Supermarket turnaround

Our client is a supermarket chain in Britain called Sparx. They have been the market leader for more than 30 years. However 5 years ago they have seen growth stall and 2 years later revenues started shrinking, keeping so until today. The profitability of the chain has followed the revenue downturn trend, but dropped in percentage much more than the revenues.

They now hold only 25% market share, with the second player getting dangerously closer with 23%.

What’s wrong and how can you help them turn this situation around?

This is a turnaround case where the client company has not adapted fast enough to two main market trends: internet as a distribution channel and hard-discounters entering the market with almost unbeatable low-end offers (cheaper products).

These two key aspects come up only if the interviewee follows a very structured analysis that covers many other possible causes for the declining revenues. The interviewer should not give away easily these two key case aspects (unless the interviewee asks specific questions about them)!

The following structure would be a good approach:

I. Customer

Here the interviewee should inquire about the customers:

• Segmentation
• Needs
• Market trends

II. Company

The following areas should be further analyzed to crack the case:

Main conclusions

• Price distribution of products concentrated on the low-end (lower prices):
  • 10% hard-discount
  • 40% low-price
  • 30% medium-price
  • 20% high-end products.

This has not changed lately. This shopping basket should be compared against main competitors later in the case analysis

• Sparx only relies on the physical stores as distribution channel (no internet delivery). This should also be compared with competitors.

III. Competitors

The analysis of competitors and their trends should enable the interviewee to crack the case:

• Main competitors and market shares
• Reach of the problem Sparx is facing
• Competitor’s price-product distribution
• Competitors’ strengths
• Competitors’ distribution channels
• Competitors’ suppliers

Main conclusions

• The two main competitors are profitable and increasing revenues at 7% and 9% yearly, stealing Sparx’s market share.
• The performance difference CANNOT be explained by a local market trend as Prisma, Byite and Sparx are active in the same cities and neighborhoods in Britain.
• 90% of clients who buy at Sparx and at another leading chain (Prisma or Byite) prefer the variety of high-end products at Prisma or Byite. They must be then buying high-margin products at the competitors instead of at Sparx.
• To top it off, both main competitors have been taking advantage of the internet as a new, high-margin distribution channel while Sparx hasn’t.

IV. Conclusion

The analysis done has uncovered valuable information.

We can conclude that Sparx revenues have been eroding and its market share being quickly taken away by the two main competitors because:

• Sparx has a wrong price positioning. Customers belong to middle and upper-middle classes and want to have more variety of higher-end products. Since the arrival of hard-discount competitors, the two other main competitors have quickly adapted and focused on the higher-end products (as competing with hard-discounter would be a sure defeat because of their lean cost-structure). Prisma and Byite have higher prices and margins than Sparx.
• Sparx has neglected a new distribution channel: the internet. The two main competitors have been exploiting this channel which has even a higher margin then the physical stores. Internet sales have increased 15% per year for Prisma and Byite.

Some possible recommendations for the client:

• Restructure its offerings, going gradually to higher-end products and abandoning hard-discount products that have almost no margin.
• Increase the shopping experience the customers get in the local shops to improve the image of Sparx.
• Initiate a pilot internet delivery service in one city in Britain. With the feedback from this pilot-service then expand to the whole country like the two main competitors Prisma and Byite.

Suppose the client starts to sell better products, increasing the average product price from £1 to £1.1.

As a consequence, the purchasing costs increase 5%. Assume the market has a price elasticity of -0.5 (that is, for an increase of 10% in price, demand of product units decreases 5%).

Is the client going to be profitable with this change in product strategy?

Possible answer:

Let us first analyze the new revenues with this strategic change. A change from £1 to £1.1 represents a 10% increase in price. Then, according to the price elasticity, the demand of product units will decline 5%.

If the average price was £1, then the customer used to buy 11 units per week (average expenses per customer per week of £11, as stated in session “available information”).

After the increase in price, clients will buy only 10.45 units. That is, the new revenues will be of approximately £11.5 per week.

In a year this represents revenue of £598 m:

Revenue = £11.5 * 52 weeks = £598 m

On the costs side, the only change will be the increase of 5% of purchasing costs, which were previously £360 m:

Purchasing costs = 60% * £600 m = £360 m

The cost will then increase £18 m to £378 m

New purchasing costs = £360 m * 1.05 = £378 m

The total costs increase to £618 m:

New total costs = £378 m + £240 m= £618 m

Conclusion

The client will still not be profitable, but its loss will decrease
from £28 m

Old loss = £572 m - £600 m = £28 m

to £20 m.

New loss = £598 m - £618 m = £20 m

More questions to be added by you, interviewer!

At the end of the case, you will have the opportunity to suggest challenging questions about this case (to be asked for instance if the next interviewees solve the case very fast).