Our client is an established food wholesaler that is trying to increase profitability
• The situation is that our client is a wholesaler of a variety of different food items.
• The client has a steady stream of business and is already profitable, but is looking to unlock more profitability from its existing lines of business.
• The question is: how can they can best increase profitability from their existing businesses?
The client is a leader in an established, mature industry
- Industry Characteristics/Market Economics
- Growing at the rate of GDP
- Significant barriers to entry
- no new competitors have entered the market in the last several years
- Client Characteristics
- Client is currently the industry market share leader
- Margins are good, but depend on product line
- Offers a range of high-end and low-end food products
- Consumers are high and low-end hotels and restaurants
- Competitive Dynamics
- The dynamics (duopoly vs. fragmented industry) depend on the region, but there are key competitors in each region
The client’s position in the year 2000 was that its sales came from Asia, Europe, and North America
1. What observations can be made from this graph?
2. What would you expect to happen in three years?
The client’s position in the year 2000 is now shown side -by-side with its 2003 position 1. What has happened in the past three years? Why?
2. What are the implications for price-cost margins?
The client is trying to figure out which exogenous factor is driving the gross margins of its individual products
If we have a graph with gross margin on the y-axis, what would go on the x-axis?
The client now wants to know how demand elasticity will affect the gross margins of its individual products
What should the graph look like?
It turns out that demand elasticity and gross margin do not have the inverse linear relationship that we would expect
- What observations can you make from this graph?
- What should the clients new strategy be in each of the four graph quadrants?
Food Wholesaling Case – Solutions and De-Brief
The case primarily tests an understanding of microeconomic concepts. As such, it is a little bit more qualitative and less quantitative than the average case. However, it is entirely possible that you will see a case such as this one at some point during your interviews.
Solutions/How to Give the Case
The person giving this case needs to give the interviewee the first two slides as background before asking him or her any questions. At slide #3, the prospect is presented with a chart and asked to interpret it by answering two questions. The key insights on question #1 are that the client is the leader in a two-company oligopoly in North America, its biggest market. It is in a highly competitive situation in Europe, and an even more competitive position in Asia where it has two competitors that are only slightly smaller, and a third competitor with a decent market share as well. For question #2, the prospect should ideally identify three major points: 1) given the economies of scale and distribution that are likely prevalent in this business, we expect them to use these advantages and the “experience curve” to increase their market share lead in North America; 2) conversely, we would expect them to lose market share in Asia and Europe during this time, for the same reasons; and 3) given the high growth rate in Asia relative to the other two continents, we would expect the Asian share of our client’s overall business mix to increase. (Note: The candidate can infer from the information presented that the market in Asia is growing, since our client’s market share in Asia is declining, but at the same time Asian sales are accounting for more and more of its total. This means either that the Asian market is growing or that our client’s sales are drastically declining. The former explanation seems to be the more logical of the two.)
If the candidate produces these insights, slide #4 should confirm their hypotheses. If not, it will be necessary to tease these insights from him or her, or just say why if (s)he is really stuck. As for previous case, price competition should be softer in the U.S. than in Asia due to our client’s commanding market share and the fact that there are fewer competitors. For bonus points, the candidate could also mention that the U.S. market may be more fertile ground for price leadership and that it may be easier to track competitor moves.
Slide #5 presents the candidate with a graph and asks him or her to label the x-axis. The correct answer here is demand elasticity. That answer is revealed on slide #6 (page 54), which in turn asks the candidate to draw the most logical line on the graph, which is a downward-sloping straight line from the upper left-hand corner to the lower right-hand corner. Finally, at slide #7, the actual graph appears and is different than what we expected.
The observation from the graph is that there is no apparent effect at all from demand elasticity on gross margins. This leads us to the conclusion that profits will increase if we change our pricing strategies in Quadrants II and IV. We should leave pricing alone in Quadrants I and III, since points in those areas are behaving in the way that we would expect them to. In Quadrant II, demand elasticity is high, yet we are still earning a high margin, indicating that there is room to cut prices here and still increase profits. In Quadrant IV, demand elasticity is low, yet margins are also low, meaning that we can raise prices to capture additional consumer surplus. These insights regarding elasticity and profit-improving price changes will occur to the candidate easily if (s)he invests some effort in understanding price elasticity of demand and its relationship to changes in revenues as price is reduced 1%. These are the main concluding insights of this case.