Culinarian Case Study Solution

Unformatted text preview: Case Analysis Culinarian Cookware: Pondering Price Promotion Submitted by: Alexander Klocke (X20151127162) Tim Witt (X20151127161) Course: Pricing Strategy and Information Technology Instructor: Wang Yu Nanjing University Table of contents Introduction .............................................................................................................................................................. 3 Culinarian Cookware ............................................................................................................................................. 3 Market Analysis ....................................................................................................................................................... 4 SWOT-­‐‑Analysis ......................................................................................................................................................... 5 Marketing implications ......................................................................................................................................... 7 Analyzing the 2004 CX1 Price Promotion .................................................................................................... 8 Promotion 2007 ..................................................................................................................................................... 12 Outlook ...................................................................................................................................................................... 14 2 Introduction In November 2006, the vice president of marketing of Culinarian Cookware (Culinarian), Donald Janus, and the senior sales manager Victoria Brown met to discuss whether or not the company should offer a price promotion for one of their 4 product lines in the next year. Representing different point of views, both took varying analyses of the promotion back in year 2004 as a basis for argumentation. In the following, an overview of the company Culinarian Cookware as well as the U.S. cookware market will be given. To understand Culinarians’ conducting of business and their market position, a deepening SWOT-­‐analysis will be taken. By using this, Culinarian’s strengths and weaknesses as well as future trends and opportunities, referred to its objectives, will be laid open. As a result of this, marketing implications will be shown. Furthermore, the two very different views on the value of the 2004 price promotion will be compared to finally find a correct solution concept. This solution concept and the knowledge about consumer behavior, arising from that promotion, should give the basis for other campaigns in the future. Having had a detailed look at the different calculations of the promotion 2004, a new campaign in 2007 will be discussed and advantages of different strategies will be distinguished. To complete the study, a short outlook that sums up the findings will be given. It mentions the most important elements and points out Culinarian’s way into the future. Culinarian Cookware Culinarian Cookware designs, manufactures, distributes and markets premium performance cookware, mainly defined as pots, pans and similar non-­‐electric tools used in food preparation. The company is market leader in high-­‐quality cookware products which support advanced performances for professional cooks. Culinarian Cookware has four different product lines: The Tyro Collection (CX1), the Classic Collection (DX1), the Advanced Chef Collection (SX1), and the Professional Grade Collection (PROX1). In 2006 four strategic priorities were established for the company: 1) To widen its distribution network 2) To increase its market share of premium cookware segment 3) To preserve its prestigious image, and 4) To continue to capture revenue growth of at least 15% while maintaining pretax earnings margins of 12% 3 Market Analysis The U.S. cookware market is a booming market. It underwent an enormous growth of about 58 % from 2002 to 2006 referring to the revenues. The cookware can be categorized in three different types: price, quality and material. It is available in aluminum, stainless steel, porcelain-­‐on-­‐iron, cast-­‐iron and copper. Due to the fact that most professional chefs prefer copper, it is the most expensive category. The manufacturers can be distinguished based on their product portfolio, low-­‐end/mid-­‐level and premium products, and the main challenge for them is to balance the need for performance, time saving and aesthetics with price. Top players in the market are Star Chef, Kitchen Select, Culinarian, Le Gourmand and Robusto. Product portfolio Market dollars Star Chef low-­‐end/mid-­‐level 18 % Kitchen Select low-­‐end/mid-­‐level 14 % Culinarian premium products 6,5 % Le Gourmand premium products 4 % Robusto premium products 3 % Top players in the cookware market 1 Generally, there are two different types of purchases, either by piece (open stock) or in boxed sets (ranging from 5 to 14 pieces). In recent years there has been a growing trend in