Problem Definition
Your client, Port-Pouri, is a discount retailer in Portugal having 130 stores spread throughout the country and thereby being the largest player in the market. It is more profitable and has a higher market share than the closest competitor (75 stores). This competitor has recently been bought by SPARnien, the largest discount retailer in Spain, who plans to convert all 75 stores into SPARnests, the infamous stores that made the company so successful in its home turf. The CEO of Port-Pouri is worried and asks for your advice. Should she react, and if so, how?
Comments
This is a candidate-led case. After having presented the main structure of the case, the interviewer takes the role of the company's CEO, knowing the data well, but not connecting the dots. Luckily she has engaged you to ask the right questions and draw the appropriate conclusion where possible.
Short Solution (Expand)
Detailed Solution
I. Structure
The interviewee should have or get knowledge of what a discount retailer is, namely a vendor of a large variety of consumer goods at discounted prices, normally offering everything from clothing to home appliances. Wal-Mart, Mercadona and ALDI are well-known examples.
II. Understanding the Portuguese Market
In this section, the interviewee is supposed to ask questions to learn about the market of Port-Pouri.
- Geographical areas: Port-Pouri and the competitor serve exactly the same geographical area.
- Store Size: On average, it is the same for both firms.
- Product mix: Port-Pouri and the competitor have more or less the same product mix, although variety of brand names tends to be slightly higher at Port-Pouri.
- Price level: Both companies offer more or less similar prices.
- Profitability: Higher profits for Port-Pouri due to higher profits per store.
We can see that the profitability per store is higher for Port-Pouri than for the competitor, although many other aspects as service area, product mix and store size are similar.
A possible explanation could be that the stores are better managed.
and indeed
It looks like the franchise model is responsible for higher profits per store. We should consider means of validating whether customers value the shopping experience higher in the franchise markets.
A recent customer survey showed that Port-Pouri’s stores are considered cleaner, more attractive, better stocked. Also, the customer service is significantly better.
To sum up, we can conclude that the strength of Port-Pouri is the management model, which is responsible for more attractive stores and gives the company a competitive advantage over its competitors, resulting in higher profits per store and a higher overall profitability.
III. Analyzing SPARnien’s home market (Spain)
In this section, we mainly want to understand, why SPARnien has been so successful in its home market.
Store Size: Typically SPARnests are around 20,000 sqm, while the competitors' stores have around 10,000 sqm.
We can infer that SPARnien sells eight times the volume of the closest competitor (4 times the number of stores, twice as big)
Other information to be shared upon request (let the candidate make assumptions first):
Cost of goods: Is 15% lower due to the higher volume SPARnien buys.
Price of goods: SPARnien can offer prices 10% lower than the competition.
Product mix: Due to the larger stores, a larger variety of good s is available.
To conclude with the analysis of the Spanish market, we can infer that SPARnien has lower purchasing prices due to the high volumes they buy. This allows them to charge lower prices for consumers.
IV. SPARnien in Portugal
We know that SPARnien is successful in its home market, but this does not automatically mean that it can transfer this success to Portugal. Here are several dimensions that we want to consider:
- Brand name: Portuguese shoppers have not heard of SPARnien.
- Product portfolio: Mainly the same, tendency for domestic products at Port-Pouri, but also many products sourced out of Spain.
- Distribution costs: Will be higher for SPARnien, as it spans a wider area of service. The costs are only about two percent higher, though.
- Labour costs: Let’s ignore labour costs in this case.
Should SPARnien enter our client’s home market, we would expect them to offer products at a lower price than our client does. The prices will probably be up to 8% lower (estimated from 10% lower prices than competition and the 2% higher distribution costs). While they definitely have the price advantage, our client’s brand name is better known and customers prefer shopping in our client’s stores.
V. Recommendation
In the short term, Port-Pouri should be fine. Brand name and shopping experience speak in its favor. However, especially discount shoppers will change their buying habits realizing that SPARnien’s prices are constantly around 8% lower than Port-Pouri’s. Our client would slowly lose market share. In the long run, SPARnien can establish a brand in Portugal, which erodes that competitive advantage for our client. Port-Pouri should act now.
Possible recommendations:
- Cut costs to make the organization efficient and offer lower prices in spite of (the same) high purchasing cost.
- Introduce a frequent shopper program.
- Leverage the higher service level in Port-Pouri’s stores, emphasize on the better shopping experience.
Difficult Questions
What could be potential problems with a frequent shopper program?
