRP of Allround is $5.49; retailers receive an allowance of 13% and a volume discount of 25%. The group noted that Allround’s price was significantly higher than the competition. However, the Brand Manager reminded them that the higher price gives them an above average contribution margin, and that the retailer is able to make more money on each unit sold when compared to competitive products. Nonetheless, they all agreed that the MSRP and overall pricing structure should be reviewed in the coming year.

Exhibit 2.4: MSRP, Volume Discount, Promotional Allowance, and Retail Price by Brand

MSRP Vol. Disc. Promo. Allow. Drug-store Grocery Mass Merch. Allround $ 5.49 30.0% 13.0% $ 5.42 $ 5.16 $ 4.58 Believe 3.99 33.5% 15.6% 3.68 3.55 3.15 Besthelp 4.59 34.5% 13.3% 4.26 4.11 3.65 Coughcure 4.69 28.5% 16.7% 4.62 4.38 3.87 Defogg 4.09 22.5% 11.1% 4.44 4.27 3.75 Dripstop 4.09 21.5% 13.3% 4.42 4.26 3.75 Dryup 4.79 21.5% 15.6% 5.10 4.91 4.33 Effective 4.09 30.0% 14.4% 3.96 3.82 3.38 End 4.49 31.0% 12.5% 4.45 4.20 3.72 Extra 4.09 31.0% 12.5% 3.99 3.83 3.39

The MarketShare Case—Page 19

NOTE: Advertising plays a major role in establishing brand awareness among consumers and in helping to shape consumers' perceptions of products.

Advertising and Promotion (4Ps = Promotion) Advertising and promotion for Allround is one of the more significant decision areas. In addition to creating a general advertising campaign for multiple media outlets, the management group must also make several choices in consumer and trade promotion—important aspects of improving distribution effectiveness. Thus, this part of the management decision process includes elements of both pull (consumer-oriented promotion) and push (trade-oriented promotion). 8B8BAdvertising The OCM group must make three basic advertising decisions each period: the amount of dollars allocated to the advertising budget, the content of the advertising message, and, if using the comparison message, the target competitor. Last period, $7 million was spent on Allround's advertising campaign, primarily for commercials aired on network television. Competitive advertising budgets for last period ranged from $1.45 million for the Defogg brand to $22.3 million for Coughcure. There are four basic advertising message types that the OCM group considers potentially useful for Allround: (1) a primary demand stimulation to focus the advertising message on increasing overall demand for OTC remedies while increasing Allround's unaided awareness, (2) a benefits approach that states the symptomatic relief properties of Allround, (3) a comparison approach that positions Allround against another brand, and (4) a reminder advertising message to maintain consumer awareness and stimulate the repurchase of Allround. The advertising message used in any period can be a combination of these types. Last period, Allround's advertising was 25% primary demand, 25% benefits, 25% comparison, and 25% reminder. The group wondered if a more effective choice of message might be implemented. Consumer Promotion Consumer promotions are a significant part of marketing in the OTC cold and allergy remedy market. Allstar Brands spent $3.2 million on consumer promotions for the Allround brand last period, which placed it somewhere in the midrange of its competition.

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NOTE: Consumer promotions used include in-store point-of-purchase displays and distribution of coupons.

The purpose of point-of-purchase items, such as sale racks, on-shelf advertisements, or end-of-aisle displays, are to promote a brand to the consumer in the retail outlet. The OCM group believes that these displays promote brand switching when the consumer is purchasing OTC products. Point-of-purchase money is paid to the retailer, but the promotion targets the end consumer. Last period, $0.8 million was spent on point-of-purchase displays for Allround. Coupons distributed to consumers in special newspaper or magazine supplements offer additional discounts off the retail price when redeemed at the time of purchase. In the last period, $2.4 million was spent on coupon support of the Allround brand. This included money spent on printing, inserts, and mailings. Exhibit 2.5 provides a summary of last period's promotional activity for the Allround brand. Exhibit 2.5: Promotional Activity for Allround Brand (in $000s)

Promo $ (Millions) Promo Allowances 26.5 13.0% of MSP

Point of Purchase 0.8 Coupons 2.4

Retail Channels (4Ps = Place / Distribution) OTC cold and allergy remedies are sold retail in drugstores, grocery stores, and mass merchandisers. A recent study shows that there is some difference in where consumers purchase different types of cold medicine. These are shown in Exhibit 2.6. Exhibit 2.6: Consumer Purchases by Channel

Retailer Cold Cough Allergy Drugstores 28.5% 35.1% 44.3%

Grocery Stores 52.6% 44.8% 38.7%

Mass Merchandisers 18.8% 20.1% 17.0%

The MarketShare Case—Page 21

NOTE: The manufacturer’s sales force plays an important role in success of a brand in the OTC cold and allergy market.

Gaining the support of the channel is an important part of a brand's success, and shelf space allocation and placement can have a significant effect on brand sales. Because of this importance, the OCM group asked their sales force to query retailers about shelf space allocation among brands. The results from this informal survey showed that retailers considered four basic factors regarding shelf space allocation: product turnover (number of units sold in a given period of time), product profitability, promotional allowances and sales force support. In general, large grocery stores, mass merchandisers, and chain drugstores were more focused on turnover and allowances, whereas independent drugstores paid greater attention to sales force support. The OCM group hoped that this information might prove useful in determining how to allocate their resources across distribution channels. Sales Force The sales force is responsible for maintaining relationships with current retailers and for developing new retail accounts. The sales force also provides special support to retailers for their in-store activities, such as shelf location, pricing, and compliance with special promotions. The management group of Allround may direct the sales force to focus on particular channels and special activities in support of all channels. Salespeople allocated to drugstores, grocery stores and mass merchandisers will spend all of their time selling to and supporting that particular channel. Salespeople allocated to indirect support will spend their time on special activities such as merchandising, ensuring use of product displays, working with wholesalers, etc. Sales force allocation (# of sales people) for Allround is listed in Exhibit 2.7. Exhibit 2.7: AllStar—Sales Force Allocation

