The following framework/structure provides an overview of the case:

Information that can be shared if inquired by the candidate:

• The company is an auto service chain that offers off-the-shelf parts and that offers mechanical services.
• Off-the-shelf parts are a low-margin business while mechanical services are a high-margin business.​
• The company added 15 stores in other geographical areas over a period of a few years.

The candidate should ask for more background information on the company.

To start off, the following information can be shared if asked by the candidate.

• The same two services are provided in the new 15 stores.
• Prices have stayed the same in the new stores.
• Costs have stayed the same, but proportionally the mechanical service segment carries a higher cost due to the need for skilled labor & special equipment.

To start off, the following information can be shared if asked by the candidate.

• Customers using the mechanical service have a higher income than those buying auto parts and doing the work themselves.
• Most of the high-income customers live in suburban areas where the first 30 stores are located.
• The new 15 stores are located in urban areas where more low-income consumers live.

The candidate should start asking for information on revenue, cost, and profit margins. The candidate should also ask for more info on the two business segments along with the new 15-store expansion and how those are characterized.

It could be that overall profits have gone down by a change of our product mix towards more low-margin products while fixed costs have stayed the same.

The candidate should ask for more info on customer behavior and characteristics.

• It seems that the move of opening 15 stores in urban areas was a wrong one since more revenue is derived from the low-margin products.
  • Consumers in urban areas have less to spend and are thus less inclined to pay for expensive mechanical services.
  • However, fixed costs per store (e.g. rent) at least stay the same; since they are located in more central areas it is likely that fixed costs are even higher compared to suburban areas.
  • This shift in revenue breakdown combined with constant fixed costs is causing the overall profitability to fall.
• The client should look into moving the mechanical services out of the urban areas and focus on auto parts. Doing so will help to reduce the workforce in these stores.
• The client should also focus more on areas where they can earn in the high-margin mechanical service business.