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Rev. Dec. 7, 2016
The Procter & Gamble Company:
Investment in Crest Whitestrips Advanced Seal
It was May 2008, and Jackson Christopher, a financial analyst for the Procter & Gamble Company’s
(P&G) North America Oral Care (NAOC) group, hustled along a sunny downtown Cincinnati street on his
way to work. NAOC’s Crest teeth whitening group was considering the launch of an extension to its
Whitestrips product, and the project had dominated most of his working hours. At least he avoided a long
commute by living downtown.
The week before, the group had met to consider the merits of the proposed product, known as Crest
Advanced Seal. Although openly intrigued by the concept, Angela Roman, the group’s general manager
(GM), was reserving judgment until she had a clearer picture of the idea and risks. She had tasked Christopher
with putting together the economic perspective on Advanced Seal, an effort that had required a lot of work
amalgamating all the different considerations and thinking through the financial implications. In the process,
he had had to manage a lot of different constituencies. In short, it had been an interesting week, and with the
follow-up meeting the next day, Christopher knew he needed to present some conclusions.
The Procter & Gamble Company
P&G was one of the world’s premier consumer goods companies. Its 2007 total revenue exceeded
$72 billion and came from almost every corner of the globe. P&G’s wide range of brands focused on beauty,
grooming, and household care and delivered a broad array of products from fragrances to batteries and
medication to toothpaste (Exhibit 1).
P&G was an aggressive competitor in its market, seeking to deliver total shareholder returns in the top
one-third of its peer group (Exhibit 2). Management achieved these returns by following a strategy to reach
more consumers (by extending category portfolios vertically into higher and lower value tiers) in more parts
of the world (by expanding geographically into category whitespaces) more completely (by improving existing
products and extending portfolios into adjacent categories).
NAOC’s portfolio consisted of seven different product lines: toothpaste, manual toothbrushes, power
toothbrushes, oral rinses, dental floss, denture adhesives and cleansers, and teeth whitening strips. Leveraging
the collective benefit of multiple products enabled P&G to focus on more complete oral health solutions for
consumers. NAOC followed the corporate strategy by, among other things, expanding the global toothpaste
presence under the Oral-B brand and to multiple adjacencies under the 3D White brand. At the heart of the
portfolio, representing more than $5 billion in annual sales, was the Crest brand.
This case was prepared by Daniel Lentz (Procter & Gamble) and Michael J. Schill, Robert F. Vandell Research Associate Professor of Business
Administration. The individuals and figures in this case have been fictionalized. All narrative details and economics are purely fictional and are not
intended to be used for a real assessment of the Crest Whitestrips business. Copyright  2012 by the University of Virginia Darden School
Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without
the permission of the Darden School Foundation.
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Crest Whitestrips and the context for Advanced Seal
Crest Whitestrips, an at-home tooth enamel whitening treatment launched in 2001, allowed consumers to
achieve whitening results that rivaled far more expensive dental office treatments. Existing whitening
toothpastes had worked by polishing surface stains from the tooth enamel, but they were unable to change
the fundamental color of teeth. Whitestrips worked through a strip applied temporarily to the teeth, binding
the product to surface enamel and actually whitening the layer of dentin beneath the enamel itself. The
intrinsic whitening results were unique to the category.
On its introduction, Crest Whitestrips saw nearly $300 million in annual sales but virtually no growth in
sales or profits after the first year (Exhibit 3). Multiple attempts at line extensions had failed to significantly
improve results, only managing to breed skepticism in major customers. Competitors that entered the
category either left shortly thereafter or encountered the same stagnant sales as had P&G. (Exhibit 4
documents the category history.)
The commercial team believed that, to turn around the business’s lackluster performance and win back
trust and merchandising support, something fundamental had to change. Advanced Seal, the extension under
consideration, was based on a new technology that prevented the strips from slipping out of position during
use. Because the new product binded with teeth more reliably, the active ingredient was delivered more
effectively, improving both the usage experience and the whitening results, which were superior to any
existing product on the market. Exhibit 5 provides the proposed packaging for the product.
With an extremely strong market share position
(Figure 1), the Whitestrips team had to manage any
new launch carefully; future success had to be as
much a function of P&L accretion as of increasing
competitive share. The business rarely saw household
penetration figures any higher than 3%1, so there
were plenty of new consumers to target.
Last Week’s Meeting
The previous week, NAOC members had
gathered in a conference room to consider the
proposed launch of Advanced Seal. As the meeting
had progressed, the group had strained to gauge the
GM’s reaction to the concept.
Figure 1. Market share of the teeth whitening
category, 2008.
