3. Quant Assignment III Kookaburra Cannibalization - FT

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1 Marketing 430 Individual Quant Assignment III – Cannibalization It’s a warm November morning in New Delhi, India, and you’re finishing your first week as the Indian cricket bat category manager for the Kookabura, a leading provider of cricket bats to professional and amateur cricket players. You just joined Kookabura after spending several years as the country product manager for Adidas’s cricket equipment line in Sri Lanka. Cricket is a bat-and-ball game that was first played in England in the sixteenth century. It now enjoys popularity around the world, and some claim that cricket is the second-most popular sports game in world (next to soccer). For many years Kookabura has been successfully selling two bat products, and combined sales are nearing a million units a year. One of Kookabura’s products is a top-of-the-line model called the Kookabura Kahuna . The Kahuna is made with wood from English willow trees, which are indigenous to England, and which Kookabura has successfully transplanted to India. The Kahuna bat is a high-performance product, and it is a “Grade 1” bat, which means it is the best looking (no blemishes in the wood). Over the years, Kookabura has been able to gain endorsements from a number of prominent cricket players, who often appear in Kookabura’s advertising. Kookabura’s second bat is a lower quality model called the Kookabura Blade . The Blade is made with wood from Kashmir willow trees, which are indigenous to India and Pakistan, and which cracks or splits more easily than English willow, especially if the bat is not oiled periodically. Kookabura Blade bats are “Grade 3,” which means they are cosmetically less attractive than the Kahuna. They are therefore priced significantly lower than the Kahuna. The Kahuna accounts for 65% of the company’s unit sales and 74% of its revenue, with the remainder coming from the Blade. The table below reports the company’s financials* when you joined the firm. Sales and costs have been relatively steady for the past couple of years. Kookabura’s senior managers are nervous because global brands like Nike and Adidas are starting to compete aggressively in the cricket equipment category. Within this increasingly

2 competitive market, they are hoping to fortify and expand their position, in part via new product development. After cricket-bat wood is harvested for production, a manufacturer must physically press the wood to increase its strength and durability. But if the wood is pressed too much, it loses its natural spring and does not play well. As a result, the bat manufacturing process must strike a balance between strength and flexibility. On your first day of work, Kookabura’s managers revealed that they have developed a new manufacturing process, which allows them to press wood with higher pressure than before, but without sacrificing natural spring. The result is a bat that sends the ball faster, straighter and further than most or all competitor products. An unexpected additional benefit of Kookabura’s new pressing process is that the new bat does not require oiling and “knocking in.” When consumers first purchase a standard cricket bat, they usually must rub it with oil and use a mallet to round out the edges, which ensures better play accuracy and additional durability. The new Kookabura bat is ready for use upon purchase, without having to take these extra steps. Based on initial consumer testing, Kookabura’s managers learned that this benefit is not desired by many or most individual cricket players, who value the ritual of knocking in and caring for their bats. However, Kookabura’s managers also learned that this benefit would be highly valued by amateur and professional cricket clubs, who tend to purchase multiple bats at once and who would save time and money if each new bat purchased did not need to be oiled and knocked in. In fact, enthusiasm among organizational buyers was so high that, during initial tests on the bat, several of those involved with the test wanted to place immediate orders. Kookabura’s managers hope the new product can be launched in a way that will protect them from impending competition, but they are unsure about how best to handle the launch. They are deciding between two strategies: 1. One strategy would emphasize the new bat’s superior performance. The aim would be to steal individual buyers from competitors and to create a strong defense against potential entry by other companies (like Adidas), who might also try to compete on performance. Kookabura’s managers believe that a superior performance claim would be more credible if the new bat were branded similarly to the Kahuna—a product already widely associated with high performance. So, they would call the new bat the Big Kahuna . The company also anticipated that the Big Kahuna would be endorsed by many of the same cricket players that currently endorse the Kahuna. 2. A second strategy would emphasize that the bat is ready to play (without knocking in). The aim would be to steal organizational buyers from competitors. Organizational buyers tend to purchase large quantities in a single order, and they include cricket clubs, professional cricket teams, and municipalities that support youth cricket. These buyers are price sensitive, which is why a significant percent of Kookabura’s Blade sales are to organizational buyers. This strategy proposes that the new bat would be called the Kookabura Readyplay. A lthough it would be significantly more expensive than the Blade, the Kookabura sales team would emphasize how much time and money

3 organizations save by not having to knock in and oil a set of new bats, and purchasing these bats would therefore result in net savings to organizations that purchase them. Under either launch scenario, the introduction of the new bat would have an impact on sales of Kookabura’s existing products. Based on consumer research and laboratory testing, Kookabura expects a cannibalization rate of 17 percent if they pursue the Big Kahuna strategy and 7 percent if they pursue the Kookabura Readyplay strategy. Managers also expect that virtually all cannibalized sales for the Big Kahuna will be drawn from the Kahuna. Marketing communication for the Big Kahuna would emphasize quality and performance, which are attributes shared by the Kahuna. Both bats would also be endorsed in similar ways by athletes already associated with the Kahuna. On the other hand, managers expect that virtually all cannibalized sales for the Readyplay will be drawn from the Blade. Organizational buyers do not tend to have the budget to afford purchasing the Kahuna, but many see value in the lower-quality Blade. Because strategic cases could be made for either approach, the senior management team has asked you to look at the financial ramifications of the branding strategy choice. The initial financial inputs are detailed in the following table: Based on the above information, please answer the following questions: 1. (Four points) Calculate the predicted pre-cannibalization profit in years 1 and 2 for Big Kahuna. Now calculate the same for Readyplay. To calculate this profit, you will need to first calculate total predicted revenue, total variable costs, and total fixed costs. In your answer, please highlight the cumulative profit for each proposed new product over two years. Without considering the potential impact of cannibalization, which is the most financially attractive product to launch? 2. (Four points) As explained above, Kookabura expects that: (a) the Big Kahuna will primarily cannibalize sales of the Kahuna (b) the Readyplay will primarily cannibalize sales of the Blade

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4 Calculate and report the unit gross margin (also known as “contribution margin”) for each of Kookabura’s existing products—the Kahuna and the Blade. Then do the same for each of the proposed new products—The Big Kahuna and the Readyplay. Please highlight these gross margins in your answer. (For more details on unit gross margin, see the Kerrin and Patterson chapter, page 35.) Considering only the gross margins you calculated, which of the above cannibalization impacts is more financially advantageous to Kookabura—(a) or (b)? Please explain your answer in two or three sentences, supported by additional calculations if necessary. 3. (Four points) Calculate the predicted post-cannibalization profit in years 1 and 2 for Big Kahuna, assuming that the cannibalization rate will be the same in each year. Now do the same calculations for Readyplay. To calculate this profit, you will need to first calculate the number of units expected to be cannibalized and the money lost due to those cannibalized units. In your answer, please highlight the cumulative profit (post cannibalization) for each proposed new product over two years. Looking at the cumulative profit for each product, which is the most financially attractive product to launch? 4. (Three points) Consider the cost of cannibalization you calculated for the Readyplay in Year 2. Would this cost have any impact on the Blade? If not, why not? Formatting and Content Details • Please submit in PDF format. Show your formulas and working clearly so partial credit can be assigned in case of any calculation errors.

3. Quant Assignment III Kookaburra Cannibalization - FT

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