offering a colored designer cookware that matches the kitchen décor as well as product lines endorsed by and branded with the name of a widely recognized television celebrity chef. Retail distribution outlets for cookware included kitchen specialty chains, local specialty stores, department stores, mass merchandisers, grocery stores, direct TV sales, online retailers and catalogs. The sales of cookware in the U.S. market are more or less seasonal based on the purchase of cookware for weddings (May-­‐July) and Christmas gifts (December). This is reflected in the percentage of consumer sales by month which has its highest values in June (10,4%) and December (14%). To describe the consumer behavior in the market it will be related to the key findings from Orion Market Research Study of households with an income over $ 74,000, June 2003. Orion is an independent company that conducts market research on kitchen products. It appears from the study that 50% of households owned at least 5 pieces of cookware and 25% owned more than 12 pieces. About a third (32%) had purchased their cookware in a mass merchandise outlet like Walmart, 29% in a department store like Macy’s, 24% in a kitchen specialty store (e.g., Williams Sonoma) and 15% answered the question about their place of purchase with “other” (e.g., internet, catalog, Home Shopping Network). In addition, 30% of the sample cited the price as the most important criterion in selecting cookware. 1 Cf. John A. Quelch and Heather Beckham; Culinarian Cookware: Pondering Price Promotion; 2009 4 Following the upcoming trend of the last years, 25% would look for cookware that matches their kitchen décor. Furthermore, those polled were asked to rank some criteria regarding cookware. The most important criteria were quality, followed by features, price, brand name, ease of use, shape, professional-­‐looking pieces, aesthetic design and color. Moreover, every second would favor a brand they recognized and 55% either received cookware as a gift or purchased it as a gift. Regarding the decision where to shop for cookware, 30% revealed they would be drawn to stores with attractive displays, 25% favored a full-­‐service store with an informed sales staff, 20% would prefer to shop during sale and another 10 % said they might respond to TV, radio, magazine/newspaper advertising. Moreover 39% of the sample watch television shows and 18% purchase cookware seen on television cooking shows. Finally, 30% would buy new cookware in case of a price discount and another 20% would buy if there was a free gift with every purchase. SWOT-­‐Analysis2 As already mentioned, Culinarian Cookware is the market leader in premium cookware. The company’s strengths have encouraged its current success. Firstly, Culinarian has very strong relationships with retailers. One reason for that is that retailers capture a higher level of profitability with Culinarian products. They gain gross margins of 52% for Culinarian products whereas direct competitors like Le Gourmand and Robusto only merchandise margins of about 48%. In Addition to that, account manager visit important customers monthly to highlight new products, offer retail sales trainings on product technologies and provide inventory management suggestions (in contrast, the competitors’ average only 6 visits per year). Besides that, Culinarian’s sales force includes an incentive program for managers who receive a part of their salary in incentive pay from exceeding sales quotas. Secondly, Culinarian has created a successful brand and marketing mix. Its focus on superior quality, performance and durability led to a strong brand equity and premium cookware, which is favored and endorsed by experts and chefs. Therefore, Culinarian Cookware has a perception of being a high quality brand. Supporting this the company is highly selective in choosing distribution channels as e.g. retail outlets as partners or focusing on magazines targeting at high-­‐income audiences. Thirdly, the company has very skilled personnel. A comprehensive training program is provided for all retail sales clerks. Furthermore, the Culinarian sales force includes eight experienced account managers who have been with the company for at least seven years. Their salary is partly from the already mentioned incentive driven payment. Certainly, Culinarian Cookware also reveals several weaknesses. Because of its premium image and selective channel distribution it has a low penetration in the low/middle income customer segment. A survey revealed that unaided brand awareness for Culinarian ranged from 15% for respondents with household incomes under $75,000 and only for those with 2 SWOT-­‐‑Analysis refers to Strengths, Weaknesses, Opportunities and Threats 5 incomes over $75,000, representing the actual target group. Competitors like Le Gourmand (17%/30%) and Robusto (14%/28%) came above those values. Further only 4% of participants affirmed the question whether they had seen Culinarian advertisements. This is a very low value and reveals weaknesses of the marketing department. Another problem is that Culinarian’s products are seldom advertised