Saturday, June 20, 2009

Cosmetic Brand Exit

Earlier this month, The Wall Street Journal reported that Proctor & Gamble's Max Factor cosmetic brand is exiting the US market. Let's look at how this fits with economics decision-making using economic profit as opposed to accounting profit. The article says that most of the accounting profits from the Max Factor brand are made outside the US; meaning that the brand is still profitable here in the US.

So why would a firm exit a market when it is making a profit? When the opportunity cost is greater than the accounting profits - or when the firm is making an economic loss. According to the article, exiting the US market frees up P&G resources and allows the firm to focus those resources on its CoverGirl brand. Thus I infer that the accounting profits from the Max Factor brand are lower than the opportunity cost of using those resources to further develop the CoverGirl brand.

No comments: