Paragraphs highlighted in green indicate diagrams or tables that can be shared in the “Case exhibits” section.
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Paragraphs highlighted in orange indicate hints for you how to guide the interviewee through the case.
Information to reveal if prompted
- Macro considerations
- PL products have grown increasingly popular in grocery stores
- The economy has been slowing and there is a potential recession coming in the near future
- Branded: 4 USD / bag
- Private Label: 3 USD / bag
- Branded: 5 USD / bag (wholesale), 5.75 USD / bag (retail)
- Private Label: 3.75 USD / bag (wholesale), 4.25 USD / bag (retail)
- Distribution channels
- Grocery outlets (90% of total cookies sales): sell branded cookies and carry their own private label cookies
- Mass merchandisers (e.g. Walmart, Sam's): sell only branded cookies
Market Overview + Competitive Landscape - see exhibit
Part 1 - Suggested approach
Determine how large the overall US cookies market is in USD.
Assumptions - to be made by the interviewee
- Size of US population: 320M
- Avg. Household Size: 2.5 → number of households: 128M
- Avg. number of cookies bags consumed per month per household: 2
- Avg. price per cookies bag 5 USD → Avg. $ spent on cookies per month per household: 10 USD
- Market size 15bn USD (p.a.!!)
The US cookies market is around 15bn USD.
Assume the cookie market is actually 20bn USD. Recently, private label cookies (those carrying the name of the retailer) have entered the market (Key: B = Branded, PL = Private Label). Is the emergence of private label cookies a threat to Gumbread Inc.?
The candidate should first ask about the overall market conditions incl. development (1) as well as Gumbread's Inc. performance in the market (2).
- Analysis of the diagram (exhibit)
- PL cookies emerged 5 years ago.
- Overall cookies growth had been flat over the past five years.
- PL holds 25% of the cookies market, B holds 75%
- Market share of client increased even though their sales decreased - a good indicator that B market is shrinking
- 2nd major player entered the PL market 2.5 years ago and has today already 40% of PL market - a good indicator that with the size of our client and other major players it is possible to gain good PL market share quickly as it may still be a very fragmented, new market; 2nd major player entering the PL market can be a good indicator that PL can be the future market instead of B cookies
- PL have been increasingly popular in grocery stores
Once the candidate has determined that overall cookies market revenues are stable, he/she should determine why Gumbread's Inc. experienced decreased sales revenues by splitting up demand along each part of the supply chain.
- Manufacturers / Company / Competitors: Competition doesn't seem to be drastically affecting the firm because the client has significantly increased B cookies market share in the past 5 years
- Retailers: Retailers are not affecting demand because it is advantageous for retailers to sell branded cookies because they provide HIGHER profit margins
- Customers: So something must be affecting demand at the consumer level
- cheaper price? PL price is around 25% cheaper than B cookies - both in wholesale and retail markets
- higher demand for cheaper cookies even though the quality is lower than B cookies
- macroeconomic trends?
- potential recession coming in the near future - therefore price sensitivity of end customers potentially higher
- Answer: While Gumbread Inc. has increased its B cookies market share (+10%), revenues have been declining (-10%). This is because the total size of the B cookies market is declining (-25%) as a result of PL cookies entering the market. We believe the demand for PL cookies is driven at the consumer level. Thus PL cookies are a threat. We need to better understand whether it is high or low threat in order to make good recommendations.
Assume PL cookies pose a threat to profits. What strategy should Gumbread Inc. take to mitigate this threat?
In case PL cookies pose a high threat, expand into the PL cookies market.
Since low manufacturing costs are essential to success in the PL cookies market, the client should focus on cost-cutting:
- Utilize all existing excess capacity
- Gain maximum product knowledge as quickly as possible
- Understand low-cost positions on product ingredients and mix
- Review process improvement/manufacturing efficiency opportunities
- Undertake overhead reduction efforts
- Seeking partnering agreements with retailers
- Explore deals with mass merchandisers to enter PL
In case PL cookies pose a low threat, stay with branded cookies
Success in the branded segment is dependent on differentiation and minimization of the momentum of the PL segment:
- Invest in the brand image to support a premium price
- Make it difficult to copy product
- Manage price gap - explore price increases where appropriate
- Explore exclusive partnering with mass merchandisers
- Consider alternative distribution Germany
- Seek partnering agreements with grocers regarding branded products
- Educate grocers as available
Could you please give our client a final recommendation on what to do next?
Our client is a US-based manufacturer of branded cookies, Gumbread Inc.. While our client has increased its market share, its revenues have been declined. This is because the total B cookie market size is declining as a result of PL cookies entering the market. We believe demand for PL cookies is driven at the consumer level. Thus, PL cookies are a threat to our client. We need to better understand if it is a high or low threat. If high, then we need to expand into the PL cookie market. If low, then we need to stay with B cookies and invest in the brand image of B cookies. In the next step, I suggest testing both scenarios.