Expert case by

Benjamin

McKinsey Round 1: Homeware Heaven

Case information

Difficulty: Advanced

Interviewer-led

4.6

< 100 Ratings

Times solved: 1.5k

Growth strategy Profitability analysis

Case Prompt:

Our client is Homeware Heaven. They are a homeware and appliance retailer that sells items such as kitchen appliances (fridges, ovens), kitchenware, lighting, bedding and bath products, home decor etc. They have 100 stores in the top 20 cities in the US. Their stores are large stand-alone stores located outside of the city centre. Over the last 3 years, business has not been going well for our client. Their revenue has been declining year over year and they have had fewer unique shoppers in their stores. They have hired McKinsey to help them turnaround the situation

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Sample Structure

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Question 2: How can Homeware Heaven increase their revenue by specialized events?

Let's take it that indeed the store locations being far away from the city is causing customers to visit the stores less frequently, especially with the presence of online retailers now. The client has heard that a recent trend in retailers is to launch specialized events in their store locations to boost sales and wonder if this can be a potential solution

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Question 3: Which type of event should Homeware Heaven launch?

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The suggested most efficient way of thinking through these tables is as follows:

Figure out the most attractive segment based on size and penetration rate

The most attractive segment is Segment D: Families with Young Children
- This segment has the largest customer base (340K) and low store visit penetration (35%). This means that 221K customers in this segment have not visited the store in the last 3 months
The next most attractive segment would be Segment B: First Home Couples
- 2nd largest customer base (260K) and still relatively under penetrated (45%). 143K customers in this segment have not visited the store in the last 3 months
The rest of the segments are less attractive
- Segment A DIY & Renovation Hobbyists -> large segment size but already highly penetrated
- Segment C Trade Pros & Designers -> very small, not worth focusing on
- Segment E Eco Driven Shoppers -> low penetration but size of segment is 2nd smallest

Identify events in the List of Potential Events that are relevant for the most attractive customer segments

Events that are potentially relevant for Segment D
- Kid's Craft Corner -> most directly relevant
- Easter Egg-stravaganza -> most directly relevant
- Cooking Masterclass
Events that are potentially relevant for Segment B
- Cooking Masterclass
- DIY Workshops

Compare relevant potential events and shortlist the most attractive one

Kid's Craft Corner seems to be the most attractive for Segment D
- Requirements are less operationally complex versus Easter event
  - Eastern event requires planning and adjusting the whole-store to make sure the hiding spots are safe for kids and there are no risk of safety issues as kids are running around the location
  - Crowd-flow management signals additional complexity of footfall and additional manpower
- Recurring event encourages higher frequency and time in store vs Easter event and Cooking Masterclass

A strong candidate will also note that this information presented is still relatively qualitative and is just a hypothesis, and further analysis and information would be needed to have a better answer on which is the best event, e.g.

Average purchase value for each customer segment
For each event, we need to understand the potential incremental sales and also costs to implement

Note for Interviewer

If asked, clarify the following:

First-Home Couples
- These are couples who have just purchased their first home. Assume that these couples do not yet have children
- Each customer refers to a unique 'couple', i.e. there are 260K unique couples
Families with Young Children
- Each "Family" refers to a unique parent 'couple' and this number does not include children.
- i.e. there are 340K unique families (parents)
Avg. store-visit penetration -> clarified already in the footnote under the table

This is a suggested solution, if the candidate proposes another reasoning and justifies it well and is reasonable you may accept it as well

Question 4: How much additional profit can Homeware Heaven expect from the following event schedule?

Our client decides to explore the option of the Cooking Masterclass as they believe it has potential with some tweaks. They share the following assumptions with you.