by the trade. Its cooperative trade advertising was a fraction of that of competitors such as Star Chef and Kitchen Select due to the company’s strict policy concerning the type of publication that the trade could use (e.g. no newspaper advertising would be supported). Culinarian Cookware only subsidizes cooperative trade advertising for retailer catalogs, direct mail and magazines determined by Culinarian. Due to these restrictions the company has a lower amount of people being reached by its advertisements compared to the competitors. Taking a look at the opportunities of Culinarian Cookware, it becomes clear that there will be a great sales potential in the future. The U.S. cookware market experienced attractive growth from 2002 to 2006, when it generated approximately $ 3.36 billion in revenues. From 2002 to 2006, Culinarian’s retail sales have grown by 58% from $ 2.115 billion to $3.336 billion. Obviously, it is a growing market and the company should try to widen its market share without being afraid of a stagnating or even reducing market potential. 2002 2003 2004 2005 2006 Est. Cast Iron, POI, Copper $505 $556 $589 $873 $1,124 Stainless Steel $507 $754 $873 $955 $1,082 Aluminum $1,103 $1,134 $933 $1,079 $1,130 Total $2,115 $2,444 $2,395 $2,907 $3,336 Growth 16% -­‐2% 21% 15% Growth in total +58 % US Retail Sales of Cookware ($ in millions)3 Another growing trend in premium cookware is the offering of colored designer cookware that matches kitchen décor and product lines endorsed by and branded with the name of a widely recognized television celebrity chef. Taking Culinarian’s market leadership in premium cookware into account, they should try to expand its portfolio of advertising efforts. For example, they could try to arrange cooperation with a television celebrity chef. On the other side, there are several threats the company could face. A look at the table shows that there had been a lack of retail sales and growth in 2004. This can be affiliated to a prolonged transfer of manufacturing operations by a major aluminum cookware supplier who disrupted its shipments for 6 months in 2004, which led to a negative growth of 2% in retail sales. Apparently, there seems to be a great supplier dependency. Another failure of delivery could have a fatal impact. Besides that, the dependency on retailers might be a threat as well. Only 5% of orders came from direct sales via the company’s website and catalogs sent out to existing customers twice per year. Culinarian Cookware has strong relationships with retailers but this is the only “real” sales market Culinarian has. If any troubles with the retailers were to occur – like 3 Cf. Mintel International Group Limited; „Cookware – US.“; Nov. 2007 6 not accepting lower margins during a promotion – the company could loose some of its most important customers. Retailers are the backbone of Culinarian’s distribution chain. Without the great amount of retailers, the company will not be able to survive as a big player in the market of premium cookware. Strengths Weaknesses -­‐ strong brand & image -­‐ low brand awareness -­‐ retailer relationship -­‐ advertisement -­‐ sales force -­‐ no low income customers SWOT Opportunities Threats -­‐ market growth -­‐ supplier dependency -­‐ upcoming trends -­‐ retailer dependency -­‐ competitors 4 Marketing implications Culinarian Cookware’s main problem is their lack of brand awareness compared to their direct competitors (Le Gourmand & Robusto). As an example, only 4% of survey participants answered “yes” to the question whether they had seen Culinarian advertisements. Therefore, they should turn a great deal of attention to that issue. At this point, it might be helpful to expand their advertising campaign. At the present, their advertising efforts focus on magazines and newspapers targeted at high-­‐income audiences. The promotion in 2004 wasn’t featured in any of its national advertising campaign. The broadening of their portfolio of advertisement by further channels such as TV/billboard advertising would afford an opportunity to increase their target group and therefore gain brand awareness. Strategically placed billboards as well as TV spots would help to call the brand into people’s mind. Those advertising efforts might just be image advertising without promoting any kind of product in particular. Hereby, both brand awareness and image can be strengthened. This would also encourage the strategic priority to preserve the company’s prestigious image. 