Global wellness economy monitor 2019 pdf

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PRAXIS: REDEFINING THE TOOTHPASTE INDUSTRY Edward Gray wrote this case under the supervision of Ian Dunn solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Our goal is to publish materials of the highest quality; submit any errata to publishcases@ivey.ca. i1v2e5y5pubs Copyright © 2020, Ivey Business School Foundation Version: 2020-04-13

On May 4, 2019, Shangbing Jiang and Kamalpreet Minhas were contemplating the launch of their business venture—Praxis. Praxis was a toothpaste that aimed to improve the health and wellness of individuals by incorporating vitamins, minerals, and supplements (VMS) into the toothpaste. The duo wanted to assess the business environment, evaluate their product and marketing strategy, project the venture’s financial performance for the first three years of operations, and ultimately determine whether they should pursue the idea. THE VENTURE Jiang and Minhas had met during their second-year accounting and business analysis course at Western University (Western) in London, Ontario, Canada. In this course, students had to work collaboratively in groups to generate and evaluate the feasibility of a new business idea. During this process, Praxis was conceived. The creators intended for Praxis to retail two variations of toothpaste: Rise and Rest. Rise toothpaste was infused with vitamin B121 and caffeine to improve the mood and energy of its consumers; Rest toothpaste used melatonin and L-theanine2 to promote relaxation. Praxis’ mission was to facilitate a health-conscious lifestyle and empower individuals to improve their productivity and well-being. Jiang and Minhas were confident their idea was scalable beyond the classroom. They had recently won Western’s Propel Entrepreneurship Centre’s Seed Your Startup case competition, had been approached by multiple investors, and had been shortlisted to star on Dragon’s Den—the reality television show featuring entrepreneurs looking for investors. These early successes influenced both owners to consider pursuing the idea as a full-time occupation. However, both Jiang and Minhas did not want to disregard their studies and wondered whether they could manage Praxis in addition to their existing workload. If they pursued this venture, they expected to see a 30-per-cent return on their investment and wanted to withdraw a total of CA$20,0003 in dividends by the end of the third fiscal year. HEALTH AND WELLNESS Health and wellness was defined as the “active pursuit of activities, choices, and lifestyles that led to a state of holistic health.”4 This broad definition encompassed a wide range of products and services, all of which contributed to improving consumer well-being (see Exhibit 1). The recent availability of health-related information had shifted consumers’ health and wellness perspectives from a reactive to a preventative state. Canadians had become increasingly health-conscious and were actively integrating self-improvement

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Page 2 9B20B005 measures into their daily lives. According to a national survey, half of all Canadians considered health implications when making a purchasing decision, and 31 per cent were willing to pay a premium for health- enhancing products and services.5 Valued at $4.2 trillion, the global health and wellness sector had experienced a 6.4-per-cent annual growth rate since 2015, outpacing the global economic growth rate of 3.6 per cent.6 In addition, industry outlook was positive, with an expected average annual growth rate of 7 per cent throughout all sub-industries.7 Industry success was dependent on the latest macroeconomic indicators, such as gross domestic product (GDP) 8 growth, the unemployment rate, and consumer discretionary income. The health and wellness industry primarily catered to wealthy customers and was widely regarded as a status symbol.9 This in turn created a limited market, as many consumers could not afford these luxury products and services. Nevertheless, corporations established wellness programs and subsidized or covered employee health and wellness expenditures. These programs indicated an investment in human capital, increased employee morale, reduced absenteeism, attracted top talent, and improved workplace productivity.10 Corporate wellness investment was expected to grow by an annualized rate of 2.8 per cent, largely driven by 6.4-per-cent growth in corporate profit.11 THE TOOTHPASTE, AND VITAMIN, MINERAL, AND SUPPLEMENT INDUSTRIES Toothpaste The global toothpaste market had undergone a period of innovation and growth. In 2018, the industry was valued at approximately $26 billion and was projected to increase to $36 billion by 2024—a 6-per-cent annual growth rate.12 Various industry trends had been observed; these were responsible for the performance of the toothpaste market. These trends included, but were not limited to the following:13  Multipurpose products: These toothpastes focused on convenience and catered to more than one oral

or health-care issue.  Strong brand loyalty: One-third of toothpaste users purchased the same product they had used in the

past, regardless of price.  Cosmetic benefits: Teeth whitening toothpastes were outselling regular toothpastes.  Natural and organic products: As a segment, toothpaste had experienced the largest growth rate in the

