Espresso, Whatelse?

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Information to be shared under request:

• Espresso Whatelse produces capsules, coffee powder and espresso machines
• Espresso Whatelse is operating only in the B2C market, using both physical stores and online channels
• Our client wants to restore his historical profit margin

First of all, a good candidate has to ask what is the target of our client in terms of profit margin. A top performer would immediately state also that, if our concern is profit margin, the problem is probably related to price or cost section rather than in volume. The only exception could be the incidence of some fixed costs but considering that revenues are increasing, that should not be the case.

This is a standard “Profit and Loss” case and the framework proposed by the candidate should be something similar to the one showed in Exhibit 1:

Good answers can be:

• Change in competitive landscape (M&A, new competitors)
• New technologies reducing production costs
• Lower raw materials costs
• Aggressive marketing campaign made by some players

A good performer should notice a couple of things before stating any conclusion:

1. The graph is showing trend of average market price, that could be significantly different from our client trend
2. In order to calculate the price change for our client, we should know its revenues breakdown by product

At this point, ask him to calculate what was our price decrease considering the following information:

• Price variation of Espresso Whatelse can be approximated equal to market average
• The product mix is the one showed in exhibit 3

The candidate should now calculate the weighted average of the price reduction:

Can state that our profitability has decreased by 4%? The answer is no, since price and revenues are only one piece of the puzzle and we should also take a look at costs evolution.

• Machines seem to have the worst performance in terms of profit margin (they are actually generation losses).
• Coffee machines revenues have increased by 1/9 in the last year and their costs have increased proportionally. This means that machines profit margin has been steady and price reduction has been offset by lower costs.
• Coffee powder revenues have increased by 30% in the last year and their costs have increased proportionally. The considerations for this segment are the same as for coffee machines.
• Capsules revenues have increased by 20% but costs have increased by 30%. This implicates that we have reduced our profit margin on this specific product.

No, from the exhibit we see that the segment’s profitability has been steady in the last years. This cannot be the reason of our declining profit margin.

The candidate should consider that Espresso Whatelse is losing money from that segment since 10 years but it is still selling it and there could be an important reason behind it.

The strategic rationale behind this choice is really simple. They prefer to sell our machines at low prices in order to have a larger customer base that buy our real core product: capsules. This is a perfect example of how a company can decide to make some losses in order to gain market share and do cross selling.

The candidate should now ask for a costs breakdown of the capsules business.

Tell the candidate that our client is handling deliveries autonomously. Ask for some possible reasons for these increased costs.

A good performer has to immediately understand that it is important to consider the percentage variation of each cost. The costs that are affecting our profitability are the ones that have increased more than 20% (the percentage increase of capsules revenues): shipping costs.

Possible reasons for increased costs:

• Increased price for single delivery
• Different packaging that takes more volume
• Less efficient deliveries (trucks partially empty)

Ask the candidate what could be the reason of this lower efficiency

The core KPI that a good candidate should calculate is the capsules/travel, that is the root cause of our declining profit margin.

Reason of this lower efficiency, good answers can be:

• Shorter delivering time that doesn’t let us to wait for the right amount of volume before shipping
• Online service in new areas with lower customers density
• Dismission of local warehouses that let us to travel with full cargo and store exceeding amount of products

A good final closure should follow the steps below:

• Answer to client’s question: We have found out that your profit margin has been affected mainly by less shipment efficiency for capsules and secondly by price reduction (that was offset by costs reduction)
• Key findings:
  • The price of all products has been reduced following the average price in the market
  • The profit margin drop is driven by increasing delivery costs for capsules
  • In the last year we have almost doubled our capsules shipments while our items sold have increased by ca. 20%
• Potential solution/next steps:
  • Increase delivery time in order to have the right stock of orders before shipping (an optional premium and faster shipment could be paid by the customer)
  • Use local warehouse to stock products, especially in areas with low density of customers
  • Increase the minimum online order, especially for specific area