Splash Corporation (B): International Expansion

International vision
In November 2005, Dr. Rolando Hortaleza, founder and chief executive officer (CEO) of Splash Corporation (Splash), considered two major opportunities to expand the company beyond its home base in the Philippines in 2006. Asian markets presented a natural and attractive opportunity to export the company?s existing skin care and hair care products. Splash already promoted these products in Indonesia and distributed them through third parties in other Asian countries. Hortaleza believed these activities should be intensified. The second opportunity was to launch Splash?s new line of nutraceutical or natural health products in the lucrative North American and European markets. Hortaleza believed the company should begin building brand awareness and distribution capabilities in the western markets as soon as possible.
The private company?s intended stock offering was at least a year away. Splash has limited financial resources in the meantime, so Hortaleza knew he would have to prioritize the two international opportunities. He knew each opportunity posed its own set of challenges and potential rewards. As he prepared for the company?s 2005 year-end review meeting, he weighed the two opportunities and began outlining an expansion strategy for 2006 and beyond.
Skin care and hair care products
Overseas demand and distribution
Demand for Splash?s skin care and hair care products outside the Philippines began with the legions of overseas Filipino workers (OFWs). Beginning in the late 1980s, political uncertainty and economic decline in the Philippines ld many Filipinos to go overseas in search of work. By 2005, there were approximately eight million OFWs, representing nearly 10 per cent of the Philippines?s total population. More than 60 percent of the OFWs lived and worked in other Asian and middle Eastern countries, with the balance in North America and Europe. Traditionally, the Filipino diaspora consisted mainly of personal caregivers and household workers; increasingly, though their ranks included skilled professionals, such as nurses, teachers, engineers and information technology (IT) personnel. Most OFWs were women, but it was becoming more common for men to travel overseas for work as well.
Brand-loyal OFWs carried Splash products with them when they went to work abroad. They often ran out of supplies and demanded more. When OFWs came into contact with local citizens, they spoke highly of Splash products. The foreigners were often impressed by the quality and surprised by the low price, and sought to purchase the products in their own countries.
Splash noticed and welcomed this overseas demand and made its full range of products available in various countries through third parties in the 1990s. The earliest third party distributorships were established in Hong Kong, Malaysia and Singapore, with others following across Asia and the middle East .The distribution managed their own relationships with retail outlets and were responsible for replenishing stocks. In the more attractive markets, Splash assisted distributors in conducting below-the-line promotional campaigns and offered discounting schemes to help distributors penetrate new retail accounts.
Hortaleza was encouraged by the distributors? volumes and came to believe foreign markets presented an even greater revenue potential than the domestic market in the long term. In 1998, he established Splash international inc. as a subsidiary of Splash Holding. Splash international?s objectives were to seek export opportunities and to plan and implement strategies to act on those opportunities.
Business Development in Indonesia
Hortaleza believed the neighboring country of Indonesia was a particularly attractive market for Splash?s skin care and hair care products. Indonesia was the world?s fourth most populous nation with 240 million citizens, nearly half of whom were under the age of 25. Although 27 per cent of Indonesians lived below the poverty line, the gross domestic product (GDP) growth rate was expected to reach 5.3 per cent in 2005, and other economic indicators were also reasonably strong. The urban centers were growing quickly, and more and more women were joining the workforce. Due to these and other factors, Indonesia had a large and growing personal care industry. Finally, Indonesia played host to many OFWs who had spread word about Splash to their Indonesian contacts.
A local third party distributed Splash products in the Indonesian market in the mid-1990s but had lacked the capital and resources for adequate coverage. Consequently, the product had been confined to a small number of retail outlets in a limited geographic area.
Hortaleza, eyeing this untapped market potential, had decided Splash would become actively involved. In March 2000, he established P.T. Splash Indonesia as a subsidiary of Splash Holding in a joint venture with a local company. Splash was the majority partner and was responsible for all business development activities, while the minority partner oversaw regulatory requirements and other necessary matters. Splash Indonesia employed approximately 30 people, all but three of whom were Indonesians.
Splash Indonesia was still ?in startup mode,? as Hortaleza said. To date, only two Splash product lines were offered in Indonesia: SkinWhite whitening bath soap and Extraderm exfoliant. As Edgardo Patron, president of Splash international explained:
We choose specific battlefields where we can effectively compete. We?ve decided to sue SkinWhite bath soap as our banner product in Indonesia because it plays in a segment where opportunities for lightening soap exist and whre our product?s proven efficacy gives us a competitive edge. Having fairer skin is an aspiration among many Indonesian women
Extraderm meanwhile enjoys decent brand equity among consumers, especially our facial soap, because of earlier opportunities campaigns involving a local importer that were big in the general trade.
