ACCOUNTING

©2012 by the Kellogg School of Management at Northwestern University. This case was prepared by Professor Julie Hennessy. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call 800-545-7685 (or 617-783-7600 outside the United States or Canada) or e-mail custserv@hbsp.harvard.edu. 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 Kellogg Case Publishing.

REVISED DECEMBER 15, 2014

JULIE HENNESSY KEL684

Kookaburra Cricket Bats: Dealing with Cannibalization

Lulu Popplewell was the category manager responsible for cricket bats at Kookaburra, a maker of cricket equipment. Kookaburra’s products were popular in all cricket-playing countries but especially so in Australia, New Zealand, the United Kingdom, South Africa, and India. Popplewell managed the Indian market, which was an important growth market for the company and the sport alike.

Kookaburra had developed a new cricket bat and was considering two strategies for positioning it in the Indian market. Both strategies would cannibalize current sales, and Popplewell needed to calculate the financial impact of each to determine which one she would recommend.

Branding a New Product

Kookaburra’s new product, marketing, and research and development groups had developed a technologically superior cricket bat prototype that significantly outperformed the company’s traditional line of cricket bats. The new bat not only exceeded past models in traditional measures of performance; it also did not require the involved process of oiling and “knocking in” that traditional bats needed for peak performance.1

The new bat’s performance was significantly better than Kookaburra’s current bats, which were the basic Kookaburra Blade and the top-of-the-line Kookaburra Kahuna. (See Figure 1 for a sampling of the Kookaburra cricket bat product line.) The Kahuna was the best-selling bat in the category, accounting for 77 percent of Kookaburra’s unit sales and 86 percent of dollar sales, with the remainder coming from the Blade. However, new bat launches by global competitors such as Adidas were threatening Kookaburra’s image and its reputation for producing the bats with the highest performance.

1 As a reference, see the YouTube video at http://www.youtube.com/watch?v=BCfOQpwqp8I to understand the process necessary for making a traditional cricket bat “play ready.”

Figure 1: Kookaburra Cricket Bats

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This document is authorized for use only by Michael Maddalozzo in Fall 2017 Managerial Economics taught by Donald Szeszycki, University of Iowa from August 2017 to November 2017.

KOOKABURRA CRICKET BATS KEL684

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Testing indicated that the name “Ready Kangaroo” best communicated the new bat’s performance advantages. Two branding approaches were being considered. One was to launch a new stand-alone brand with an endorser link to the parent Kookaburra brand. “Ready Kangaroo by Kookaburra” (similar to “Courtyard by Marriott”) would be positioned as a super-premium niche product, the first bat to support a specific claim of being immediately ready to use, needing no preparation. Marketing research had indicated that this was not important to most consumers, who doubted a bat that had not been knocked-in truly could be high-performance. However, it was very appealing to a select group. Ready Kangaroo would seek to build perceptions of efficacy through endorsement by leading Indian cricket teams.

The other branding approach was to launch the bat under the Kookaburra Kahuna brand umbrella as “Kookaburra Kahuna Ready.” In this option, the bat would be positioned as the best- performing bat overall, one that could send the ball fastest, straightest, and furthest. This mainstream launch strategy was designed to appeal to the mass market, including current users of the Kookaburra Kahuna line, and it would update and upgrade the image of Kookaburra as an innovator.

Financial Analysis

Because both branding approaches could be justified on a strategic basis, Popplewell’s team needed to calculate the financial impact on the Indian market for each option. The initial financial inputs are detailed in Table 1 through Table 3.

Table 1: Financials for Indian Base Business (Blade and Kahuna) Latest Year Unit sales 783,360 Net sales (Rs. 000) 1,442,940 Variable cost of sales (Rs. 000) 808,050 Total advertising and promotion (A&P)

Media (Rs. 000) 152,130 Consumer promotions (Rs. 000) 134,520 Trade promotions (Rs. 000) 124,120

Operating profit (Rs. 000) 154,130

Table 2: New Product Sales Estimates

Niche

(Ready Kangaroo by Kookaburra) Mainstream Strategy

(Kookaburra Kahuna Ready) Positioning Strategy Year 1 Year 2 Year 1 Year 2 Retail units 80,000 150,000 270,000 440,000

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This document is authorized for use only by Michael Maddalozzo in Fall 2017 Managerial Economics taught by Donald Szeszycki, University of Iowa from August 2017 to November 2017.

