McKinsey Round 1: Homeware Heaven

A good candidate should be able to develop a MECE framework that breaks down the profitability of the client in a relevant way, as shown in the sample framework image.

A good candidate should be able to elaborate on the framework with a logic that is aligned to the specifics of the question (whether or not the store format is causing the drop in profitability). For example:

• Revenue: "We would need to understand whether or not the store-format is causing our client to lose unique customers or causing our customers to spend less"

A strong candidate should be able to generate specific hypotheses on the drivers that demonstrate business judgment and logical thinking. For example:

• Costs: "perhaps the rental/leasing costs have increased in the out-of-town areas our client is present in, therefore driving up the cost significantly especially due to the large store sizes"

A strong candidate should prioritize and show some business judgment on which drivers are not as relevant to the specifics of the question, which is in this instance the location of the stores

• E.g. drivers like packaging and arguably salaries (if these are fixed headquarter/admin staff their salaries are likely to be pegged to the city/state they are in even if they have to commute for work)

Further clarifying information, if asked by the candidate before coming up with the framework:

• Clients objective is to boost sales and profitability, but no specific target is given
• There are no further limitations or constraints as mentioned by the client so far

1. Increase # of unique customers
   1. Host events to attract customer segments that have churned
   2. Host events to attract new customer segments
2. Increase frequency of visits
   1. Launch one-off events to attract greater frequency
   2. Launch recurring events to attract greater frequency
3. Increase average spend per unique visitor per visit
   1. Product/promotion: link events to a specific product (e.g. cooking class that educates and promotes a new special frying pan)
   2. Placement: optimize store product placement to encourage event participants or foot traffic to make more purchases
   3. Price: Offer special discounts for event attendees 

The suggested most efficient way of thinking through these tables is as follows:

Figure out the most attractive segment based on size and penetration rate

• The most attractive segment is Segment D: Families with Young Children
  • This segment has the largest customer base (340K) and low store visit penetration (35%). This means that 221K customers in this segment have not visited the store in the last 3 months
• The next most attractive segment would be Segment B: First Home Couples
  • 2nd largest customer base (260K) and still relatively under penetrated (45%). 143K customers in this segment have not visited the store in the last 3 months
• The rest of the segments are less attractive
  • Segment A DIY & Renovation Hobbyists -> large segment size but already highly penetrated
  • Segment C Trade Pros & Designers -> very small, not worth focusing on
  • Segment E Eco Driven Shoppers -> low penetration but size of segment is 2nd smallest

Identify events in the List of Potential Events that are relevant for the most attractive customer segments 

• Events that are potentially relevant for Segment D
  • Kid's Craft Corner -> most directly relevant
  • Easter Egg-stravaganza -> most directly relevant
  • Cooking Masterclass
• Events that are potentially relevant for Segment B
  • Cooking Masterclass
  • DIY Workshops

Compare relevant potential events and shortlist the most attractive one

• Kid's Craft Corner seems to be the most attractive for Segment D
  • Requirements are less operationally complex versus Easter event
    • Eastern event requires planning and adjusting the whole-store to make sure the hiding spots are safe for kids and there are no risk of safety issues as kids are running around the location
    • Crowd-flow management signals additional complexity of footfall and additional manpower
  • Recurring event encourages higher frequency and time in store vs Easter event and Cooking Masterclass

A strong candidate will also note that this information presented is still relatively qualitative and is just a hypothesis, and further analysis and information would be needed to have a better answer on which is the best event, e.g. 

• Average purchase value for each customer segment
• For each event, we need to understand the potential incremental sales and also costs to implement 

A strong candidate may ask to refer back to the table (if they do not remember the details of it) and should note the implications of running this monthly instead of half annually. Initially the plan was to hold this class once every half a year. But given it is run monthly now, will the client have to setup and take down the temporary kitchen build each time? Probably better to find a dedicated space that they can run this smoothly every month. 

Further implications would be to ensure that this monthly class does not have an impact on customer experience for other customers (e.g. cooking smells, smoke)

You have requested us to help turnaround Homeware Heaven's declining profitability. Through our analysis, we have identified that the store format is one of the key reasons contributing to the problem, namely because customers are less willing to travel outside the city area. 

We have identified store events as a way of attracting customers back to the store and potentially increasing sales and profitability. Specifically, we recommend launching a weekly Kid's Craft Corner and Cooking Masterclass to attract the top 2 largest and most under-penetrated segments (Families with Young Children and First Home Couples) back to the store. 

• Our initial analysis suggests that Cooking Masterclass can add an incremental $2.75M in profit annually if we roll it out successfully across all 100 stores

As a next step, we'd like to look into calculating the profit potential of the Kid's Craft Corner, as well as assess the implications and risks of launching these events on the store's operations and customer experience.