Splash planned to launch additional products in Indonesia soon ?We will need a third pillar to solidify our market position,? Patron continued , ?Which will enable us to be a more credible player in Indonesia?s personal care industry.
From the beginning, Hortaleza?s approach to Indonesia had emphasized advertising and promotional spending to generate brand awareness and pull. Splash Indonesia worked with two local advertising firms to develop and execute campaigns. At times, advertising actually outpaced distribution capability. Hortaleza wanted Indonesian consumers to go to retail stores looking for Splash products; even if they could not find the products, Hortaleza believed their inquiries would make Splash more credible to store managers and owners. Hortaleza acknowledged this strategy was risky; unmet demand might result in consumer disenchantment or even demand spillover to competing products. As he explained:
Conventional wisdom teaches that you should not advertise until you?re ready to distribute and consumers are able to find your products in stores this is ?Marketing 101.? But sometimes you must gamble. In Indonesia, we are advertising early to build up our brand and gain awareness. We are going against marketing conventions. It?s risky, but I?m an entrepreneur, a gambler, a risk taker.
Indonesia had nearly one million general trade outlets. Many of which were small stores or market stalls similar to the sari-saris of the Philippines. Modern trade accounts were also important, with large multinational retailers, such as Carrefour, leading the way. According to AC Nielsen data, large retailers accounted for more than 30 percent of all sales of fast-moving consumer goods in Indonesia. By late autumn 2005, Splash Indonesia had penetrated all of the country?s modern trade outlets and approximately 50 per cent of the general trade outlets. Physical distribution of Splash?s products to modern and general trade accounts was outsourced to a third party.
These high upfront costs meant Splash Indonesia has not yet achieved profitability. Hortaleza maintained that expenditures and losses were necessary in the early stage, to achieve distribution coverage and consumer recognition, and that profitability would follow. By mid-2005 Splash had just more than one percent of the Indonesian market for personal care products; Patron hoped to reach four per cent within three years. Indonesia contributed eight per cent of Splash?s skin care and hair care revenue in 2005. Hortaleza hoped Splash Indonesia would record positive earnings in 2006.
Splash?s competition in Indonesia came primarily from multinational corporations but also from a variety of smaller, local players. These competitors had noticed Splash and directly challenged the Filipino company. The multinationals were increasingly aggressive in the skin whitening segment with a variety of new products and advertising campaigns. Splash responded by stressing the differentiation and efficacy of its products, just as it had in the Philippines. As Patron remarked:
MNCs no longer take Splash for granted! This is why we remain focused and deliberate in our campaigns and in product offerings to make sure that we are differentiated from the points of view of value, efficacy and service.
Other Asian Markets
Hortaleza believed the market for Splash?s skin care and hair care products would be limited to Asia and the middle East since the products had been designed with those consumers in mind. He reasoned that consumers in other regions of the world had different beauty care needs.
Hortaleza and Patron viewed Vietnam as a high potential market. ?It?s very attractive,? Patron proclaimed, ?with a young population that gets attracted to almost anything new in the market.? Vietnamese consumers had similar skin tones and dermatological concerns as Filipinos, so Splash?s products, particularly the exfoliants, sold well there. Also, research conducted by Splash?s marketing personnel revealed positive indicators in Vietnam. Splash?s third party distributor was expected to capture two per cent of the Vietnamese personal care market by the end of 2007. Those results led Hortaleza and Patron to consider more active involvement in the market.
Hortaleza and Patron also had high expectations for Malaysia, Malaysians generally had darker skin tones than the Vietnamese. Similar to Filipinos, many Malaysians viewed lighter skin tone as being more attractive. Skin-whitening products were therefore expected to sell well in Malaysia. Again, the two men considered more active involvement in Malaysia.
Hortaleza considered expanding Splash?s activities in Thailand, although demand indicators in that market were not as strong as in Vietnam or Malaysia. He gave China brief consideration but quickly dismissed the idea, admitting Splash had no name recognition or credibility there. Furthermore, he believed China was a tough and risky market for practically any foreign company to enter.
Natural And Nutraceutical Products.