Channel #SF Drugstores 30

Grocery Stores 40

Mass Merchandisers 10

Indirect Support 30

Total Sales Force 110

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Market Segmentation and the Market Survey The trade typically segments the OTC cold and allergy market on the basis of how the brands are labeled. The three standard product categories in the OTC market are cold, cough, and allergy. The brand management group often uses the information presented in Exhibit 2.8 as a basis for determining the brand’s direct competition, but also realizes that the report fails to account for the cross-usage of brands (e.g., using a cold medicine to relieve allergy symptoms). Exhibit 2.8: Market Share by Product Category

Cold Cough Allergy Total Mfr Sales ($M) $ 999.8 $ 517.2 $ 160.4 $ 1,677.3 Growth 7.7% 7.0% 0.6% 6.7% Allround 21.4% 0.0% 0.0% 12.8% Believe 0.0% 0.0% 64.6% 6.2% Besthelp 27.0% 0.0% 0.0% 16.1% Coughcure 0.0% 51.4% 0.0% 15.8% Defogg 0.0% 0.0% 35.4% 3.4% Dripstop 7.7% 0.0% 0.0% 4.6% Dryup 18.0% 0.0% 0.0% 10.8% Effective 15.3% 0.0% 0.0% 9.1% End 0.0% 48.6% 0.0% 15.0% Extra 10.5% 0.0% 0.0% 6.2%

A major marketing research firm offers a nationwide survey of OTC cold and allergy consumers. This firm claims that the survey provides a great deal more information on how consumers perceive and use cold and allergy products. The survey is conducted every year. Survey Data The consumer survey consists of the following reports: (1) awareness, purchases and satisfaction, (2) purchase decision-making criteria used by consumers, and (3) brand comparison based on consumers' perceptions of their ability to relieve symptoms. The sample data for awareness, purchases, and satisfaction are presented in Exhibit 2.9.

The MarketShare Case—Page 23

Exhibit 2.9: Market Survey—Awareness, Purchase, Satisfaction

NOTE: The OCM group believes that these studies contain useful information for decision-making, but that there exists a trade-off between the cost of the studies and the importance of the information which they provide. The OCM group also recognizes that all marketing research studies have some error in them.

Brand Awareness Purchases Satisfaction

Allround 68.1% 10.6% 50.6% Believe 35.7% 7.4% 36.0% Besthelp 76.8% 17.1% 47.0% Coughcure 67.0% 15.1% 40.6% Defogg 28.0% 3.4% 35.4% Dripstop 36.3% 4.6% 37.6% Dryup 62.9% 9.1% 47.5% Effective 42.5% 10.2% 38.6% End 69.8% 15.5% 40.2% Extra 61.4% 7.1% 38.0%

Other Marketing Research In addition to the survey data, other information about the market is available. Market trade publications, similar to Exhibit 2.8, are free to the OCM group and provide data for industry outlook on population, industry growth rate, and inflation. Other data concerning competition and distribution are available for a fee. All of these reports are discussed in detail in Section 3. Financial Situation Allround is a successful and profitable brand with sales of $214.3 million at the manufacturer's level last period. The gross margin was $132.5 million, and the contribution after all marketing expenditures, including advertising, promotion, sales force, and administrative costs, was $106.7 million. The Allround brand also carries its share of fixed costs, including the plant where Allround is produced, and a share of corporate overhead charges. These charges were $56.0 million, leaving a net income of $50.7 million. Senior management of Allstar Brands expects the OCM group to make even greater contributions in the future. A detailed income statement is presented in Exhibit 2.10. The group hopes that their budget will increase in future years, but upper management reiterated that their budget would be based on their performance in both sales and profitability. However, due to the new

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emphasis on growing the market share of Allround, additional budget

funds are available to the group. The Brand Manager pointed out that there are enough funds for significant increases in one or more areas of their marketing mix, but also noted that they should consider the marginal impact of spending increases. Exhibit 2.10: OCM Group Income Statement

NOTE: The marketing budget received from the division must cover all sales force, advertising, and promotional expenditures, as well as the cost to purchase marketing research.

$M $M % Manufacturer Sales 214.3

100.0% Promotional

Allowance 27.9 13.0

Cost of Goods Sold 54.0 25.2 Gross Margin 132.5 61.8

Promotion 3.2

1.5 Advertising 7.0 3.3 Sales Force 8.5 4.0

Administrative 7.1 3.3 Total Marketing 25.8 12.0

Contribution After Marketing 106.7 49.8

Fixed Costs 56.0 26.2

Net Income 50.7 23.6 Next Period Budget 28.3 13.2

The Marketing Task The task of the Allround brand management team is to increase market share and profitability in an increasingly competitive and changing environment. With great enthusiasm the OCM group sets out to do the job. Each member has separate assignments, but all are concerned with the performance of Allround and potentially, a new brand introduction. The group will use the information presented in the exhibits and other marketing research studies to assess Allround’s situation. After completing its analysis of the situation, the group will then make decisions in the areas of product, distribution, promotion, and pricing. The group must keep in mind that all decisions are interrelated, and must be considered in context. This process will be repeated over the coming 6 periods as they attempt to establish AllStar Brands as the leader in both profitability and market share in OTC cold medication.