Applebee’s Restaurant to Focus on Family Dinner Customers

Case Type: business competition; business turnaround.
Consulting Firm: OC&C Strategy Consultants first round full time job interview.
Industry Coverage: restaurant & food service.

Case Interview Question #00748: Your client is the owner of an Applebee’s franchise restaurant in the small town of Shelton, Connecticut (population ~40,000 as of 2010 census). The Applebee’s concept focuses on casual dining, with mainstream American dishes such as sandwiches, burgers, salads, shrimp, chicken, and pasta.

Recently, the Shelton Applebee’s restaurant’s revenues are trending downward but costs are stable. Therefore, profits are shrinking quickly. What are your thoughts on:

(1) the cause of the issue,
(2) how to help turn around the business.

Additional Information:

There are no changes in customer tastes. The client’s menu, food quality, service and suppliers are all the same.

The main cause in the sales drop is the opening of a new competitor FinerFoods Restaurant that just opened across the street. FinerFoods Restaurant is a fast food “plus” style restaurant that serves not only traditional fast food (sandwiches, burgers), but also a broader menu (chicken, pasta, burritos) with table clothes and waiter service. FinerFoods Restaurant has a family-friendly atmosphere.

(Do not give the below information unless candidate asks about the Applebee restaurant’s customer segments) There are two main customer segments served by Shelton Applebee’s:

• Business customers for lunch (60% of your clientele)
• Families for dinner (40% of your clientele)

Shelton Applebee’s is losing both its business lunch and family dinner segment to the new competition.

Possible Answer:

Interviewer: Which customer segment is more important and more profitable between the business and family segments?

By reviewing the profitability of Shelton Applebee’s by customer:

• Business Lunch garners an average profit of $8 per customer
• The overall average profit is $10 per customer

Interviewer: What is the average profit for the Family Dinner segment?

Possible Answer:

The candidate should ask for the following information to back solve for a weighted average:

• Lunch is 60% of the customer segment
• Dinner is 40% of the customer segment

Once the candidate asks for the number of customers, she/he can use a weighted average formula to find the profitability per customer for the dinner segment.

0.60 * $8 + 0.40 * $X = $10 overall average profit per customer

X = profitability for the Dinner segment is $13 per customer, which is more profitable than the lunch segment for Shelton Applebee. It would likely recoup the loss of this customer segment from FinerFoods.

Interviewer: If the total average profit margin is 50%, what is the overall average revenue per customer?

Possible Answer:

$10 / 0.50 = $20 revenue per customer (customers really like Applebee’s)

Interviewer: FinerFoods Restaurant’s revenues are 20% higher and costs are 10% higher than that of Shelton Applebee’s overall average customer. What is the average profit per customer at FinerFoods Restaurant?

Possible Answer:

Revenues: (1 + 20%) * $20 = $24
Costs: (1 + 10%) * $10 = $11 (Note: The costs for Shelton Applebee is determined by revenue less)
Shelton Applebee’s Gross margin from above: $20 – $10 = $10
FinerFoods Restaurant’s Profit = $24 – $11 = $13
Insight: FinerFoods has a more profitable business at $13 vs. Shelton Applebee’s $10 per average customer.

Interviewer: How would Shelton Applebee’s determine why their customers are leaving?

Possible Answers:

• Create customer satisfaction survey — be sure to account for biases by interviewing an equal number of regular vs. one-time customers.
• Ask corporate headquarters to provide information on performance of other Applebee’s restaurants due to effects of a nearby FinerFoods (or similar competitor) opening to determine if customer defections are widespread.
• Industry publications.

Interviewer: You now have a chance to create some customer survey questions. You can ask any customer but state whom the survey is tailored toward and state your most important question. (Provide opportunity for the candidate to state various survey audiences and question possibilities).

Wait until after candidate finishes the exercise then state the following:

Interviewer: We have some additional survey data collected and here are the results:

First survey audience consists of Shelton Applebee’s defecting family dinner customer:

Survey Question: What are important factors in your purchase decisions?

Survey Answer: Family dinner customers value price and service. They are price sensitive and like the perception of FinerFoods as providing value. FinerFoods also has waiter service so the parents do not need to clean up after their children’s meals, service is viewed as quick. The prices are comparable to Shelton Applebee’s, although 20% higher.

Second survey audience consists of Shelton Applebee’s defecting business lunch customer:

Survey Question: What are important factors in your purchase decisions?

Survey Answer: Business lunch customers value speed and convenience. They perceive Shelton Applebee’s as providing relatively slower service and less convenience than FinerFoods since FinerFoods has waiter service. While the time spent at with waiter service at FinerFoods and the time spent waiting in line at Shelton Applebee’s is about the same, the perception is that FinerFoods is faster service.

Interviewer: Which customer segment would you focus on based on your survey information and recommend solutions to help your client Shelton Applebee’s restaurant. You cannot hire any additional service staff nor change their menu offerings (per corporate policy).

Possible Answer:

Focus on the more profitable family dinner customer (at the higher $13/profit per customer vs. $8 business lunch customer) and one possible solution includes:

Providing entertainment for children at Shelton Applebee’s such as a playground, a clown, or offer promotions on birthday or other special celebrations to make Shelton Applebee’s a destination of choice for family events. Shelton Applebee’s can also reduce the amount of packaging so there is less to clean up for the family. The children may drive the decision of parents to frequent Shelton Applebee’s if they view the restaurant as more attractive and fun.

Recommended Conclusion

Interviewer: Please summarize your findings (cause of the sales deterioration, and recommended solutions to address the problem faced by your client Shelton Applebee’s franchise).