4 diagram by authors 7 Additionally, the strict requirements for cooperative trade advertising should be loosened due to the fact that Culinarian’s trade advertising is a fraction of that of their competitors. Out of this Culinarian’s products and promotion programs would be advertised by the trade more often. Potential promotions should definitely be part of the advertisement in the future. Another main issue is the dependency on the retailers based on the absence of other profitable distribution channels. Just 5 % of orders came from direct sales via the company’s website and catalogs sent out to existing customers. In times of steadily advancing opportunities regarding the World Wide Web, this distribution channel is by far not exhausted. If feasible, Culinarian should redesign its homepage and optimize the order process for customers. The company’s website might as well be illustrated in their advertising to attract the customers’ attention as a new channel of distribution. Through direct sales via homepage the distribution chain will be shortened and Culinarian might possibly even grant allowance on online purchases. The widening of the distribution network is one of the strategic priorities the CEO established. The creation of a whole new product line for the low-­‐end/mid-­‐level market is another alternative to take into consideration. The new line should be offered under a new name or brand to prevent damaging Culinarians’ premium image. Hereby, the company could increase its market share enormously. They currently lead the premium market and the introduction of the new line would open up new possibilities. The required know-­‐how already exists due to the fact that Culinarian was the leader in metallurgy technology. Even though this activity would occur a lot of costs for investments in the beginning, it might possibly pay off in the long run. In this context, the company might think about considering the upcoming trend of colored cookware that matches the kitchen décor. The new product line could be offered in several different colored versions. Similar to the creation of a whole new product line, Culinarian could broaden their product portfolio with further cooking products like cutlery, tableware or knives (horizontal diversification). Hereby, they could penetrate a whole new market using their premium brand image. Consumers are more likely to purchase brands they recognize and therefore the company might have a big advantage for their market introduction. At this point a cooperation with a television celebrity chef following the upcoming trend might help at the beginning. Analyzing the 2004 CX1 Price Promotion The vice president of marketing of Culinarian Cookware, Donald Janus, hired a team of outside consultants to analyze the profitability of the 2004 price promotion. The consultants used a times series analysis as well as several models to define the amount of units sold without the promotion. Additionally, another time series analysis was used to calculate the cannibalization costs caused by the CX1 price promotion. Furthermore, they came to the result that Culinarian was able to save inventory costs during the promotion period. To sum 8 up they came to the result that the promotion wasn’t profitable due to the fact that $ 529,281 were lost in contribution including cannibalization loss and inventory savings. Consultants’ calculation with Promotion Units sold during promotion: 184,987 Average manufacturing selling price: $ 62.40 Variable costs: $ 52.05 Revenue: 184,987 x $ 62.40 = $ 11,543,188.8 Costs: 184,987 x $ 52.05 = $ 9,628,573.35 Profit: $ 11,543,188.8 – $ 9,628,573.35 = $ 1,914,615.45 Consultants’ calculation without Promotion Estimated units sold: 119,504 Average manufacturing selling price: $ 72 Variable costs: $ 52.05 Revenue: 119,504 x $ 72 = $ 8,604,288 Costs: 119,504 x $ 52.05 = $ 6,220,183.2 Profit: $ 8,604,288 – $ 6,220,183.2 = $ 2,384,104.8 Profit incremental: $ 1,914,615.45 – $ 2,384,104.8 = $ – 469,489.35 Cannibalization loss: – $ 99,332 Inventory savings: + $ 39,540 Profit incremental: $ – 529,281.35 As opposed to this, the senior sales manager Victoria Brown who is a supporter of the promotion, felt the consultants’ analysis was flawed for several reasons. She held the view that the sales figures used by the consultants were too high. Therefore, she calculated them based on the sales orders of the previous year. Moreover, Brown didn’t agree with the consultants’ overhead cost allocations that had been added to the variable costs. According to her, the variable costs should only include labor and raw material. Additionally, Brown believed that the cannibalization costs and inventory savings should be left out of the analysis. Finally, she reached the result that the promotion was profitable on the basis that it led to an increase of $ 2,397,992 in contribution. 9 Brown’s calculation with promotion Units sold during promotion: 184,987 Average manufacturing selling price: $ 62.40 Variable costs: $ 38.64 Revenue: 184,987 x $ 62.40 = $ 11,543,188.8 Costs: 184,987 x $ 38.64 = $ 7,147,897.68 Profit: $ 11,543,188.8 – $ 7,147,897.68 = $ 4,395,291.12 Brown’s calculation without promotion Estimated units sold: 59,871 Average manufacturing selling price: $ 72 Variable costs: $ 38.64 Revenue: 59,871 x $ 72 = $ 4,310,712 Costs: 59,871 x $ 38.64 = $ 2,313,415.44 Profit: $ 4,310,712 – $ 2,313,415.44 = $ 1,997,296.56 Profit incremental: $ 4,395,291.12 – $ 1,997,296.56 = $ 2,397,992.56 Solution concept Having taken the consultants and Browns calculation into account, the promotion’s profitability should include components of both views. Using a computer-­‐generated model to determine the normal sales without the promotion, the consultants were