“Natural and Organic Personal Care” market.  Tooth sensitivity: One in every two adults experienced tooth sensitivity, leading to an increase in

demand for toothpastes that addressed the issue. The Canadian toothpaste market was highly saturated, was dominated by industry conglomerates and private label brands alike, was valued at $883 million, and expected a 1.3-per-cent compounded annual growth rate (CAGR) over the next five years.14 In comparison, the Canadian GDP had slowed from 3 per cent in 2017 to 1.8 per cent in 2018.15 The average retail price for toothpaste in Canada had risen from $2.54 in 2015 to $2.94 in 2018.16 Vitamins, Minerals and Supplements (VMS) VMS consumption was often viewed as an efficient way of maintaining consumer health and wellness. According to Health Canada and Statistics Canada respectively, 75 per cent of Canadians had used a natural

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Page 3 9B20B005 health product, and 45 per cent of all Canadians had used a nutritional supplement within the last year alone.17 The use of these products and supplements was partially due to changing dietary behaviours. Approximately 70 per cent of the global population had reduced its meat consumption or was eliminating meat altogether and transitioning toward a more plant-based diet.18 However, many necessary vitamins, specifically vitamin B12, were obtained only through the consumption of meats and dairy, increasing the need for over-the-counter vitamin products.19 Finally, the industry had recently experienced dozens of product recalls, mislabelling claims, and public scandals. The effect that these incidences would have on future industry performance was unknown.20 THE COMPETITION Jiang and Minhas had segmented their competition into three categories: niche private label toothpastes, multinational consumer goods corporations, and over-the-counter VMS brands. The duo wanted to establish a list of key success factors to help differentiate Praxis from industry players. Power Toothpaste21 Power Toothpaste retailed a caffeinated toothpaste available individually or as a value pack of two tubes priced at $14.99 and $24.99, respectively. Power Toothpaste had initially generated impressive media attention through its Indiegogo crowdfunding22 campaign, achieving over 2,000 pre-order unit sales valued at approximately $40,000.23 Nevertheless, the business had since ceased almost all operational efforts, its business website had been discontinued, and the product was difficult to access. While Power Toothpaste was no longer a direct threat, Jiang and Minhas believed they could learn from that company’s historical performance. Twice24 Twice marketed itself as a naturally sourced health-and-wellness toothpaste. With a minimalistic and aesthetically pleasing design, Twice retailed two variations of toothpaste: Early Bird for the morning and Twilight for the evening. Both variations provided teeth whitening capabilities; sensitivity relief; vitamins A, C, and E (see Exhibit 2); and various botanical extracts such as lavender, aloe vera, wintergreen, and peppermint. Nevertheless, Twice toothpaste also included fluoride, a mineral that had been recently criticized by many dental associations. Fluoride encouraged strong bone formation and was well known for preventing dental cavities; however, some sources reported that regular ingestion of fluoride was dangerous, as accumulation within the body could have lasting chemical effects.25 Twice toothpaste was sold individually as well as in combination packs of two or four tubes and was priced at $9.00, $17.00, and $32.00, respectively. Hello Products26 Hello Products (Hello) was the leading natural oral-care brand, offering a diversified product portfolio beyond just toothpaste. Hello retailed over 16 variations of toothpaste, as well as mouthwashes, toothbrushes, dental floss, and various gift baskets. Hello was backed by dental professionals and advertised itself as an environmentally- and vegan-friendly organization. None of Hello’s product lines incorporated VMS ingredients; its most similar product was an a.m./p.m. fluoride-free bundle that retailed for $9.99.

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Page 4 9B20B005 Multinational Consumer Goods Corporations Colgate-Palmolive Company, Proctor & Gamble Company, Johnson & Johnson, and GlaxoSmithKline plc—all billion-dollar corporations—owned the leading toothpaste brands including Colgate, Sensodyne, Crest, and Aquafresh, among others. Together, these corporations comprised approximately 80 per cent of the total market share.27 Their product lines were well-established household brands that benefited from strong customer loyalty and innovation in response to emerging consumer needs. Nevertheless, none of these brands provided a VMS-focused or health and wellness-oriented toothpaste. Over-the-Counter VMS Brands VMS products were available for purchase, without a prescription, from local pharmacies and health retailers throughout North America. While VMS brands did not retail toothpastes, their products catered to consumers looking to improve their health and wellness. VMS products were commonly sold in tablet or capsule form but were also sold as powders, sprays, liquids, candies, and lozenges. THE CONSUMERS Consumers had become increasingly aware of the correlation between oral health and overall health. Their expectations extended beyond the traditional desire to prevent cavities to include other features such as teeth whitening, fresh breath, taste, and other health benefits. Nevertheless, product functionality was not the only driver influencing consumer willingness to spend; brand, design, price, distribution channel, and professional testimonials were also key factors (see Exhibit 3). Adults aged 18 to 34 prioritized the cosmetic benefits of toothpastes, such as whitening, above those of oral care.28 Despite having a lower disposable income, this age group was more likely to experiment with new products than older adults were.29 Middle-aged and older adults demonstrated a higher engagement in almost all aspects of oral care. This demographic preferred the more advanced products that “worked harder” for the consumer and provided multiple benefits in one usage.30 From a health and wellness perspective, consumers preferred products that advertised simple and familiar ingredients. Well known, natural ingredients (such as vitamins or lavender) were more likely to influence consumer perception about a product being organic or not.31 In fact, many consumers were unaware of the risks that certain ingredients posed; consumers were more willing to purchase health and wellness products as their education about those products increased.32 Finally, as many individuals aged, they lost the ability to absorb necessary vitamins—specifically vitamin B12.33 As a result, older adults were the primary consumers of VMS products (see Exhibit 4). Jiang and Minhas had loosely identified three consumer profiles that would benefit from using Praxis: individuals who led busy lives and valued the convenience of the product; individuals who prioritized the use or health aspects of the product; and individuals who purchased the product for its premium, organic brand image. The owners agreed that children or individuals below the age of 18 were not a suitable market for Praxis. MARKETING PLAN Product Praxis would provide three product offerings: a 100-millilitre vitamin B12 and caffeine-infused toothpaste (Rise), a 100-millilitre melatonin and L-theanine infused toothpaste (Rest), and a combination pack that

