DairyCo, a mid-sized CPG manufacturer (consumer packaged goods) which sells dairy products (derived from milk), has turned to you to ask for your advice.
The firm has been facing declining profits in the last few years and does not know what it should do to change this trend.
How would you help them out?
This case is all about discussing ideas to improve revenues so that the client can improve its bottom line (profits). The candidate should also inquire about the possibility of reducing costs, even though it does not come into question in this specific case.
As you will notice in the “Suggested approach” section, the focus should not be on the numbers or math, but rather on concepts. This is more of an interviewer-led case interview since the interviewer is supposed to help and guide the interviewee to the point where they can brainstorm possible ways to increase revenue.
However, don’t give the interviewee too much guidance too early.
Short Solution (Expand) (Collapse)
Suggested case structure:
In this first step the interviewee should gather some information about the company and its products:
- Amount sold
- There are no specific end-customer segments DairyCo addresses. DairyCo’s clients (which represent two different distribution channels) are big supermarkets and wholesale distributors (which resell the products to small grocery stores).
- Like in the overall industry, the number of units sold of both lines of products increased slightly in the last few years.
- The industry’s revenue however has declined.
- DairyCo sells two lines of products:
- Long-life milk
- Plain yoghurts
- DairyCo has only one factory which is being used to 60 % of its capacity.
- DairyCo has two revenue streams: long-life milk and plain yoghurts.
- Both have experienced declining revenues in the last few years.
- However, the number of units sold for both lines has actually increased in the last years. That means necessarily that the price has declined.
- So the price is definitely one of the causes (there may be more than one) of the decrease in profit.
The interviewee should try to understand both sides of the profitability equation:
- Generation of revenues
- Variation over the last years
- Cost breakdown
- Variation over the last years
- Increase of specific costs
- Costs per unit have not increased in the last years.
- Revenues and profitability have decreased for both lines of products in the same fashion (no absolute numbers provided).
Possibility of reducing costs:
- Raw material costs
NOT possible as raw material is an extremely commoditized good (milk has a fixed price in the market).
- Production costs (not including labour):
Factory has already been optimized and productivity improvements would require huge investments the company could not afford.
Unions control the salaries. Decreasing salaries would likely lead to dissatisfaction and strikes.
Could be reduced but revenues would as a consequence most likely decrease more than what would be saved with marketing.
NOT possible, already tried by CEO.
Outsourced to cheapest providers in market.
- Other costs:
NOT possible, already tried by CEO.
- DairyCo's costs per unit produced have not increased in the last years.
- That means that costs have NOT contributed to the decrease in profitability.
- The only cause must then have been the fall in price.
At this stage, the interviewee should ask meaningful questions about the competitive landscape and inquire whether this price decrease also happened to DairyCo’s competitors (industry wide) or if this happened only to DairyCo (internal issue):
- Main competitors
- Competitor’s size
- Competitor's cost structure
- Competitor’s products
- Price of competitor’s products
Information that can be shared if inquired:
- The market is fragmented across some bigger players and mostly mid-sized companies like DairyCo.
- All competitors, regardless of their size, are facing very similar problems as DairyCo (revenue and profit shrinking).
- Overall profit margin of products has been constantly decreasing over time for all competitors as their prices keep falling as a consequence of a price war.
Knowing more details about the client’s company as well as about the competitors, the interviewee should consider options to be able to increase the profit.
The options to improve profits are:
1. Increase the price:
Increasing the price in order to increase the revenue is not an option as DairyCo would very fast lose its entire market share to competitors.
2. Decrease costs:
As discussed, this is not a viable option, as costs are already optimized.
3. Increase revenues by exploiting the Ansoff Matrix:
A good solution to find an option to increase the revenue is the usage of the Ansoff Matrix.
- Market penetration (selling more current products to existing customers):
In the current situation, insisting in current products would not be a good idea as we saw that these are similar to commodities (i.e. it is very hard to sell more units without decreasing the current price, which is already low, even more).
- Market development (selling current products to new customers):
Is not a good solution (see comment „market penetration“).
- Diversification (selling new products to new customers):
Diversifying would be too bold for DairyCo. Before expanding in both dimensions (product and market) it should focus on only one.
- Product development (selling new products to existing customers):
The best choice would be to develop new products and sell them to existing customers.
The best solution to increase DairyCo’s revenues seems to be the development of new products for its existing customers.
At the end the interviewee should make a sound and actionable suggestion for the client to increase his profits again.
A good closing could be:
After studying the client’s case, we concluded that the main cause for the declining profits has been a price war among competitors in the long-life milk and plain yoghurt industry.
In order to counter this destructive trend of industry declining profitability I suggest that DairyCo develops and commercializes more sophisticated products with clear and distinctive USPs for which it can charge clients a price premium (for instance flavored yoghurts, fresh milk, low-fat yoghurt, etc.).
There are three reasons:
1. Cutting costs
This is not a viable option. For most cost blocks, a cost optimization has already been done. For others, a very large investment would be required (decrease of production costs).
2. Selling more of the current products
This is almost impossible (be it for existing clients or for new clients) as this would require a further decrease in price (products are seen as commodities).
Doing this would make the price war worse and probably decrease even more the profitability of the whole industry.
3. Developing new products
New products with clear USPs would allow DairyCo to position itself in the market aiming at specific groups of clients (low-fat yoghurt would aim young, healthy customers for instance).
Having a price premium would allow for a much bigger profit margin per product and therefore a bigger overall profit.
Suppose the client accepted your suggestion of producing higher-value products. He asks you how to do it as they do not possess strong R&D competencies. How would you help him?
If the client wants to implement this strategy change straight away, a very effective way of doing it would be to acquire a small company with the desired capabilities (for instance, a company specialized in low-fat yoghurt).
This would however only be possible if the firm already possesses the capital necessary for an acquisition.
Another option would be to hire a complete team of product developers from a company that already has experience in sophisticated dairy products.
If the interviewee solves the case very quickly, you can come up with more challenging questions to ask them.