Population density

Question

Hello, how would you solve this case...

Your client is a superstore and they want to open a store in Lagos (any city would do). What is the minimum population density the city should have.

I thought about approaching it by using the following steps:

1. Population density first which is population/area.

2. Calculate the area of the city (honestly struggling with this, will need some help)

3. Then detemine the minimum population needed for the client to Breakeven taking into consideration market penetration, competition, and purchase power.

4. To determine the population to breakeven, I will then have to estimate the cost of the store both fixed and variable costs as well as contribution margin to get the volume that has to be sold.

5. Next step will be to determine the average frequency of purchase/person/month.

6. I should be able to determine how many people on average should come to my store and buy/ month.

7. Making the assumption that the client will have 50% of the 80% or so of the population that will shop in a superstore, we should be able to reach a reasonable answer.

8. Plug it into the initial equation and we should have answer.

I'd love to know how others will solve this.

Thanks.

Answer 1

Hey there,

You need to work out the breakeven volume of baskets for the store (including making some assumptions about payback period), and then extrapolate the purchase volume into population (by making some assumptions about conversion rates between the population size and their rate of purchase at the store).

Here is an illustration with some sample numbers

Let breakeven volume of baskets = B

Breakeven is when:

Avg price of basket x B = Fixed Costs of Setting Up Store + Variable cost per basket x B
Or, B = Fixed Costs / (Avg price per basket - Variable cost per basket)

Assume

Fixed Cost of Setting up the Store = 10 million
Average Price per Basket = $100
Average variable cost per Basket = $50

Therefore B = $10m / ($100-$50) = 200,000 baskets to breakeven

Now, assume

you need to payback the store in 1 year.
on average, each customer of superstore shops 10 times per year there (~once per month)
that in this city, 1% of the population will become customers of superstore

Hence, you need

200K baskets per year = 20K customers (each shops there 10 times per year) = 2m population (1% of people in the city will become customers)

Hope that is helpful!

Answer 2

Hello!

Precisely for the high amount of questions (1) asked by my coachees and students and (2) present in this Q&A, I created the “Economic and Financial concepts for MBB interviews”, recently published in PrepLounge’s shop (https://www.preplounge.com/en/shop/prep-guide/economic_and_financial_concepts_for_mbb_interviews).

After +5 years of candidate coaching and university teaching, and after having seen hundreds of cases, I realized that the economic-related knowledge needed to master case interviews is not much, and not complex. However, you need to know where to focus! Hence, I created the guide that I wish I could have had, summarizing the most important economic and financial concepts needed to solve consulting cases, combining key concepts theorical reviews and a hands-on methodology with examples and ad-hoc practice cases.

It focuses on 4 core topics, divided in chapters (each of them ranked in scale of importance, to help you maximize your time in short preparations):

Economic concepts: Profitability equation, Break even, Valuation methods (economic, market and asset), Payback period, NPV and IRR, + 3 practice cases to put it all together in a practical way.
Financial concepts: Balance sheet, Income statement/P&L and Performance ratios (based on sales and based on investment), +1 practice case
Market structure & pricing: Market types, Perfect competition markets (demand and supply), Willingness to pay, Pricing approaches, Market segmentation and Price elasticity of demand, +1 practice case
Marketing and Customer Acquisition: Sales funnel, Key marketing metrics (CAC and CLV) and Churn, +1 practice case

Feel free to PM me for disccount codes for the guide, and I hope it helps you rock your interviews!

Answer 3

Do it in reverse:

Revenue = price * vol

At break even: total revenue = total costs.

=> Price * x = FC + UVC*x (UVC is unit var cost)

=> x = FC / (Price - UVC)

now you need to assume avg prices for the product and avg UVC. It could also be a blended / weighted avg based on product mix.

Once you have x == no# of "purchases". Now a few things:

- what was this over: 1yr, 2? 10? -- depends on your expectations for returns

- how does this translate to no# of people -- do people buy once a year, twice?

Say people buy from the superstore 12 times per year and we want BEven in 5 yrs.

So, actual population needed to achieve this = x / (12*5) = x/60

Now you have x. Assume an area, and get the pop density.

Answer 4

Hi,

I would also take into account several macro factors:

Demand seasonality (e.g. tourists, climate, etc)
Roads and infrastructure availability (public transportation, cars, etc)
Consumer salaries and willingness to spend (since it drives frequency)

Best