Confused by this prompt

Question

Your client is a U.S.-based grocery retailer with $20B in sales. Their competitors offer lower prices for some product categories while maintaining the same profit margin as your client. How do their competitors manage to do that? What should the client do?

I don't understand why the same profit margin would be a concern to our client unless the competitor's profit is higher than the client and they sell same amount of products. Can someone explain it a bit to me? And what would be your structure to solve this? Thank you

Answer 1

Hi there,

The point is that if you have the same margin as your competitor, but they have lower prices, then the expectations is that they're going to sell more / have a higher market share.

It should also make the client reflect on whether they could reduce their cost structure to either increase their margin or match the competitor's lower price.

Best,
Cristian

Answer 2

Great question - it's these kinds of real-world dilemmas that make management consulting such an intriguing field.

The key concern for your client here is about competitive positioning. If competitors can offer lower prices while maintaining the same profit margin, they might be attracting more customers and possibly undermining your client's market share, even if their absolute profit isn't necessarily higher. Additionally, this situation could indicate that the competitors have found a way to reduce costs or improve operational efficiency, which may put them in a better position for future growth and profitability.

In terms of structuring your approach to solve this problem, I would suggest the following:

Cost Structure Analysis: Begin by investigating how competitors can lower prices while maintaining the same profit margin. Are they benefiting from economies of scale, more efficient supply chains, or perhaps a different cost structure?
Competitor Strategy Understanding: Look at the competitor's overall strategy. Are they using low prices as a loss leader to attract customers and sell other, higher-margin products? Or are they attempting to increase market share in the short term?
Client's Current Position Analysis: Compare these findings with your client's current situation. Are there operational inefficiencies to address? Are there opportunities to leverage in their supply chain, product mix, or customer base?
Strategic Recommendations: Based on your findings, develop strategic recommendations. This could range from matching competitor prices, differentiating their products, improving operational efficiency, or even redefining the customer value proposition.

Remember, the ultimate goal here is to secure your client's competitive position and ensure long-term profitability, not just to match the competitors on every metric. Sometimes, understanding a competitor's strategy can provide invaluable insights, but it's also important to maintain a unique and sustainable strategy.

I hope this provides a clear structure and better understanding of the prompt. I'm more than happy to discuss further if you have any questions!

Answer 3

Hi there,

It means we are a fundamentally inefficient business who's days are numbered.

If we cannot produce the same products at the same price as our competitors, then we will steadily go out of business. This assumes all else is equal (quality, customer service, brand, etc.).

Basically, your doubt is short term thinking but you need long term thinking in business.

In terms of how to approach this, you need to:

Identify which products are at this lower price
Of those, figure out which ones matter
1. Which are a high % of our revenue/profit
2. Which are a high % of the market
3. Which keep customers coming
Of those in #2, figure out which ones we can cut costs + price for
Of those in #3 figure out the actual revenue/profit impact of this.
1. Cost to make the change (invest in cost-cutting tech/processes)
2. Resulting new revenue (lower price higher volume)
3. Minus new costs
4. Delta between that profit and the original
For #4 we have to do this long term (ROI/NPV)
Finally, only implement the ones where it is worth it

Answer 4

Dear candidate,

A suggestion:

a) since the competitors offer a lower price than your store, they can attract customers probably better. Since they also make the same profit margin, they seem to have lower costs for example if the profit margin per item is meant, then they receive less money for the item but relatively make the same profit, so it seems that they have lower costs somewhere, could be in a favorable position.

b) there are many ways to approach this and to understand this question. For example first get the big picture clear, what are we solving and how can that best be done? Clarify the for ways. For example maybe instead of aiming just for lower prices, we might aim to keep our prices high, attract more customers in different ways and still achieve a better profit margin than competitors. This you can also analyze by looking at the details behind revenues, costs, breaking them down, the drivers for them, but don't forget to get the big picture and overall framework right first, maybe this is not all we are meant to focus on.

Best regards

Answer 5

Your competitor has a lower price, but similar margin. This means that their cost position is better than your clients'.

By the way, it doesn't say that they sell the same ammount of products, but some similar product categories.

You basically need to look into major cost categories. You will need to consider which cost categories are fixed vs. variable, as you want to isolate volume / scale effects coming from higher sales levels. In any case you will want to know the absolute level of sales.

Major costs could be, for example:

Cost of goods sold
Marketing Costs
Salaries
Logistics
Real estate (stores rental costs)
G&A (basically central headquarters costs)
Other (utilities, insurance, etc)