Bain Case: BeautyCo – Where Did the Profits Go?

The clear structuring of the problem (development of a profitability driver tree for BeautyCo as well as strong quantitative skills (calculation of profit margin, market assessment) are important. This case also tests the candidate's creativity (generation of possible countermeasures).

Question 1: After deriving a profit tree, the candidate should conclude that the high product price is the cause of declining profitability (through hypothesis building and concrete question asking).

Question 2: The candidate should calculate the margin and costs for BeautyCo and compare these with its main competitor. The margin for the exemplary product is 8%. A lower purchase price can be the solution to BeautyCo’s profitability issues, which can mainly be achieved by purchasing products on the grey market.

Question 3: Amazon has 100% of grey market products. The grey market share amounts to 30% of the overall market.

Question 4: BeautyCo should consider exerting slight pressure on suppliers, while positioning itself as a strategic partner to jointly protect the market from grey goods.

In the first step, the candidate should draw up a profitability tree for BeautyCo. 

This results from:

• (a) sales minus (b) costs
• Sales consisting of
  • aa) number of products sold times
  • ab) price per product
• Costs consisting of
  • ba) fixed costs plus
  • bb) variable costs

The candidate should then derive hypothesis and ask questions to identify the cause.

The candidate should conclude that BeautyCo's profitability problems stem either from a change in product mix (e.g., increased sales of low-priced products, fewer more expensive ones) or that BeautyCo is fundamentally selling fewer products.

The candidate should now infer that the profitability problems stem from a decline in volume.

The candidate should observe the following points:

• The market has grown and not shrunk from 2012 to 2022 (around 15%).
• Offline retail has shrunk significantly while online retail has grown at a strong rate (more than 4x as big as 10 years ago – why is that the case?).
• Amazon and other online players are a strong competitor to BeautyCo's online store and are taking part of its online market.
• The drugstore market is also growing.

Classification of the findings: Sales have fallen because BeautyCo has lost market share to other players, primarily Amazon and drugstores, shift from online to offline.

The candidate should identify the following options, questions can be answered by the interviewer: 

• Broader offer -> No, not the case.
• Greater convenience for the customer -> Neither. BeautyCo's online shop is comparable to Amazon and Co.
• Better prices -> Yes. Especially in the category "Fragrance". This should be the focus of further analysis.

The candidate should realise that BeautyCo probably doesn’t have a 50% margin, but that in addition to variable costs, there are also fixed costs which affect the product margin.

The candidate should then be able to calculate the average margin at the company level, using exhibit 1 as a base for the calculation.

Amazon makes a profit of €0. 

The candidate should state this and explain that this does still make sense due to Amazon's bundling strategy and that the company earns money through advertising.

Amazon's lower selling price is therefore the big advantage compared to BeautyCo. 

The key criteria therefore are the purchase prices: If BeautyCo had a purchase price of €20, then it would be possible to sell the product for €20 + €25 fixed costs + (0.08 * x) = x. The candidate should perform the calculation in writing. Dissolving the calculation by x results in a sales price of €49 for BeautyCo. This would still be more expensive than Amazon, but much closer.

• Quantity effect: Possible, but not yet given, since BeautyCo sells more products in total and therefore buys more from the suppliers than Amazon.
• Other supplier: In the Selective Beauty market, the producer controls the distribution chain, so it should not be possible to buy the products cheaper elsewhere, but: Amazon buys on the "grey market" (producers + distributors sell part of their products through unofficial distribution channels, at lower prices).

The candidate should mention a few of these points – if the "grey market" is not addressed, the interviewer can pass this information on to the candidate.

The candidate should be able to fill in the "?" box based on the discussion so far, because Amazon can only source 100% of its goods on the grey market.

In the next step, the size of the grey market can be calculated (in writing).

This task is for brainstorming for the candidate (creativity is needed here):

• Sourcing products also via the grey market
  • Pro: lower purchase prices and thus higher competitiveness
  • Con: possible consequences under contract law; risk of losing one's own manufacturer; reputation risk if this is made public
• Put pressure on manufacturers by threatening them with consequences
  • Pro: if successful, cheaper purchase prices or contained grey market and thus weakened competition
  • Con: Grey market sourcing, delisting, less shelf space etc. (if not successful: continued weak competitiveness)
• Strategic alliance with the manufacturer to protect the market
  • Pro: Win-win for manufacturer and BeautyCo
  • Con: If the manufacturer does not comply, persistent weak competitiveness

Conclusion (important, that the candidate finishes with an action-oriented and concise answer)

• If BeautyCo does not take steps against the grey market, the problem will intensify with the expansion of the drugstore and online business, so BeautyCo will continue to lose market share.
• It seems most sensible to exert slight pressure on suppliers, but at the same time to position itself as a strategic partner to jointly protect the market from grey goods.