Retirement homes

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Market information that can be share if inquired: People above the age of 60 usually occupy the homes for long periods of time. We do not have information on our competitors.

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.

Market information that can be shared if inquired: The company itself has almost no employees (apart from administrative and customer relationship positions). Every on-site service is outsourced to other companies. The SG&A costs for the Berlin home did not decrease after the Munich home was launched.

The interviewee should inquire about cost information.

Key Insights

Costs per apartment are higher in Munich. (Higher-end offerings; the city is relatively more expensive. Munich has an additional cost - the entertainment center.

The interviewee can now use the following formula to calculate the profit for both facilities.

Profit = Revenue - Cost

Key Insights

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.

Possible conclusion:

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.

Suggested answer:

See Table 5 for calculation of break-even occupancy rates.

Breakeven calculation for the Berlin retirement home

The only true var. costs are the var. cost per occupied apartment!

Breakeven calculation for the Munich retirement home

The only true var. costs are the var. cost per occupied apartment!

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.