Aquafresh
11%
Crest
60%
Listerine
10%
Rembrandt
6%
Other
13%
Source: Created by author.
“I follow you so far,” said Roman. “I have questions, but I don’t want to derail you, Christina. Keep
going.”
Even among other brand managers, Christina Whitman was known for her energy and enthusiasm, which
was saying something.
1 Household penetration (HHP) tracked the percentage of a given market of households that had purchased a product within the last year. Whitestrips
traditionally had very low HHP, whereas toothpaste had HHP of virtually 100%.
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“Consumer research has been clear,” Whitman asserted briskly. “The tendency of Whitestrips to slip off
teeth is the number one barrier to repeat purchase and word-of-mouth recommendation. Advanced Seal’s
new technology will address this concern, providing a real jolt of energy to the whitening category and a
strong sales lift in the process. ”
“We see pricing this innovation at the high end of our range, which should drive up trade in our portfolio
and improve market share. The product improvement gives us creative advertising and positioning
opportunities to leverage as well. We definitely think we should move forward.”
Roman sat back in her chair and exhaled thoughtfully. “What’s the downside scenario here, everyone?”
Hector Toro, the account executive, cleared his throat. “I’m worried about whether we can count on
getting the merchandising support we’ll need to get this off to a good start. For the product to catch on, we’ll
need to get out of the gates fast, and a lot of retailers are still frustrated about the mediocre velocity of our
last line extension. If they don’t get behind this, it won’t be successful no matter what we do.”
Whitman agreed immediately. “To show them we’re committed to pulling consumers to the oral care
aisle for this, we really need to adequately fund marketing. We also need to allow for strong trade margins2 to
get us display space and offset the high carrying cost of this inventory. It’s a much higher price point than
buyers are used to carrying in inventory.”
Jackson Christopher, the data floating in his head from hours of study, saw an opportunity to bring up
some of his concerns. “That may not be as straightforward as it sounds. Pricing this at a premium is one
thing, but can we price it high enough to cover the costs of the improvements?”
This was the first Roman had heard of this potential issue. “Say more about that. I agree with Christina in
principle, but what are the preliminary economics we’re looking at here?”
“Oh, we’ll be able to price this up, for sure,” he replied. “We could charge a 25% premium without
having a precipitous drop in volume. The problem is that this product improvement will drive up our costs
by almost 75%. That could easily dilute our margins. We could end up making less gross profit on this
product than on our current Premium product line. If we’re not careful, the more this product takes off, the
worse off we’ll be.”
“But even so,” Whitman interjected, “we’re confident that we’ll pick up so much incremental volume that
we’ll be net better off anyway.” Whitman knew Christopher’s concerns were valid but didn’t want them to kill
the idea prematurely.
“What do you think, Margaret?” asked Roman, turning to Margaret Tan, a market researcher.
“I think the real answer is probably somewhere in the middle,” Tan replied. “I don’t think we’ll be able to
price this high enough to offset the costs, but we probably will pick up a lot of new volume. Whether we’ll be
net better off depends on bringing in enough new users to the category to offset profit dilution from the cost
structure.”
2 Trade margins were the gross profit margins retailers made on any product they sold, the difference between the shelf price and the list price paid to
product manufacturers. In general, the higher the shelf price (determined by the retailer), the higher the trade margin requirement to retailers.
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Everyone was silent as Roman took a few moments to think it over. “Alright then,” she said. “I’m OK to
proceed at this point. I like the idea. We need to be looking for ways to delight our consumers. This product
improvement really is huge for this consumer; we know that she’s been complaining about Whitestrips
slipping off her teeth for quite some time. But we need to find ways to meet her needs while preserving our
core structural economics.
“If I’m following your logic, Christina, you’re saying we’ll sell enough incremental units to end up net
better off, even with the margin dilution. That can happen sometimes, but I’ve been doing this long enough
to know that’s a risky strategy. That said, we need a jolt to drive top-line sales on this category. I may be
willing to take that risk, but there must be enough of a top-line opportunity to make it interesting.”
She turned to Christopher. “I’m going to need you to set our baseline here. There are a lot of moving
pieces, and I need you to paint the picture on how this comes together. Does this pay out for our business?
Are we financially better off launching this product or not, what are the risks, what do we need to be thinking
about as we design this? Work with marketing, sales, manufacturing, and market research to pull together the
overall picture in the next week or so. We’ll get back together and decide where to go from here.”
Christopher agreed, and the meeting wrapped up.
Establishing a Base Case
Christopher’s initial analysis established the expected price point for retailers at $22 per unit for
Advanced Seal, compared to $18 and $13 per unit for P&G’s Premium and Basic offering, respectively.
