COLGATE BRANDING 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) drugs 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 $8 billion. It is the largest non-food consumer products industry, and it is growing at over 6 per cent annually. Several trends are 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 clinical 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. 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 year-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. 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 percent. Advertising and sales promotions are the largest expenditure categories for these products, accounting for an average of 42 per cent of sales. OTG drugs produce on average 11 percent 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. 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 OTC firms are growing larger and larger, and they are willing to fight aggressively for market share. Given all these barriers 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, are 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 decongestant 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 board. We need to expand into more profitable categories.' Required: a. Describe the elements of a brand Life-cycle [10 Marks] b. What are the desirable qualities of a good brand? [ 10 Marks]