able to forecast a very exact amount of 119,504 units for March through May. As against this, the method of Victoria Brown to set the normal sales 24% below the 2003 sales for the same period (59,871) is too imprecise. Aside from that the costs of cannibalization within the product lines and the savings from inventory costs should be considered as they result from higher orders during the promotion. While the consultants estimated the variable costs at $ 52.05 including direct labor, raw materials, general and administrative expenses, manufacturing overhead, 7% selling expenses and 5% advertising/promotion allocation, Brown felt they should only include costs for labor and raw materials. In her opinion, the variable costs should be set at $ 38.64. In fact, they should because the mentioned costs – like manufacturing overhead -­‐ cannot be added to only one product line or a single unit. In contrast, $ 123,400 ($ 2,468,000 x 5%) advertising costs, allocated to the promotion can be added to the variable costs, due to the fact that they were spent only to promote the 20% discount on product line CX1. Hence $ 1.5 (184,987/123,400) can be allocated to the variable costs of each unit of CX1, what 10 leads to $ 40.14 ($ 38.64 + $ 1.5) in total. Consequently, the promotion was successful with a profit contribution of $ 250,621. On the one hand, it is much less than Brown’s calculations ($ 2,397,993), but on the other hand it was a positive profit contribution in contrast to the consultants’ analysis ($ – 529,281). Above all, you cannot only judge the success of a promotion with the help of key data. For example, the brand awareness increased a lot. It is not possible to quantify that. Calculation with promotion: Units sold during promotion: 184,987 Average manufacturing selling price: $ 62.40 Variable costs: $ 40.14 Revenue: 184,987 x $ 62.40 = $ 11,543,188.8 Costs: 184,987 x $ 40.14 = $ 7,425,378.18 Profit: $ 11,543,188.8 – $ 7,425,378.18 = 4,117,810.62 119,504 Calculation without promotion: Estimated units sold: Average manufacturing selling price: $ 72 Variable costs: $ 40.14 Revenue: 119,504 x $ 72 = $ 8,604,288 Costs: 119,504 x $ 40.14 = $ 4,796,890.56 Profit: $ 8,604,288 – $ 4,796,890.56 = $ 3,807,397.44 Profit incremental: $ 4,117,810.62 – $ 3,807,397.44 = $ 310,413 Cannibalization loss: – $ 99,332 Inventory savings: + $ 39,540 Profit incremental: $ 250,621 11 Units Price Variable Costs Profit Profit Incremental Cannibalization loss Inventory Savings Promotion Contribution Consultants Brown Solution concept Promotion W/O Promotion W/O Promotion W/O Promotion Promotion Promotion 184,987 119,504 184,987 59,871 184,987 119,504 $ 62.40 $ 72 $ 62.40 $ 72 $ 62.40 $ 72 $ 52.05 $ 52.05 $ 38.64 $ 38.64 $ 40.14 $ 40.14 $ 1,914,615 $ 2,384,104 $ 4,395,291 $ 1,997,296 $ 4,117,810 $ 3,807,397 $ – 469,489 $ 2,397,993 $ 310,413 $ – 99,332 $ 39,540 -­‐ -­‐ $ – 529,281 $ 2,397,993 $ – 99,332 $ 39,540 $ 250,621 Comparison of the different calculations5 Promotion 2007 After several promotions in previous years, a new one should run in 2007. Looking back at the promotion in 2004, it becomes clear that promoting the price can be successful. Even though it only had a little impact on the profit, it strengthened the brand awareness and exposed important facts about consumer behavior through a survey. Based on this, 70% of the customers responded that the price promotion was very important or at least important in their purchase decision. 30% felt that the price is the most important criterion in selecting cookware and 15% considered upgrading from CX1 to a better product line from CC. Moreover 50% of all retailers passed along the 20% discount to customers. In addition, 80% of customers, using the promotion, were from households who already owned Culinarian products what means 20% were new customers. Knowing this, a new price promotion relating to the product lines CX1 or DX1 should be started from March to April in 2007. Only these two lines should be promoted to protect the higher quality images of product lines SX1 and PROX1. Besides that, the discounted price has to be indicated in .99-­‐cent pricing (e.g. $ 269.99) to underline the discount and to use a psychological advantage regarding the customers’ behavior. It should be between the peak sales months December and May/June to stimulate the demand on Culinarian’s products when it is usually not that high. Moreover, it should run only for two months to prevent an overbuying at the market. A price discount of 20% should be set to guarantee the customers acknowledgement of the promotion. Because of that, 10% might be not enough of a discount. Furthermore, this campaign needs to be communicated through every possible channel. The more channels you use the more people you reach what leads to higher revenues. That would be more expensive than former 5 calculated by the authors 12 campaigns. Therefore, the company should start the advertisement just two months before the promotion begins to secure that people do not forget about it again. That would even compensate some costs for using more communication channels. Furthermore, Culinarian Cookware has to lower its strict requirements regarding the type of publication the trade could use and should subsidize more advertising campaigns. That would higher the scope of ads as well as the revenues in the end. To continue, between the peaks sales months June and December, in September and October, the high-­‐quality product lines SX1 or PROX1 should be advertised through a gift-­‐ promotion. Bygone campaigns have shown that this kind of promotion usually increases sales for about 15%; so the concept should be kept roughly. Culinarian should offer a free gift with every $ 500 purchase of their selected merchandise. 