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Setup high level formula

Total Additional Profit = Additional Profit from Incremental Spend - Additional Cost incurred (from event)

A good candidate will breakdown Additional Profit from Incremental Spend further, therefore the formula should look like:

Total Additional Profit = [Additional Revenue * average Gross Profit Margin] - Additional cost incurred (from event)

Note that the candidate may also choose to frame or calculate this formula differently in the following ways:

1. [Addition Profit from Incremental Spend] is calculated by subtracting the cost of goods sold - this is also perfectly acceptable, but direct them to calculate on GPM instead

2. Framing the Costs together, i.e. Total Cost = Cost of events + Cost of Goods Sold

Revenue: Setup high level formula

Additional Revenue Per Year = [# of unique customers per year per store ] * [average incremental spend per unique customer per year] * [# of stores]

Revenue: Solve for # of unique customers per store

We have to realize that the 100 customers that are attending each class is a mix of customers who are already customers of Homeware Heaven (existing customers), and new customers who are attracted to come down to the store because of this class.

Because each existing customer attends the classes on average 3 times in a year, we cannot simply take 100 (# of customers per class) and multiply it by 12 months and say that there are 1200 unique customers per store per year. We have to disaggregate the 1200 and find out how many unique customers there are from NEW customers and from EXISTING customers.

Therefore:

# of NEW unique customers per year per store = 25% * 1200 = 300

# of EXISTING unique customers per year per store = [1200-300] / 3 = 300

# of unique customers per year per store = 300 (new) + 300 (old) = 600

Revenue: Solve for revenue per store and total additional revenue (across all stores)

Revenue per year per store = 600 * $350 = $210K

Total additional revenue per year for 100 stores = $210K * 100 = $21M

Solve for Additional Profit from Incremental Spend

As a recap, Additional Profit from Incremental Spend = [Additional Revenue * average Gross Profit Margin]

$21M * 43% = ~$9M

Cost: Setup high level cost formula

Total cost per year = [Food cost per store] + [Equipment cost per store] + [Chef Cost per store] * [100 stores]

Cost Incurred: Solve for costs

Food cost per store = $25 * 100 customers * 12 classes = $30K

Equipment cost per store = $25 * 100 customers = $2500

Chef cost per store = $1250 * 2 hours * 12 classes = $30K

Total cost per year = [$30K + $2.5K + $30K] * 100 = $6.25M

Solve for Total Additional profit

Total Additional Profit = Additional Profit from Incremental Spend - Additional Cost incurred (from event)

Total Additional Profit = $9M - $6.25M = $2.75M

A strong candidate may ask to refer back to the table (if they do not remember the details of it) and should note the implications of running this monthly instead of half annually. Initially the plan was to hold this class once every half a year. But given it is run monthly now, will the client have to setup and take down the temporary kitchen build each time? Probably better to find a dedicated space that they can run this smoothly every month.

Further implications would be to ensure that this monthly class does not have an impact on customer experience for other customers (e.g. cooking smells, smoke)

Note for Interviewer

There is more than 1 way of structuring and solving this problem. E.g. candidates can also choose to calculate the profit per store and then multiply that by total # of stores.

As long as it is logical and gets to the correct final number it is fine.

Candidates that struggle here often struggle with the concept of unique customers. Because the incremental spend data is given on the basis of a unique customer, this means that we need to account for "repeat" attendances given existing customers will attend a class more than once in a year. If a candidate is struggling here, remind them to think about whether or not 100 customers per class/session means 100 unique customers.

In addition, as mentioned in the earlier note, candidates may often forget to consider the Cost of Goods Sold / Gross Profit Margin. They will only take the revenue and subtract the event costs, which will give a 'event level profitability' -> this is sometimes used in marketing to judge whether an activation or event makes sense, but for the purpose of this advanced case push the candidate to consider the need to account for the fact that the products that customers are spending more on also costs money to purchase in the first place.

Question 5: We are going to meet the client now. Can you summarize the findings for our client?

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Question 3 asks for additional profit but solution just provides revenue, yea?

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McKinsey Round 1: Homeware Heaven i

Case Prompt:

Sample Structure

Question 2: How can Homeware Heaven increase their revenue by specialized events?

Question 3: Which type of event should Homeware Heaven launch?

Question 4: How much additional profit can Homeware Heaven expect from the following event schedule?

Question 5: We are going to meet the client now. Can you summarize the findings for our client?

McKinsey Round 1: Homeware Heaven