Problem Definition
Your client American Airlinks has seen its inflight revenues stagnate for the past 3 years.
The CEO offers the possibility of doing a partnership with Balzac Coffee and of selling Balzac Coffee in the future, instead of handing out the current non-brand coffee for free.
Advise the CEO if AA should either do this partnership or put a price on the current, non-brand coffee that is currently given out for free.
Comments
This case encompasses a large amount of data which requires good structuring and data gathering from the interviewer.
Short Solution (Expand)
Detailed Solution
The following structure would be a good approach:
I. Company
First step, the interviewee should investigate about the company.
# clients per flight = 220 * 90% = 198
II. Product
This section should help the interviewee get crucial information about which different products are already sold inflight and about the competitive edge of Balzac Coffee.
AA Profit margin for Balzac Coffee = 50% * 20% = 10%
III. Customer
The customer part covers the amount of current customers as well as their purchase power.
From Table 2 the potential amount of purchased items per day can be deduced.
Short and long range flights have the potential of 7,920 products per day each:
We now know that in total 7,920 products are sold per day.
Now the interviewee should try to compare selling Balzac Coffee to putting a price tag on its current coffee.
Estimate the amount of Balzac Coffee sold
Sales split show that coffee represents 35% of 50% of inflight sales, hence 17.5%:
Sales split = 35% * 50% = 17.5%
The coffee products therefore amount to 1,386 items per day.
These flights operate 365 days per year, and the average price per item is $4, therefore generating $1.5 m per year:
Profit from Balzac Coffee
With a profit margin of 10% AA could generate a profit of $200,000 from the coffee:
Balzac Coffee profit = $1,518,400 x 10% = $151,840
Estimate the amount of normal coffee sold
The coffee products amount to 624 items per day.
This is due to the fact the coffee sold is not a known brand such as Balzac Coffee and therefore the demand reduces to a higher extent!
These flights operate 365 days per year, and the average price per item is $3, therefore generating $0.68 m per year:
Profit from normal coffee
With a profit margin of 20% AA could generate a profit of $91,104 from the coffee:
Normal coffee profit = $455,520 x 20% = $91,104
IV. Conclusion
Looking at the data, the interviewee should come up with the conclusion that it would make sense to put a price tag on the coffee in the plane.
- Currently, coffee can be seen as pure costs, therefore any price on coffee would improve on-board revenues.
- This can either be done by simply putting a price on the coffee that is already available on board or via a joint-venture between AA and Balzac Coffee.
- From a profit point of view, it makes most sense to do the joint-venture with Balzac Coffee.
- In addition, the brand on the plane could increase on-board sales as it could affect co-consumption of other things such as desserts together with the coffee.
However, it is important the interviewee specifies the different risks:
Risks:
- People may not want to pay for coffee since they usually get it for free.
- People could be drinking coffee before taking the plane, which would reduce sales.
- The reduction of demand could be greater than estimated and therefore lead to a lower profit.
Difficult Questions
Which main risks should the CEO consider before doing a joint venture with Balzac Coffee?
The important part is to have the interviewee brainstorm and explain his thoughts.
Possible/potential answers:
- Objectives of the venture are not totally clear and communicated to everyone involved.
- Partner has different objectives for the joint venture.
- Different cultures and management styles result in poor integration and co-operation.
- Partner doesn't provide sufficient leadership and support in the early stages.
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 interviewees solve the case very fast).
