Case

DHL Consulting case: Bike Shop

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Difficulty: Beginner | Style: Real Case | Topics: Profitability analysis, Growth strategy

Problem Definition

You have been hired to support the owner of a bike-shop as a business consultant. The bike-shop has suffered a significant revenue decline during the last year, and now the owner would like you to assess the situation and options for the way forward.

They want to know last year’s profit, i.e. how it was affected by the revenue decline, and what the priority actions are to survive the next year. (short term)
In addition they would like to understand the strategic competitive position of the shop better and how to increase revenues again mid- to long-term.


Comments

This case is mostly interviewer-led. The questions should be used to guide the interviewee.

The case is split into three parts:

The first part focuses on understanding the key financials and on calculating the profit development.

The second part is directed towards the possible options for a mid- to long-term strategy.

In the last part the interviewee should give a recommendation and conclusion.


Short Solution

  • The client could position himself as a bike specialist. This could justify higher prices and increase retention. They could also offer increased services, e.g. accessories, a repair shop or training for employees.
  • The client should attract new customers via a marketing campaign and events, e.g. rent-a-bike or guided bike trips.
  • In addition they could decrease cost of sales, e.g. via a purchasing cooperation with other smaller suppliers and focusing on 2-3 core brands exclusively.

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.

The following framework/structure provides an overview of the case:

I. Background

Provide some additional information to help the interviewee understand the situation and the problem.

  • The shop is very local (around for the last 20+ years), focusing on selling bikes (i.e. no repairs)
  • It has 2 FTEs working there + 1 owner.
  • The profit is essential as the owner is living from it.

II. Profit

In order to derive profits it is necessary to evaluate the cost structure:

1. What is the actual cost structure of the bike shop? (no actual numbers yet)

Here the interviewee should come up with the biggest cost elements:

  • Cost of Sales (COS) – Variable Costs
    • i.e. sold bikes to be paid to the suppliers
  • Direct Operating Expenses (DOE) – Fixed Costs
    • Rent, Utilities, Personnel expenses
    • Optional: Insurances, Advertising

2. What is the profit for 2013?

Share Table 1 with a cost overview for 2013 with the interviewee.

Information that can be shared if inquired by the interviewee:

  • The company sold 1,000 bikes in 2013.
  • The price per bike sold was €800.
  • The COS make up 80% of the revenue 2013.

Don’t tell the interviewee that the COS are actually a fixed amount (€640), he/she should come up with that later on by him/herself.

Revenue

= #bikes sold per yr * Price per bike = 1,000 * €800 = €800,000

COS

= Revenue * 80% = €800 * 80% = €640 per bike

= €640 per bike * 1,000 bikes = €640,000 per year

Direct Operating Expenses

= Rent + Personnel expenses + Social Benefits (SB)

= €1,000 /month * 12 months + 2 FTEs * €16 /hr * 8 hrs /day * 220 days /yr * 145% (SB)
= €12,000 + €56,320 + €56,320 * 45%
= €12,000 + €56,320 + €25,344
= €93,664 per year

Profit before taxes

= Revenue – COS – DOE
= €800,000 – €640,000 – €93,664
= €66,336

3. What is the profit for 2014?

Information that can be shared if inquired by the interviewee:

  • The bike sales were 10% lower than in 2013.
  • The price per bike also got reduced by 10% compared to 2013.

Revenue

= #bikes sold per yr * Price per bike

= 1,000 * 90% * €800 * 90% = 900 * €720

= €648,000

COS

= €640 per bike * 900 bikes

= 576,000 per year

The COS are the tricky part as the interviewee has to realise that they are fixed at €640 per bike and NOT relative to the sales price!

Direct Operating Expenses

= Rent + Personnel expenses + Social Benefits (SB)

= €1,000 /month * 12 months + 2 FTEs * €16 /hr * 8 hrs /day * 220 days /yr + 145% (SB)

= €12,000 + €56,320 + €56,320 * 45%

= €12,000 + €56,320 + €25,344

= €93,664 per year

Profit before taxes

= Revenue – COS – DOE

= €648,000 – €576,000 – €93,664

= - €21,664

4. What can be respective short-term priorities?

Possible answers:

  • Reduce to 1 FTE at least to decrease DOEs and make a slight profit (owner is living from profit)
  • Increase prices / stop discounts: less volume does not impact profitability as much as less value (COS only for sold bikes)

III. Strategy

5. What can be a sustainable strategy on a long-term basis?

Information that can be shared if inquired by the interviewee:

Competitors

  • A new big bike store opened in a city nearby:
    • shopping center like
    • high volumes / low prices / low service
  • No relevant competition of small comparable bike shops within own city district

Customers

  • Increasingly looking for “tour-bikes” instead of family “city-bikes”
  • Consumer spend affected by economic downturn

Other trends

  • Go Green
  • Congestion of high ways

Possible options:

  • The position of the bike shop in the volume segment is challenged by a new competitor in a close city.
  • The tour segment shows growth opportunities due to the current trends.

IV. Conclusion

6. What is your conclusion?

The interviewee should suggest our client to enter a new market.

  • The client could position himself as a bike specialist. This could justify higher prices and increase retention. They could also offer increased services, e.g. accessories, a repair shop or training for employees.
  • The client should attract new customers via a marketing campaign and events, e.g. rent-a-bike or guided bike trips.
  • In addition they could decrease cost of sales, e.g. via a purchasing cooperation with other smaller suppliers and focusing on 2-3 core brands exclusively.

Difficult Questions

Is quitting the shop an option for the owner?


Possible answers:

  • After 20 years having the shop, the owner is ~50 years.
  • Giving up the shop would result in the need to consider possible other occupations and means for living (pension, private funds).
  • This could be difficult, but is very much depending on the private situation of the owner.

How could a more aggressive expansion strategy to beat the new competitor look like?

Possible answer:

  • Key levers for expansion could be
    • Size of the location
    • Number of locations
    • Service offering
    • Differentiation per location
  • It would require management attention and additional investment capital.

More questions and risks to be added by you, interviewer!

At the end of the case, you will have the opportunity to suggest challenging questions about this case (to be asked for instance if the next interviewees solve the case very fast).

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Case exhibits


Cost overview