## Problem Definition

How many **gas** **stations** are there in **Paris?** Suppose a friend of yours wants to open a gas station in Paris. What aspects should he consider?

## Comments

Since this is an interviewer-led case, the interviewer should guide the candidate through the interview.

There are several ways to estimate the number of gas stations. Their feasibility may be influenced by the amount of information the interviewer decides to give the interviewee. (In this case, there is not much information.)

Generally, an estimation method should **use values** that can be **easily** **estimated** and sanity-checked (verified using another approach).

## Short Solution (Expand)

## Detailed Solution

Suggested case structure:

### 1. Strategies

Here, the interviewee should come up with **two possible methods** to estimate the number of gas stations in Paris.

#### Suggested methods:

- Estimate from the
**supply standpoint** - Estimate from the
**demand standpoint**

**Information that can be shared if inquired:**

**Supply:**

**This is the more direct method. We can estimate the number of gas stations in Paris by estimating the number of gas stations in a big city. **

If we assume that there is an average of one gas station per block in Paris (we assume that a block has an area of 1 km²), we can use Paris’ total surface area to estimate the number of gas stations in Paris.

**Demand:**

**This strategy requires us to estimate the demand for gas in Paris. The demand should be proportional to the number of vehicles in the city. The number of vehicles in the city should be proportional to the number of inhabitants in the city.**

After calculating the total demand for gas in Paris, we need to **estimate** the **demand** that each **gas station** can serve. By dividing total demand for gas by the demand that each gas station can serve, we can estimate the number of gas stations in Paris.

### 2. Selection

The **first approach** is very **inaccurate** because the population density of a block can vary significantly. This could cause the number of gas stations per block to vary.

The **second strategy** better reflects **reality** (gas stations are built as demand increases). Thus, we will **use** the **second strategy** to estimate the number of gas stations.

### 3. Calculation

**Table 1**(short

**overview**) and

**Diagram 2**with the

**calculation tree**if inquired by the interviewee.

First, we will calculate the **total daily demand** for gas in Paris (left side of the tree). There are about **10 million people** living in Paris.

Since people **below **the age of **18** do **not own cars** and a lot of people use public transportation in Paris, we can estimate that there is **1 car** for **every 5 people**.

There are also **commercial vehicles** such as **trucks** and **company** **cars**. (For simplicity’s sake, these are not shown in Diagram 2.) Let’s say that there are **4 times more private vehicles** than **commercial** vehicles.

In total, there **are 2.5 million vehicles**.

**20%**(0.5m/2.5m) of the total vehicles are**commercial vehicles**.**80%**(2m/2.5m) of the total vehicles are**private vehicles**.

To estimate the **consumption** per **vehicle**, we assume that cars have **tanks of 50 liters**. The tanks must be **replenished** every **10 days**. Thus, **each vehicle** consumes **5 liters** of gas every day.

Since commercial vehicles are on the road **more frequently**, they consume up to **5 times more gas** than private vehicles.

We can **calculate** a **weighted average** of daily gas consumption per vehicle.

Thus, the **demand** for gas in Paris every day is **22.5 m liters**.

Now, we can estimate the right side of the tree.

Let us assume that an average gas station has about **5 pumps**. Each pump serves about 12 cars per hour during peak hours and about **5 cars per hour** during **off-peak hours**.

If we assume that a **gas station** is **open** for **10 hours per** **day**, 4 of which are peak hours, each pump **serves 78 vehicles every day** (4 * 12 + 6 * 5).

Thus, each **gas station** serves **390 vehicles every** **day**.

**!**

__400__Assume that every time a vehicle visits a gas station, normal vehicles buy about 50 liters while commercial vehicles (some of them are trucks) buy about 100 liters.

This gives us an **average** of **60 liters** bought **per vehicle**.

**Every day**, **each gas station** supplies **24,000 liters**.

This gives us about 938 gas stations in Paris.

### 4. Part 2

**Suppose your friend wants to open a gas station in Paris. What aspects should he consider?**

A good response to this question will consider both the **attractiveness** of the general **industry** and the **proposed location** of the gas station (Paris):

- What are a gas station’s typical profit
**margins**?__Hypothesis:__Profit margins are generally low due to fierce competition among gas stations. - Why is
**competition**among gas stations so**fierce**?__Hypothesis:__Gas is a**commodity**. In big cities such as Paris, it is also a**common good**. - What is the
**bargaining****power**of**suppliers**?__Hypothesis:__Since the suppliers are massive multinational oil companies, their bargaining power is**high**. - What is the
**bargaining****power**of**customers**?__Hypothesis:__**Low**because they cannot bargain down the price of gas. However, they can easily drive to a different gas station. - Are there
**substitutes**in sight?__Hypothesis:__**Minor**ones such as electricity for electric cars. However, given the current oil industry, this is a minor problem.

#### Key insights

This is a **difficult** industry to **enter**.

Your friend should **only** go ahead with this idea if there are **other** **favorable conditions** such as:

- A
**location**with**big**market**growth** - A
**location**with**little**local**competition** **Other sources**of**income**(e.g.: a small market at the gas station)

## Difficult Questions

### What other sources of income could you think of for a gas station in a big city?

#### Possible answer:

**Bundle products** like:

- Car-wash discount for clients who buy more than 50 liters
- A small convenience shop which sells food and pharmaceutical items.
- Maintenance services for cars such as oil changes and brake maintenance.

If the **interviewee** **solves** the case very **quickly**, you can come up with **more challenging questions** to ask them.