Christopher had worked with his supply chain leaders to estimate the cost structure. The new technology
would run at a cost of $5 per unit cost more than the current Premium product offering, such that the gross
profit for Advanced Seal would be lower than for Premium. Exhibit 6 provides the summary assessments
that had coalesced regarding the unit price and cost for the Crest Whitestrips products.
The forecasting models suggested a base case annual forecast of 2 million units for Advanced Seal. The
analysis also suggested that cannibalization of existing Crest Whitestrips products would be high, on the order
of 50% to 60% for Premium units and 15% for Basic units. Such cannibalization rates meant that 65% to
75% of Advanced Seal’s 2 million expected units was coming straight out of existing P&G sales.
Preliminary discussions around advertising spending indicated an expected launch budget of $6 million
per year. He estimated that the cannibalized Premium and Basic products already received $4 million per year
in advertising support that would no longer be required after the launch. This meant the group would have to
spend an incremental $2 million in advertising to support the launch. He also needed to include $1 million per
year for incremental selling, general, and administrative expenses.
Based on the amount of time R&D felt it would take a competitor to match the product innovation,
Christopher expected a project life of four years, over which time annual unit sales were expected to be
relatively constant. For this type of decision, P&G used an 8% discount rate and a 40% tax rate.
Manufacturing partners expected to spend $4 million in capital expenditures and incur $1.5 million in onetime development expenses to get the project going. Regarding capital expenditure depreciation, he conferred
with an accounting team, which recommended the five-year accelerated schedule for tax purposes and the
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straight-line schedule for reporting purposes.3 Engineering indicated that the equipment likely would need to
be replaced at the end of the project life, and they did not expect it to have any residual value.
Christopher also knew that he had to factor in any incremental working capital required to support the
project. For the Whitestrips business, net working capital turnover typically ran at a rate of between 8 and 10
times.4 The project would require that at least this amount be on hand prior to the market launch date. It was
P&G’s policy to model the recovery of any working capital investment at the end of the project life.
Proposal to Drive Revenue
Later that week, as Christopher rubbed his eyes to remove the imprint of a spreadsheet from his vision,
Whitman popped her head into his cube. “I came to see where the steam was coming from. I guess from
your ears.”
Christopher chuckled. “The math isn’t really complicated, but the results all depend on what you assume.
I just need to make sure I think through everything the right way.” He was getting close to wrapping up his
work, but he knew that when Whitman came by unannounced and excited, it meant her creative wheels were
turning and that she was looking for more advertising dollars.
“I had some great buzz-creation ideas that I think we can use for the launch,” she said, her voice
lowering. “I’m envisioning some digital campaigns that I think could go viral, and I’m also interested in
expanding our initial media plan. We have such low household penetration numbers that, if we drive a change
in launch plans, we could focus a great deal more on driving trial. According to Margaret, one problem with
trial is that we’re really at the high end of the price range. She thinks a small drop in price could really
accelerate sales.”
“That makes sense, assuming this consumer is as elastic as Margaret says. What kind of numbers are we
talking about?”
“I’m going to need my starting advertising budget to go from $6 million to $7.5 million in Year 1. I can
then go back to $6 million per year after that. Next, we reduce price by $1 to $21 for Advanced Seal. Margaret
thinks those two effects will drive annual unit sales up 1.25 million to 3.25 million units per year.”
“Sounds impressive. Let me take a look, and I’ll let you know where we land.”
“Thanks! We all know that Roman is looking for bigger revenue dollars from Whitestrips and my
calculations suggest this will certainly deliver big revenue gains for the group.”
3 Five-year accelerated depreciation specified by the U.S. tax authority (IRS) was calculated by multiplying the amount of investment by the
following percentages for each respective year, 20% in Year 1, 32% in Year 2, 19.2% in Year 3, 11.52% in Year 4, 11.52% in Year 5, and 5.76% in Year
6.
4 The net working capital turnover ratio was defined as Revenue divided by Net Working Capital, where Net Working Capital was equal to Current
Assets less Non-Interest-Bearing Current Liabilities.
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Proposal to Minimize Cannibalization
The next day, Christopher thought he had figured out what he would recommend to Roman, and he had
a good risk profile built for the team to design and sell against. Just as he was starting to relax, Tan entered his
cube.
“This can’t be good,” Christopher said preemptively.
Tan sighed. “Yes and no. I’ve gone back and reworked the volume forecast for Christina’s initiative. We
have the potential for a more severe cannibalization problem than we originally thought. It’s not certain, but
there is greater likelihood that we end up sourcing more of the incremental volume from our current
Premium products.”