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Page 5 9B20B005 included tubes of both the Rise and Rest variations (see Exhibit 5). Both Rise and Rest helped to improve the productivity and well-being of its consumers by reducing the time it took for individuals to wake up and fall asleep, respectively. Additionally, each toothpaste was comprised of natural ingredients such as baking soda, bentonite clay, xylitol,34 and peppermint essential oils. Jiang and Minhas believed that a creative product design would not only help develop Praxis’ brand image but also be key to increasing sales. Price Praxis would price both the Rise and Rest toothpastes for $8.00 each. A two-in-one pack would also be available, for $15.00. All orders were charged a flat $7.00 transportation fee, shipped FOB (free on board) shipping point. Promotion Jiang and Minhas were unsure as to how they should promote Praxis. First, they needed to determine whether to position Praxis as an oral-care or a health-and-wellness product. Additionally, in order to overcome the toothpaste industry’s strong brand loyalty, Jiang and Minhas knew they had to provide an engaging customer experience. A recent Mintel report had identified that value-focused promotions, such as free samples, coupons, and money-back guarantees, were the most successful methods of counteracting strong brand loyalty.35 Regardless of their choice, Jiang and Minhas knew they had to establish an online presence in order to generate sales. Jiang and Minhas considered Facebook and Instagram advertising. Praxis could use either a cost-per-click (CPC) method of advertising that would charge Praxis every time a user clicked on an advertisement, or it could use a cost-per-thousand impressions (CPM) method of advertising that would charge Praxis for each user to whom an advertisement was displayed. Since Facebook Inc. owned Instagram, any advertising done on Instagram was also seen on Facebook, and vice versa. In the preliminary research into this advertising option, the duo learned the company would likely have to pay between $1.30 and $2.00 per click for CPC advertising versus $4.00 per 1,000 impressions for CPM advertising. If Facebook and Instagram were used for advertising, Jiang and Minhas could select the audience for these advertisements using Facebook users’ demographic information. This information was submitted by users upon signing up for the social media sites and was based on the users’ activity while using the sites.36 Praxis could also advertise with Google Ads using a CPC method. Instead of using demographic information as Facebook and Instagram advertising did, Google Ads identified consumers by their Google search terms. Jiang and Minhas needed to identify some keywords that they believed would relate to the product. Google would charge Praxis an average of $4.50 per click.37 Another option was to establish partnerships with medical practices, nutritionists, or dental offices. Jiang and Minhas wanted to collect professional testimonials to display on their website and social media platforms. They believed these testimonials would increase Praxis’ credibility and further increase sales. The duo also considered providing local professionals with free samples to distribute to their respective clientele. If these samples created interest, Jiang and Minhas wanted to determine whom and where they should target, and what portion of the marketing budget should be allocated toward this effort. Jiang and Minhas were also open to other methods of advertising. They anticipated a monthly promotional budget of $250, which they planned to increase by 50 per cent each year thereafter.

