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Case

Grocery Wholesaler

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Difficulty: Intermediate | Style: Interviewer-led (McKinsey style) | Topics: Profitability analysis, Pricing, Market analysis

Problem Definition

Our client Fresh Groceries is a prominent wholesale food company that is trying to increase their profitability.

The client currently sells a variety of food items and is collecting a significant amount of business and generating sufficient profit. However, the company is trying to gain more profitability from its existing lines of business.

Comments

This is an interviewer-led case; therefore the interviewer should lead the candidate through the case.

Short Solution

Short Solution:

The client should take part in a variety of pricing strategies, depending on the relationship between gross margin and elasticity that is different in each market.

Specifically, the client should undertake the following changes:

  • Decrease prices in Quadrant II
  • Increase prices in Quadrant IV
  • Continue the current pricing strategies in Quadrants I and III

Detailed Solution

Paragraphs highlighted in green indicate diagrams or tables that can be shared in the "Case exhibits" section

Paragraphs highlighted in blue can be verbally communicated to the interviewee.

Paragraphs highlighted in orange indicate hints for you how to guide the interviewee through the case.

I. Background

At this point the interviewee should understand the company's problem and thus the interviewer should share some basic background information.

Market Economics:

  • The market that the client is operating in is growing at the same rate as GDP, and high barriers to entry are present.

Client Characteristics:

  • The client is the market leader, offering a range of high and low-end food products. Its main consumers consist of hotels and restaurants.

Competition:

  • In each region, the client faces some competition, with most areas having a duopoly or fragmented industry.

II. Analysis

Current business situation

Diagram 1 should be shared with the interviewee once the case has been introduced.

1. What assessments/assumptions can you make from the diagram?

From Diagram 1, the interviewee should make assessments about the following topics:

  • Competitive dynamics
  • Market position
  • Causes of any changes from 2012-2015

2. What are three main points are important to mention?

Once the qualitative assessments have been made, the interviewee should identify these main points:

  • The business likely has significant economies of scale and distribution, explaining their increases in market share in North America.
  • For the same reason, it also makes sense that market share in Asia and Europe fell between 2012 and 2015.
  • The decrease in the overall market share in Asia corresponds with the fact that Asia is mostly emerging economies with high growth rates.

Key insights:

  • Price competition should be less severe in North America than in Asia, due to already high market share.
  • Due to the company’s position as a market leader in North America, it could become a price leader.

Bonus points for excellent case response

  • An interviewee with excellent performance would identify what the drivers are for changing the market dynamics for each continent and recommend a potential strategy (i.e. Price leadership in North America).
  • Additionally, an interviewee with excellent performance will immediately identify the relationship between gross margin/elasticity and recommend strategies from the situation in Diagram 3.


Gross Margins:

Diagram 2 should be shared with the interviewee once the issues in Diagram 1 have been solved.

3. Please indicate what should be on the x-axis.

The interviewee should identify that the missing label on the x-axis is price elasticity.

4. Please illustrate the relationship between gross margin and what was concluded the x-margin was. (Refer to previous question).

They should then be asked to illustrate what the relationship between gross margin and price elasticity is, and draw a downward-sloping line from the top left corner.

Key Insights:

  • It is expected that there is a negative linear relationship between gross margin and price elasticity.

Elasticity

Diagram 3 should be shared with the interviewee once the issues in Diagram 2 have been solved.

5. What observations can you make from the diagram?

From Diagram 3, the interviewee should make the following observations:

  • In reality, demand elasticity and gross margin do not have the negative linear relationship that was predicted in Diagram 2.
  • Quadrants I and III are behaving in line with expectations, so nothing needs to be done.
  • In Quadrant II, demand is very elastic, but high profit margins also exist – therefore, cutting prices and thus increasing profits is an option.
  • In Quadrant IV, both elasticity and margins are low, suggesting that prices can be raised to gain additional contribution margin.

Key Insights:

  • There are three main strategies that the client can follow to further increase profitability in each region.
  • While Quadrants I and III are working well, changes need to be undertaken in quadrants II and IV.

III. Recommendation

6. What conclusions have you made for Fresh Groceries Wholesale?

The interviewee should come to the following conclusions:

  • Decrease prices in Quadrant II
  • Increase prices in Quadrant IV
  • Continue the current pricing strategies in Quadrants I and III

Difficult Questions

More questions to be added by you, interviewer!

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Case exhibits

1. What assessments/assumptions can you make from the diagram?

2. What three main points are important to mention?

3. Please indicate what should be on the x-axis.

4. Please illustrate the relationship between gross margin and what was concluded the x-margin. (Refer to previous question).

5. What observations can you make from the diagram?

6. What conclusions have you made for Fresh Groceries Wholesale?