“How much of an increase are we talking about here?”
“I expect the price reduction and extra advertising to expand the range of cannibalization rates on
Premium to between 50% and 65%.”
“All right, that might not be so bad. I need to look at the financials to be sure though.”
“Well, in case it is, we’ve worked up an alternative strategy.” Tan continued. “The alternative is to pivot
to a more conservative position, to minimize cannibalization by reducing the launch advertising splash and
focusing the marketing on untapped customers. In doing so, we’ll have less of a broad appeal than we
thought. More of a niche. We’d be prioritizing cannibalization over trial. Our thought was to also offset the
gross profit differential by raising price to $23, giving Advanced Seal an $11 gross profit. It’s clearly not what
Christina was hoping for, but it’s a choice that we have. Essentially, instead of dropping the price, raise it a
little.”
Together, they agreed on the final assumptions. The advertising budget would be reduced by $1 million
each year, to $5 million. The sales model predicted that the effect on Advanced Seal units would be strong
with unit sales declining to just 1 million per year. The changes would also reduce the cannibalization rate for
Premium to a more certain rate of 45%.
The Recommendation
Christopher still needed to figure out how to convert all this data into a realistic P&L for the initiative
and find the baseline net present value. Beyond that, he needed to determine what the team needed to do to
mold this opportunity into a winning proposition for P&G shareholders. He agreed with Whitman that this
was an exciting technology, but he had to make sure that any decision would give investors something to
smile about.
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Exhibit 1
The Procter & Gamble Company:
Investment in Crest Whitestrips Advanced Seal
Procter & Gamble Brands
Beauty and Grooming
Always
Braun
Clairol Professional
DDF
Dunhill Fragrances
Fusion
Gucci Fragrances
Herbal Essences
MACH3
Nice ’n Easy
Old Spice
Pert
Rejoice
Scope
Tampax
Wella
Anna Sui
Camay
CoverGirl
Dolce & Gabbana Cosmetics
Escada Fragrances
Ghost
Hugo Boss Fragrances
Ivory
Naomi Campbell
Nioxin
Oral-B
Prestobarba/Blue
SK-II
Sebastian Professional
Venus
Aussie
Christina Aguilera Perfumes
Crest
Dolce & Gabbana Fragrances
Fekkai
Gillette
Head & Shoulders
Lacoste Fragrances
Natural Instincts
Olay
Pantene
Puma
Safeguard
Secret
Vidal Sassoon
Household Care
Ace
Bold
Cascade
Comet
Downy
Era
Gain
Luvs
Pampers
Pringles
Tide
Align
Bounce
Charmin
Dash
Dreft Laundry
Eukanuba
Iams
Metamucil
Pepto-Bismol
Puffs
Vicks
Ariel
Bounty
Cheer
Dawn
Duracell
Febreze
Joy
Mr. Clean
Prilosec OTC
Swiffer
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Exhibit 2
The Procter & Gamble Company:
Investment in Crest Whitestrips Advanced Seal
Value of $1 Invested in P&G Stock and the S&P 500 Index, 2001 to 2008
$2.5
$2.0
$1.5
$1.0
$0.5
$0.0
Jan-97
Jan-98
Jan-99
Jan-00
PG
Jan-01
Jan-02
Jan-03
Jan-04
S&P500
Data source: Yahoo! Finance.
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Exhibit 3
The Procter & Gamble Company:
Investment in Crest Whitestrips Advanced Seal
Crest Whitestrips’ Revenue and After-Tax Profit Since 2001 Launch
(in millions of dollars)
$350
$300
$250
$200
$150
$100
$50
$0
2001
2002
2003
Revenue
2004
2005
2006
2007
After-tax profit
Note: Data is disguised.
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Exhibit 4
The Procter & Gamble Company:
Investment in Crest Whitestrips Advanced Seal
Whitening Category History
Image source: Procter & Gamble Company. Used with permission.
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Exhibit 5
The Procter & Gamble Company:
Investment in Crest Whitestrips Advanced Seal
Crest Whitestrips’ Advanced Seal Packaging
Image source: Procter & Gamble Company. Used with permission.
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Exhibit 6
The Procter & Gamble Company:
Investment in Crest Whitestrips Advanced Seal
Gross Profit Comparison
Per unit revenue and costs
Revenue
Cost of goods sold expenses
Gross profit
Advanced Seal
Premium Product
Basic Product
$22
$12
$10
$18
$7
$11
$13
$6
$7
Note: Data is disguised.
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