One day you are grocery shopping when you are approached by Barb B. Queue, the owner of the supermarket’s deli shop. Facing serious competition from other supermarkets and fast food chains, Barb is worried whether his shop is working alright, as lately profits have been stagnating. He had figured that you work in a renowned consultancy and seeks your advice. Because you are a consultant from the bottom of your heart, you agree and sit together with Barb and have a look into his books.
Short Solution (Expand) (Collapse)
II. Background / Data
- Revenue streams:
- Deli meats & prepared foods.
- Industry Growth:
- deli meat: flat, slightly declining.
- prepared food: 10%/year as people cook less.
- deli meat: supermarkets and discounters that spend more money on advertising.
- prepared food: fast food restaurants.
- Which one of the business lines is responsible for the lack of growth?
- What are the reasons for the lack of profit growth (flat revenues, increasing costs or both?)
- What causes the flat revenues, increasing costs or both?
We can see that our client’s shop is in line with the industry-wide growth in deli meat, i.e. low to zero growth, and outperforms the market in revenue growth for prepared food with around fifteen percent (market: 10%.) This is good; however, the growth doesn’t bring upon a higher overall profit, thus we can assume that the margin is deteriorating. Furthermore, a flat margin in the deli meat is acceptable, as growth is zero. In prepared food, there should be a growing profit margin.
We will have to look more closely into the prepared food financials.
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.
- Product mix: Remained the same, except BBQ chicken wings and pulled pork burgers which were introduced only lately and have boosted prepared food sales.
- Product info: BBQ chicken wings: take a little while longer to make and a BBQ sauce is applied afterwards; The pulled pork burgers are custom-made upon an order by a client and only available during lunch and dinner time.
Calculating the values for the BBQ chicken wings, we find our profit margin to be 50% of the revenue, which is a good value.
With the pulled pork burger, the situation is quite the opposite. Every day we are losing 10 € with the burgers. Assuming that the employee cannot work faster, this loss will get bigger the more our sales grow.
- Apart from eliminating this product from the portfolio, Barb could increase the price of the burger (This will depend on the price elasticity).
- Alternatively, material costs could be lowered.
- Barb could find an employee that works faster.
- The burgers could be limited to the busiest time.
The contribution margin of a single burger is 3€ without the employee cost. To break even, the employee cost must be earned (25€). While 8 burgers/hour still cause losses (8*3 = 24), from 9 burgers/hour on the business will be profitable. (In fact, currently Barb sells 7.5 burgers per hour = unprofitable)
Barb has asked us to identify the underlying reasons for the stagnation of profits in the face of market and revenue growth. The reason for this is to be found in the pulled pork burgers that are incurring losses.
Possible recommendations include:
- Eliminate the pulled pork burger
- Change prices/ material cost
- Increase demand (advertising, promotions, …)
More questions to be added by you, interviewer!