Don't understand suggestion for declining profit margin

Question

When Analysing Table 1, the question stated by the interviewer is 'What could be a reason for deteriorating margins (PM) in prepared food?'

The answer provided here is:'We know that revenue is not a problem, as there is substantial growth. So, either product mix has changed or labour/material costs have increased.'

However we can clearly see from Table 1 that the cause of the deteriorating PM is the increase in COGS. So I don't understand why the suggested answer contains 'changed product mix'. Since labour/material cost would be included in COGS.

Many thanks for your help.

Answer 1

On a high level perspective you're right. COGS are increasing and deteriorating the profit margin. But if you dig a level deeper, the issue is not in a simple increase in COGS (e.g. meat getting more expensive), but in a shift in product mix.

The burgers have a negative margin - meaning you're loosing money on every sold burger. The case mentioned the burgers were only introduced recently (and I've seen other versions of this case that also called out specific promotions for the burger), driving down overall margin by increasing the share of revenue contributed by a negative-margin item.

Ergo: It's not that the COGS on a unit-by-unit basis have increases, you're shifting your product mix towards less profitable products, increasing total COGS.

Answer 2

Hi Estelle,

Henning has it spot-on...your product mix has changed in that you're selling much more of an unprofitable product!

This is a great lesson in segmentation...and overall picture may say one thing, but then the different parts within that larger picture may add a lot more nuance!

Answer 3

Hello Estelle!

Can you please indicate which case you are referring to?

Best,

Clara