Your client is a 5-year-old company that operates retirement homes (where elderly people can receive appropriate care) in Germany.
A few months ago, they opened a new home in Munich. They are concerned about its profitability. How would you help the client?
This case is all about realizing that the client is concerned for no reason because the new retirement home in Munich has a higher profit margin than the older retirement home in Berlin.
To arrive at this conclusion, the interviewee should use the profitability framework (revenue minus costs) to uncover all necessary information.
One of the first clarifying questions the interviewee should ask is obvious: if the company is already 5 years old and just opened a home in Munich, what other homes has it run? The interviewer should state that the company has only run one other home in Berlin.
Short Solution (Expand) (Collapse)
Suggested case structure:
The information gathering on the revenue side is rather straightforward.
Key Insights The new Munich homes generate much more revenue per apartment and are better utilized than those in Berlin (Munich’s occupancy rate is 90%. Berlin’s is 75%.) The cost side is more important to better understand the profitability issue. The interviewee should inquire about cost information.
The interviewee should brainstorm the main cost segments.
The new Munich homes generate much more revenue per apartment and are better utilized than those in Berlin (Munich’s occupancy rate is 90%. Berlin’s is 75%.)
The cost side is more important to better understand the profitability issue.
The interviewee should inquire about cost information.
Key Insights The interviewee can now use the following formula to calculate the profit for both facilities. Profit = Revenue - Cost
The interviewee can now use the following formula to calculate the profit for both facilities.
Profit = Revenue - Cost
The new business in Munich is profitable. Although its absolute profit is lower than Berlin’s absolute profit, its profit margin is slightly higher (17% versus 16%).
If the client is satisfied with the performance of his Berlin retirement home, he should also be satisfied with the performance of his Munich retirement home.
The interviewee should summarize his or her findings and give the client a solid recommendation.
The client was concerned about the profitability of his new retirement home in Munich. However, after calculating the profits of both the Munich and Berlin homes, we see that the Munich home has a higher profit margin than the Berlin home.
There are a few ways that client could improve the retirement home’s profitability (the interviewee could suggest other ways).
- Increase the Berlin’s home’s occupancy rate:
25% of apartments are not occupied. If the client can increase occupancy rate by 10%, the client’s profit will increase by €10,000 (= (800 - 300) * 10% * 200).
The client should try to make the Berlin home more attractive to customers. The client could build an entertainment center (similar to the one in the Munich home) or by conducting an aggressive advertising campaign targeted towards people with parents who are above the age of 60.
- Reduce costs through synergies:
SG&A costs in Berlin did not decrease after the Munich home was launched. SG&A costs in both cities are similar. (€8,000 in Munich and €10,000 in Berlin).
The client could centralize departments such as customer support, HR, purchasing, and sales.
- Create new revenue streams:
Currently, the only revenue stream is apartment rental. The client could partner with companies who provide products and services for elderly people.
Since the rent does not include breakfast or dinner, there could be small shops and restaurants built near the homes. Coaches could train people in sports.
What is the breakeven occupancy rate for each retirement home? What can you conclude from the result?
See Table 5 for calculation of break-even occupancy rates.
Breakeven calculation for the Berlin retirement home
Breakeven calculation for the Munich retirement home
To break even, the retirement home in Munich requires a higher occupancy rate. This could be because the Munich home has fewer apartments. If there were more apartments, fixed costs per apartment would be lower.
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 next interviewees solve the case very fast).