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Page 6 9B20B005 Placement Jiang and Minhas were confident that Praxis should design and maintain a strong website to sell its products online. Nevertheless, they were unsure as to whether they should sell their products through existing brick- and-mortar retail outlets; if they did pursue that route, they needed to identify the most appropriate brick-and- mortar retail strategy (i.e., pharmacy, grocery, health and wellness stores, or other similar outlets). The retail expansion would be costly if executed incorrectly; both owners agreed they needed a detailed action plan. THE FIRST THREE YEARS Jiang and Minhas knew that start-up companies usually took a few years to gain traction; therefore, they wanted to project a statement of earnings, a cash budget, and a statement of financial position for the venture’s first three years of operations. Praxis’ fiscal year-end would be May 31. Revenues After reviewing Power Toothpaste’s performance, Jiang and Minhas estimated that Praxis could sell between 2,400 and 3,600 tubes of toothpaste in the first year. In the second and third years, they believed that total tube sales would grow by 50 per cent and 20 per cent, respectively. After conducting preliminary research, the owners believed that the combination pack would comprise 80 per cent of total tube sales, whereas the remaining 20 per cent would be split evenly between Rise and Rest. Jiang and Minhas had already secured a great deal of consumer interest, and strongly believed that 25 per cent of the first year’s total revenues would occur in the first month of sales. Due to the lack of seasonality in the toothpaste industry, all remaining sales would be split evenly throughout the year. Praxis planned to use a third-party e-commerce application to accept payments for its online sales. The company would immediately deposit the money into Praxis’ bank account at a cost of 2.6 per cent of the total transaction value. Praxis would set up a business account at the Royal Bank of Canada for $10 per month. Before they could sell and distribute Praxis within Canada, Jiang and Minhas required a Canadian Natural Health Product licence.38 Fortunately, all of the ingredients used in Praxis toothpaste were already approved by the Canadian government. The owners were confident the licence would be obtained; the licensing process was to start at the beginning of June and was expected to take two months to complete.39 Costs In an effort to limit their personal liability, Jiang and Minhas decided to incorporate the business. Incorporation cost a one-time legal fee of $2,000, due the first week of August 2019. In addition, Praxis was required to complete a newly updated automated name search (NUANS) at a cost of $40. This search identified whether any existing companies had the same name as the company filing for incorporation. Finally, Jiang and Minhas agreed to purchase a two-year, $4,800 insurance policy. The insurance policy was paid semi-annually, in four equal instalments, and would be renewed, for the same amount, at the start of the third year of operations. The NUANS and the first insurance instalment was payable in June 2019. Praxis operated out of Jiang’s home for the first three years of operations in order to reduce operational expenditures. As a result, rent and utility costs were subsidized, costing approximately $100 and $50 per month, respectively. Praxis’ phone and Internet expense were $90 per month.

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Page 7 9B20B005 Office equipment was purchased for $750. The office equipment was depreciated using the straight-line method, with no residual value. The owners estimated that the equipment had a useful life of five years. Finally, Jiang and Minhas decided to utilize Shopify Inc. as their e-commerce website. A Shopify subscription cost $79 per month as well as a $14 annual domain fee. Jiang intended to design, complete, and pay for the website in July 2019. During the third year of operations, Jiang and Minhas planned to hire a part-time sales representative who would earn a 10-per-cent commission on respective sales and was estimated to generate 20 per cent of the total monthly revenues. These sales had already been included in the total annual projections. The sales representative would be paid commissions on the first of each month following the month in which the sales were made. Jiang and Minhas budgeted $600, $1,200, and $2,400 in sales-related travel expenditures incurred evenly throughout the first three years, respectively. Inventory Management Manufacturing Praxis in-house would be a complicated and expensive process. As a result, Jiang and Minhas decided to outsource production to an overseas manufacturer. Jiang and Minhas knew that inventory management was the next major challenge, and they agreed to replenish inventory levels if these decreased to 1,000 tubes of toothpaste or less. The duo would review and reorder inventory at the start of each month. Praxis’ manufacturer enforced a minimum order quantity of 2,000 tubes per shipment (comprised of either variety) and guaranteed that all orders would be delivered within four weeks.40 Jiang and Minhas intended to place an order for 3,000 tubes, evenly split between Rise and Rest, on June 1, 2019.41 All inventory payments were made on account and were payable one month after the order was placed. Projected Investment and Return Jiang and Minhas were willing to invest $10,000 of their own money and $3,000 of case competition proceeds. At that time, the duo assumed that no external financing would be required or obtained. Additionally, Jiang and Minhas agreed to compensate themselves in the form of dividends paid at the start of each fiscal year. The dividend would be 50 per cent of the cash balance (if any) at the end of May and would be split evenly between both owners. Jiang and Minhas wanted to achieve a 30-per-cent return on their investment by the end of Praxis’ third year of operations. DECISION As Jiang and Minhas contemplated launching Praxis, they wanted to ensure they had developed an effective marketing strategy. Both owners agreed that any changes to the marketing strategy should not materially influence their financial estimates, but an effective marketing strategy would be key to reaching the projected high sales estimate for each of the first three years. Additionally, the duo wanted to project three years of statements of earnings, cash budgets, and statements of financial position. The small business tax rate in Canada was 10 per cent and was payable in July of the following year. If Praxis was deemed feasible, Jiang and Minhas intended to launch the company on June 1, 2019.

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