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CASE
23
The Procter and Gamble
Company: Investment in Crest
Whitestrips Advanced Seal
It was May 2008, and Jackson Christopher, a financial analyst for the Procter and
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 whiten-
ing 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 com-
mute by living downtown.
The week before, the group had met to consider the merits of the proposed prod-
uct, known as Crest Advanced Seal. Although openly intrigued by the concept, Angela
Roman, the group’s 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 amalgamat-
ing all the different considerations and thinking through the financial implications. In
the process, he 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 and Gamble Company

P&G was one of the world’s premier consumer goods companies. Its 2007 total rev-
enue 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

This case was prepared by Daniel Lentz (Procter and 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.

337
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338 Part Four Capital Budgeting and Resource Allocation

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 share-
holder 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.

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 doc-
uments the category history.)
The commercial team believed that, to turn around the business’s lackluster per-
formance 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 func-
tion of P&L accretion as of increasing competitive share. The business rarely saw
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Case 23 The Procter and Gamble Company: Investment in Crest Whitestrips Advanced Seal 339

FIGURE 1 | Market share of the teeth whitening category, 2008.

Aquafresh
11%

Listerine
10%
Crest
60%
Rembrandt
6%

Other
13%

Source: Created by case writer.

household penetration figures any higher than 3%1, so there were plenty of new
consumers to target.

Last Week’s Meeting

The previous week, NOAC members had gathered in a conference room to consider
the proposed launch of Advanced Seal. As the meeting had progressed, the group
strained to gauge the GM’s reaction to the concept.
“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.
“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 con-
cern, 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

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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340 Part Four Capital Budgeting and Resource Allocation

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 con-
sumers 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 look-
ing 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 prod-
uct 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 cur-
rent 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 mar-
ket 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 proba-
bly 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.”
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 look-
ing 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. We need to find ways to meet her needs while pre-
serving our core structural economics.”
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

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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Case 23 The Procter and Gamble Company: Investment in Crest Whitestrips Advanced Seal 341

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 would
be lower than premium. Exhibit 6 provides the summary assessments that had coa-
lesced 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 percent for Pre-
mium units and 15% for Basic units. Such cannibalization rates meant that 65 to
75 percent of Advanced Seal’s 2 million 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 one-time devel-
opment expenses to get the project going. The accountants he conferred with regard-
ing capital expenditure depreciations recommended the five-year accelerated schedule
for tax purposes and the straight-line schedule for reporting purposes.3 Engineering
indicated that the equipment would likely need to be replaced at the end of the proj-
ect 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 typ-
ically ran at a rate of between 8 and 10 times.4 The project would require that at least

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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342 Part Four Capital Budgeting and Resource Allocation

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 spread-
sheet 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 she
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 thinking through some digital campaigns that I think
can 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. One problem with trial according to
Margaret 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. What kind of numbers are we talking about?”
“Good. I’m going to need my starting advertising budget to go from $6 million
to $7.5 million in year one. 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.”

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, Tam entered his cube.
“This can’t be good,” Christopher said preemptively.
Tam sighed. “Yes and no. I’ve gone back and reworked the volume forecast for
Christina’s initiative. We may have a more severe cannibalization problem than we
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 that the price reduction and extra advertising expands the range of can-
nibalization rates on Premium to between 50 percent and 65 percent.”
“Alright, that might not be so bad.”
“Well, in case it is, we’ve worked up an alternative strategy.” Tam continued.
“Strategy B is to pivot to a more conservative position to minimize cannibalization
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Case 23 The Procter and Gamble Company: Investment in Crest Whitestrips Advanced Seal 343

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.”
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 mil-
lion per year. The changes would also reduce the cannibalization rate for Premium to
a more certain rate of 45 percent.

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 propo-
sition for P&G shareholders. He agreed with Whitman that this was an exciting tech-
nology, but he had to make sure that any decision would give investors something to
smile about.
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344 Part Four Capital Budgeting and Resource Allocation

EXHIBIT 1 | Procter and Gamble Brands

Beauty and Grooming

Always Anna Sui Aussie

Braun Camay Christina Aguilera Perfumes
Clairol Professional CoverGirl Crest
DDF Dolce & Gabbana Cosmetics Dolce & Gabbana Fragrances
Dunhill Fragrances Escada Fragrances Fekkai
Fusion Ghost Gillette
Gucci Fragrances Hugo Boss Fragrances Head & Shoulders
Herbal Essences Ivory Lacoste Fragrances
MACH3 Naomi Campbell Natural Instincts
Nice ’n Easy Nioxin Olay
Old Spice Oral-B Pantene
Pert Prestobarba/Blue Puma
Rejoice SK-II Safeguard
Scope Sebastian Professional Secret
Tampax Venus Vidal Sassoon
Wella

Household Care

Ace Align Ariel

Bold Bounce Bounty
Cascade Charmin Cheer
Comet Dash Dawn
Downy Dreft Laundry Duracell
Era Eukanuba Febreze
Gain Iams Joy
Luvs Metamucil Mr. Clean
Pampers Pepto-Bismol Prilosec OTC
Pringles Puffs Swiffer
Tide Vicks
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Case 23 The Procter and Gamble Company: Investment in Crest Whitestrips Advanced Seal 345

EXHIBIT 2 | 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

PG S&P500
$0.0
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08

Data Source: Yahoo! Finance.

EXHIBIT 3 | Crest Whitestrips’ Revenue and After-Tax Profit Since 2001 Launch
(in millions of dollars)

$350
Revenue After-tax profit
$300

$250

$200

$150

$100

$50

$0
2001 2002 2003 2004 2005 2006 2007

Note: Data is disguised.

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346 Part Four Capital Budgeting and Resource Allocation

EXHIBIT 4 | Whitening Category History

May Apr Sep Jan Apr May Jan Jul

2001 2003 2003 2004 2005 2005 2007 2007

Disc.
1/06
Sep May Oct Sep Apr Jan Mar Mar
2002 2003 2003 2004 2005 2006 2007 2008

Private
Label

Disc. Disc. Disc. Disc.

1/06 1/09 1/09 1/09

Image Source: Procter and Gamble Company. Used with permission.

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Case 23 The Procter and Gamble Company: Investment in Crest Whitestrips Advanced Seal 347

EXHIBIT 5 | Crest Whitestrips’ Advanced Seal Packaging

Image Source: Procter and Gamble Company. Used with permission.

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348 Part Four Capital Budgeting and Resource Allocation

EXHIBIT 6 | Gross Profit Comparison

Advanced Seal Premium Product Basic Product

Per-unit revenue and costs

Revenue $22 $18 $13
Cost of goods sold expenses $12 $7 $6
Gross profit $10 $11 $7

Note: Case writer has disguised these figures.