How to communicate the "mix factor" in a profitability case clearly?

Question

Hi all,

I'd like to seek your thoughts on how to communicate the “mix” factor in a profitability case.

For instance, we want to improve the profit margin of a supermarket.

In my first analysis bucket, I want to understand the numerical drivers. Which option sounds clearer to you?

Option one: I want to look into three areas - revenue, cost, and mix (e.g., product mix, customer mix, store type mix).
Option two: I would start by understanding how to segment. One hypothesis could be that low-margin segments are growing. Possible segmentation approaches could include A, B, and C. Then, I would examine the financials, looking into revenue first, then cost.

Both options don't seem entirely “MECE” to me, but if I only split profit into revenue and cost, we miss out on the “mix” factor. Please share your advice!

Answer 1

Hi! The second option is better.

Often large companies have separate divisions which have their own P&L and focus on relatively different businesses. So, the first step would be to ask whether you have multiple divisions and, if this is the case, apply your profitability structure to each division separately and then comment on the combined.

You can also have revenue segmentations within a division (by product, by client as you mentioned). In this case the mix will likely affect only the gross profit (since fixed costs will likely be shared). So, here the approach would be identifying the revenue segmentation first, assessing the gross profit of each segmentation, assessing the mix effect, and then taking into consideration also fixed costs.

I hope this helps!

Answer 2

Option 2, exactly. First you segment, then you deep dive on each segment, not the opposite.

Answer 3

Hi there,

I would be happy to share my thoughts on your question:

First of all, none of the options make sense for one simple reason: "mix" is not a numerical driver, but a potential root cause of the numerical driver(s) looking the way they do.
Moreover, what would be the next step in your analysis once you have identified the numerical driver(s)?

If you would like a more detailed discussion on how to best prepare for your upcoming interviews, please don't hesitate to contact me directly.

Best,

Hagen