KEL684 KOOKABURRA CRICKET BATS

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Table 3: Key Planning Assumptions

Niche

(Ready Kangaroo by Kookaburra) Mainstream Strategy

(Kookaburra Kahuna Ready) Positioning Strategy Year 1 Year 2 Year 1 Year 2 Investment in capacity (Rs. 000) 50,000 22,000 150,000 52,000 Depreciation on equipment (Rs. 000) 5,000 7,200 15,000 20,200 Advertising and promotion (Rs. 000)

Media 45,000 62,000 95,000 112,000 Consumer promotion 24,000 27,500 62,000 70,500 Trade promotion 19,500 21,000 35,500 38,000

Variable cost/unit (Rs.) 1,330 1,330 1,250 1,250 Price/unit to retailers (Rs.) 2,350 2,350 2,150 2,150

Assignment

Note: Make sure you read helpful hints and guidance at the end. Also, a spreadsheet Excel file has been provided for you to build your profit and loss (P&L) statements and to compute your cannibalization calculations.

Calculate answers to at least three decimal places except for unit calculations, which should be rounded up to the next full unit.

1. Using the data provided, create Year 1 and Year 2 P&L statements for the niche and mainstream positioning strategies. Your P&L should include the following items:

a. Unit volume b. Revenue c. Variable cost d. Variable margin: total and per unit e. Fixed costs (detail what should be included here) f. Profit (pre-cannibalization)

Under either positioning strategy, the introduction of the new bat will have an impact on sales of Kookaburra’s current products. Estimating cannibalization is an inexact science, but volume testing and past experience indicate that the company should expect a cannibalization rate of approximately 22 percent if it pursues the niche strategy and of approximately 32 percent if it pursues the mainstream strategy. A “cannibalization rate” represents the percentage of new product unit sales that will be taken from sales of the current product(s). Kookaburra expects units on existing products to be lost proportionally to the current Kahuna-to-Blade sales ratio. When calculating the cost of cannibalization, it is traditional to value units lost at the average unit contribution of the current products.

2. Create a chart of Year 1 and Year 2 cost and impact of cannibalization. Assume that no reductions (or increases) in fixed spending for the current Kahuna and Blade business will occur as part of the new product launch. In your chart:

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This document is authorized for use only by Michael Maddalozzo in Fall 2017 Managerial Economics taught by Donald Szeszycki, University of Iowa from August 2017 to November 2017.

KOOKABURRA CRICKET BATS KEL684

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a. Show pre-cannibalization profit from 1(f). b. Calculate and show the number of units lost from the base business. c. Calculate and show the value of lost units. d. Calculate and show post-cannibalization profit.

3. Given these calculations, which positioning strategy would you choose?

4. Is there any cannibalization rate that would result in the niche strategy reaching break-even or positive profit in Year 1? What is the break-even cannibalization rate for the niche option in Year 2? (In other words, what cannibalization rate would have to occur to make zero profit in Year 2 alone, not in Year 1 and Year 2 cumulatively?)

Notes

 The data in the exercise is not comprehensive; for example, subtracting variable cost and A&P from net sales (revenue) will not yield an operating profit of Rs. 15,413,000. This is not a mistake; it simply means that Kookaburra has other fixed costs that are not listed.

 Some of the data in the description may not be needed to complete the assignment; for example, depreciation has been calculated for you in the exercise. A P&L statement does not include the full investment cost of capital assets such as plant and equipment; instead, it includes depreciation, through which the full cost of these assets is reflected in the P&L as the assets are used up over their useful lives.

 It is not necessary to calculate separate unit contributions for Kahuna and Blade. (More importantly, the exercise does not provide the data necessary to do it.)

For the exclusive use of M. Maddalozzo, 2017.

This document is authorized for use only by Michael Maddalozzo in Fall 2017 Managerial Economics taught by Donald Szeszycki, University of Iowa from August 2017 to November 2017.

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