Definition and Demand
The other international expansion opportunity that Splash was considering was the launch of natural and nutraceutical products into western markets. The World Health Organization defined natural products as those derived from spontaneously occurring or naturally grown raw materials, such as plants, animals and minerals, and processed under a set of acceptable methods. Natural products could include beauty, body and personal care products; herbal medicines; food supplements; vitamins and minerals; and essential oils, among other categories. The latter categories- those with healing, preventive or general health benefits-could also be referred to as ?nutraceuticals.? Nutraceuticals were commonly used to boost the immune system or treat minor illnesses, such as colds, fevers and influenza.
Several years ago, while searching for consumer trends. Hotaleza and his market research staff noticed the large and growing demand for nutraceuticals worldwide. Annual nutraceutical sales were estimated to be between P5 billion and P7 billion domestically and as high US$80 billion globally, with a heavy concentration in North America and Europe.
Despite this consumer demand, Nutraceuticals had gone largely unnoticed by major manufacturers. Most of the products available on the market were produced by backyard enterprises with little or no product promotion. Knowledge of the products spread mainly through word of mouth.
Despite the growing demand for these products, not all consumers were convinced of their benefits. Due to their traditional root, a lack of scientific development and the absence of major modern products, nutraceuticals were often considered to be ?folkloric.? While some consumers subscribed to them, others doubted their efficacy and mistrusted the producers. Such doubts were common around the world , but were more pronounced in western markets and in urban centers. Patron admitted that skepticism existed even in the Philippines.
Splash Pharmaceuticals
Upon seeing the consumer demand and the lack of major producers, Hortaleza decided to act. He believed there was a tremendous opportunity to formulate nutraceutical products on a scientific basis, validate and measure their benefits, and produce and promote them on a major scale. He established Splash Pharmaceuticals, a subsidiary of Splash Holdings, to spearhead this effort. The new entity leveraged the resources of Splash Corporation and the Splash Research Institute. As Hortaleza explained:
Splash Pharma took two to three years in the making. We already have the people, the research group. We know how to develop a brand. We have a distribution network. We have marketing capability. We also have the technology, the system and the capital. Everything is interrelated.
The new subsidiary had roughly 40 of its own employees, including managers and support staff. It was formally launched on July 29, 2005. Splash Pharmaceuticals unveiled its first nutraceutical products in August 2005, including those under the centerpiece TheraHerb brand.
Theraherb and Virgin Coconut Oil.
Theraherb encompassed various products, but the anchor products were derived from virgin coconut oil, or VCO. This coconut oil was referred to as ?virgin? since it was not heated during the extraction process; heated coconut oil, by comparison, lost many of its therapeutic benefits and was used only for cooking, VCO contained lauric acid, which speeded metabolism and released energy to the human body. It was billed as a cure-all natural product for maintaining health and prolonging life. Studies had shown VCO to aid with digestion and weight loss, prevent premature aging of the skin, strengthen the immune system and protect against heart disease, diabetes, arthritis, hepertension and even cancer. Fortunately for Splash, coconuts were plentiful in the Philippines. VCO was normally ingested, although it could also be used to enrich other products, such as soaps. Splash?s market research had discovered that most consumers did not like the natural flavor of VCO, so SRI had created variations with banana , sweet corn and jackfruit flavoring Hotaleza believed the flavoring gave Splash a differentiated, competitive edge. The ingestible products were available in 150ml and 250ml bottles, with consumers advised to take two or three tablespoons daily. In the domestic market the product was available in major supermarkets and priced between P150 and P180 per bottle.
The TheraHerb brand also encompassed various teas and capsule products. Theraherb Choles Trite, for example, was a capsule combining extracts of three medicinal plants ? garlic, ginger and Centella Asiatica ? with claims of lowering blood pressure and preventing blood clots. Theraherb Jointaide, another capsule product, was made from natural products known to have anti-inflammatory properties, and was intended to ease joint pain. Similarly, TheraHerb Kidneyaide was derived from ingredients known to be effective in dissolving kidney stones. Theraherb Sugarite tea had been formulated to maintain blood sugar levels and promote weight loss, low cholesterol levels and good digestion.
The initial VCO products were expected to contribute 70 per cent of Splash Pharmaceutical?s estimated first-year sales of P400 million. The company planned to launch 30 coconut based products in 2006. In the long run, Hortaleza expected VCO to become a blockbuster product both domestically and internationally matching the success of Skin White and Maxi-Peel.
Western Markets.
Perhaps most importantly, Hortaleza believed the VCO products would finally open the door to the lucrative North American and European markets. Splash?s market research personnel had noticed strong trends toward health and wellness in those markets and believed those consumers were becoming aware of VCO and its benefits. Furthermore, Hortaleza believed natural products based on materials indigenous to an ?exotic? country like the Philippines would intrigue western consumers.