20% of customers were motivated to make a purchase because of the free gift coming along with their bought object. Just like the price promotion, it needs to be promoted through all possible channels of communication and restrictions for advertising retailers have to be lowered as well. But in contrary, the price has to be indicated in round dollars (e.g. $ 300) to emphasize the premium quality. Former gift promotions caused troubles with some retailers because they were confused about how many of the gift products to order and they felt the gift products took up too much valuable floor space without generating any associated revenue. In addition to that Culinarian should store the gifts at its own stockrooms which would offer enough floor space according to a surge of orders. Costumers could send their bills postage-­‐free to the company which would send the gifts to an address, decided by the costumer. This procedure would stand for service and prohibit any troubles with the retailers. Having lowered the restrictions for advertising communicated by the trade and having solved the floor-­‐space problem, it should be possible to get more than 50% of retailers to pass the promotions along to the customers. That would be an important point in increasing the brand awareness. Nevertheless, it is very important for Culinarian to be prepared for the next mass of orders. If Culinarian’s manufacturing plant was not able to handle the increase of orders during their promotions, the brand image would suffer very much what can be treated equivalently to a loss of image, customers and money. During the different promotions, the management should calculate the effect of cannibalization within the product lines CX1/DX1 and SX1/PROX1. According to this, they might produce less units of the product line, which will not be promoted. In this way, costs might be reduced as well. 13 Outlook As the market analysis has proved, Culinarian Cookware is market leader in the growing premium segment of cookware. Culinarian’s core capabilities like its skilled personnel or strong retailer relationships have brought them to where they stand today. Those competences should further be strengthened to at least keep the market share and to benefit from upcoming trends like attractive growth in the future. In the meantime, the weaknesses, such as low brand awareness cannot be neglected. To solve this problem, e.g. by increasing the costs for advertisement, the low brand awareness can be improved, costumers can be gained and trends might be used. For example, by launching a new brand under a different name and focusing on core capabilities at the same time, all strategic priorities can be reached at once. Having analyzed the promotion of 2004 from different points of views, it becomes clear that all opinions are reasonable. However, the variable costs have to be set at $ 40,14 to guarantee a fair allocation of costs. As a result of that, the promotion of 2004 was profitable. It has to be mentioned that the success of a promotion cannot only be rated on its quantified key data. Important factors like image, brand awareness or the knowledge about consumer behavior are difficult to express in figures. Keeping all this in mind, it is to expect that an optimized campaign in 2007 will have an even bigger impact on the most important key performance indicator, the profit. If Culinarian Cookware considers all the mentioned points, they won’t only strengthen their position as market leader in premium cookware, but also gain market shares in the lower-­‐quality segment. That could make Culinarian the strongest supplier on the whole cookware market. 14 ...
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Q.1 Describe consumer behaviour in the cookware market. How is

cookware bought? How is it sold? What are the implications for


marketing strategy?

Retail distribution outlets:

Kitchen speciality chains ( Williams Sonoma)

Local speciality stores, department stores (Macy’s)

Mass Merchandisers (Walmart)

Grocer Stores(Kroger)

Direct TV Sales( Home Shopping Network)

Online Retailers (Amazon)

Catalogues(Manufacturers direct mailings)

Sales were seasonal


High during May-June(Weddings), November 



Top players


Star Chef ( Mid level and low end products)



Kitchen Select (Mid level and low end products)



Culinarian(premium products)


6.5 %

Le Gourmand(premium products)



Robusto(premium products)




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