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Case study #1: We’ve saved costs but why are my profits declining?

Team GradAustralia

The first of ten case studies, with questions and answers, to help guide you through your graduate consulting case interview.

Case study examples

Case interviews allow you to demonstrate how you think - your ability to understand a problem, break it down into its requisite parts, analyse them and communicate a solution. In this series, we give you ten case studies to give you an idea of how to approach the case and how to walk through it with your interviewer.

You may want to consider the case question first and think about how you might structure a response before looking at the ‘answer’. Of course, bear in mind there are many ways to answer a case, so this is just one example!

For the purposes of these examples, we will only look at market sizing and business cases.

Case study #1: We’ve saved costs but why are my profits declining?

Question

A major retailer of household products has been experiencing sluggish growth and less than expected profits in the last few years. The CEO has hired you to help her increase the company’s annual growth rate and ultimately its profitability.

The retailer has 11 stores located in shopping malls in metropolitan and suburban areas. Total revenue from the 11 stores has declined, despite major back-end cost savings.

Solution

You need to understand why growth has slowed and profitability has declined despite cost savings. Some questions you may ask include:

  • Do different stores experience variations in revenue?
  • Do they all have the same approach to selling?
  • Is purchasing behaviour of the consumer different in the two areas?
  • Has there been any new competition on the scene? In one area and not the other?

This is a profitability question, so you should be thinking immediately about revenue and cost drivers. However, you have already been told there have been some cost savings, so you should focus on the revenue side, at least to start with.

You may want to focus on the fact that the company has 11 different stores in two different geographical areas. What are the key differences between the two in terms of the consumer, competition and growth?

Let’s assume you begin to dig a little deeper and have the following conversation with the interviewer.

You:  I want to understand store profitability better. Are all stores equally as profitable?

Interviewer: No, some stores are more profitable than others. We see variations throughout.

You: Are there any differences between those stores that are metropolitan vs. suburban?

Interviewer: Yes, actually the suburban stores are more profitable than metropolitan ones.

You: Interesting. Is that because there is more competition in the metropolitan areas?

Interviewer: Not really. The competition is proportionally the same between both areas.

You: What about the stores themselves – do they sell the same products?

Interviewer: Yes, they do. All stores have the same product mix.

You: Ok, given that all stores sell the same product mix but some stores are more profitable than others, this suggests that customers might be behaving differently in each area. Is there a difference in the purchasing behaviour of customers in the suburban areas compared to metropolitan?

Interviewer: Actually, yes. Suburban customers tend to buy more of the major appliances and electronic equipment than the urban consumer.  

You: Ahh, right. Suburban customers, I assume would be more likely to living in houses compared to apartments in the city, correct?

Interviewer: That’s correct.

You: Which means that the metropolitan consumer is more likely to buy smaller furniture and appliances. Is there a difference in profitability between the goods purchased by the suburban and the urban customer?

Interviewer: Yes, major appliances and TVs have a higher profit margin compared to other smaller items.

You: This suggests then that the current product mix is more suited for the suburban customer than the metropolitan one.

Interviewer: Yes, it sounds like it.

You: And so, I would say the stores in the city are not catering to the needs and demographics of its customers – who are less likely to be buying those big-ticket items. In fact, this would also suggest that unnecessary costs are being incurred with bigger items taking up floor space and inventory, resulting in lost revenue.

Interviewer: That sounds right. What would you suggest the retailer do then?

You: We need to better understand our customer, particularly those living in urban areas and differentiate their purchasing behaviour and income levels.

Once we do that, we can better cater to the product mix according to the customer research findings. If stores can’t sustain the low-cost items, then we should consider closing them down.