Splash would initially offer VCO products in the United States, Canada and the United Kingdom. While it was difficult to quantify the market opportunities in those countries, Hortaleza was confident they were the most attractive markets.
Hortaleza wanted to reach as many outlets as possible in those three countries. Since did not have local offices in those countries, he knew the company would have to rely on distributors. Splash would limit its direct involvement to some below-the-line promotion activities designed to build awareness and encourage product trials.
At this early stage, Hortaleza referred to the three target markets as ?green fields.? He did not expect high return in the first year or two. Instead, he was more concerned with finding distribution who firmly believed in the future of the products and could support future growth,
Challenges of international Expansion
Hortaleza knew Splash would have to overcome tough challenges to successfully expand beyond the Philippines. He thought Asian expansion would be a challenging but natural progression, and thought western expansion would be significantly harder.
Localization
The Splash brand lacked recognition and credibility in foreign markets. In Hortaleza?s opinion, this was a challenge commonly faced by Filipino companies. The Philippines was better known for handcrafted wood items than it was for sophisticated, scientifically developed and branded consumer products. Hortaleza thought it would be difficult to change consumer perceptions in other countires, particularly in the West. Even in other Asian countries, Splash had some grassroots recognition but lacked the mass market recognition it enjoyed at home.
Furthermore, Splash would have to gain a deep understanding of each new market. Hortaleza believed local knowledge, adaptation and targeting would be keys to successes in new markets, particularly for a smaller company like his own. As he reflected:
Our multinational competitors apply the same business model in every market, because they have the resources and the international brand recognition to make it work. Splash cannot take that approach we must adapt to the local markets.
Of course, Hortaleza and his Filipino team had only limited experience in markets outside their own. Hortaleza thought local partnerships or even acquisitions might help Splash gain valuable local knowledge. ?In some countries,? he observed, ?there?s just no way to start from zero.? This seemed particularly true of Thailand, a fiercely competitive market dominated by local players.
Professionalization
Splash also needed to professionalize to expand internationally. Hortaleza knew the company needed to hire talented and experienced people, both at home and abroad; however, he admitted this hiring was easier said than done.
The company had traditionally approached business school graduates as wells as experienced professionals in the Philippines to build up its marketing and other departments. Splash had had trouble hiring ?the cream of the crop? in competition with the local subsidiaries of the multinational competitors, but hiring had become easier for Splash over time as the company?s reputation had risen. Splash had recently hired several experienced managers from Unilever, Kraft and other multinational corporations; in fact, Patron himself was a veteran of Kraft. Despite these recent successes, thought, the market for top talent remained very competitive.
Supply and Distribution
All of Splash?s products were produced in the Philippines, and mostly at Splash?s own manufacturing facility. In fact, Philippine production was part of Splash?s corporate mission. Consequently, Splash?s products were comparatively more expensive in Indonesia and certain other foreign markets.
Hortaleza had considered outsourcing some local production in Indonesia, but was not yet satisfied with the alternatives available there. Most of the Indonesian outsourcing partners but could produce cosmetics and toiletries products already had contracts with Splash?s rivals, which left only the less reliable and less desirable outsourcing partners. Furthermore, whereas raw material suppliers in the Philippines extended 90-day terms to Splash, suppliers in Indonesia would only offer 60-day term. Hortaleza thought Indonesian outsourcers and suppliers would be more accommodating in the future, one Splash had sold more volume in that country.
Financial Resources.
Finally, Hortaleza considered the financial implications of international expansion. Splash Indonesia was not yet profitable, and future efforts in other foreign countries would likewise require significant investment before achieving profitability. Funds were required primarily for advertising and promotional activities, as well as for training programs for local personnel. Also, since international expansion would have an impact on Splash?s cash cycle, it would affect the company?s domestic operations. At the time, Splash lacked the financial resources necessary for simultaneous expansion on both fronts.
Hortaleza planned to offer some of the company?s stock to new investors in an initial public offering (IPO) in 2007. He hoped to raise between P3.5billion and P4.0 billion. Seventy per cent of the new capital would be allocated to international expansion, with an emphasis on Indonesia, Vietnam and the western markets. The remaining 30 per cent would be reserved for developing new products, including shampoos, conditioners, and home care soaps and detergents hortaleza was already soliciting proposals for financial advisory for the IPO.

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