Pets Medicine Profit Improvement

With the understanding of the breakdown of the client’s business, ideally the candidate should ask whether there is profit data available in those breakdowns, so the candidate can identify which part of the business is driving the profit decline. When asked, provide Exhibit 1 to the candidate. 

After the candidate shares his/her takeaway from Exhibit 1, ask the candidate to think about what the company can do to improve profitability. This is where the candidate should have a structured framework for profit uplift, and the structure should realize that revenue, cost and mix can all drive margin changes.

If the candidate didn’t ask for the breakdown of the client’s business, instruct the candidate to come up with the structure first. After that, you can provide Exhibit 1 to the candidate and ask about the takeaways. 

Some additional information you can provide to candidate, if asked:

• Competition hasn't had much impact on pricing
• No significant change in pricing structure
• Pricing is consistent year-to-year, with inflationary adjustments
• New product introductions haven't had a meaningful impact to pricing/margins
• No significant changes in cost structure
• Client continues to use the same suppliers, distribution network, and manufacturing systems
• The company’s focus has been on growth, so not much has been done to improve cost position
• Client spends similar % of sales to competitors, and has a variety of products in development

After the candidate has drawn insights from Exhibit 1 and developed the structure (in either sequence), share Exhibit 2 with the candidate and ask the candidate to solve for the empty cells. The calculation assumes that (1) there is 5-10% price increase in the different geo regions, and (2) there is a 15% COGS reduction across the board. 

The answer is provided in the Solution section. A great candidate would realize that even after these 2 improvements, the gross margin is still short of the 70% target.

Share Exhibit 3 with the candidate, and provide this prompt to the candidate: “Assume the company can double its revenue in the next 5 years (from $1B to $2B).  Of this growth, $500M comes from existing products at current profitability levels (including the price and cost initiatives).  The remaining $500M comes from new products developed or acquired by the company. To reach the target of 70% gross margin in 5 years, what does the margin have to be on these new products?”

The answer is provided in the Solution section.

Once the Exhibit 3 exercise is done, you can ask the candidate to wrap up the case.