C&S Wholesale Grocers Trying to Increase Profit Margin

Case Type: improve profitability; business competition, competitive benchmarking
Consulting Firm: Ernst & Young (EY) Advisory first round job interview.
Industry Coverage: food & beverages.

Case Interview Question #00401: Your client C&S Wholesale Grocers is a large wholesale distributor of food and grocery store items. With its headquarters in Keene, New Hampshire, C&S is the twelfth largest privately held company in the United States, as listed in 2008 by Forbes. It provides more than 95,000 stock-keeping units (SKUs) food and nonfood items to 4,600 corporate customers, including produce, meat, dairy products, delicatessen products, fresh and frozen bakery items, health and beauty aids, candy, and tobacco.

Recently, however, the CEO of C&S Wholesale Grocers is thinking of exiting the business. He is basing his decision on the company’s profitability – C&S has a 2.5% profit margin, while the major competitor U.S. Food Service has a 4% margin. Is the client C&S in a 2.5% business or a 4% business? Are there any ways to improve client’s profit margin to 4%?

Additional Information: (to be provided to you if requested)

• There are 4 major players in the wholesale food distribution industry, our client C&S is currently the #2 player. The 4 players are:
  • #1 U.S. Food Service with $6B in revenue, 4% margin
  • #2 Client C&S with $6B in revenue, 2.5% margin
  • #3 $5B in revenue, 2.4% margin
  • #4 $5B in revenue, 2.2% margin
• The client C&S has a reputation for good operations: Its fleet is well maintained, it has excellent routing, and almost always ships full trucks.
• The #1 competitor U.S. Food Service has a similar mix of customers, also ships full trucks, and has fewer trucks than the client.
• Our client’s warehouse is located across the street from U.S. Food Service’s warehouse.
• Drivers for all firms are union employees.
• Food makes up 70% of costs, while distribution makes up 25% of costs.
• Customers vary from white tablecloth restaurants to low end diners, and the mix is the same across all four firms.
• The #1 competitor U.S. Food Service’s customers are physically closer together.

Possible Answer:

The candidate should deduce that the food distribution is a near perfectly competitive industry, where prices are set by the market and margins are extremely low. Therefore, if revenue is the same for #1 and #2, then price and quantity are almost the same for both firms, too.

The candidate should recognize that food purchased by the distributors is a commodity, and that food costs for all competitors are essentially the same. They should focus on the distribution costs, and not the food costs.

The candidate should ultimately conclude that if sales are the same for both #1 and #2 firms, operations are similar, number of customers are the same, and the #1 firm U.S. Food Service has fewer trucks, then the delivery time must be shorter for #1 and the physical distance between #1 firm’s customers is shorter. Thus, the client is in a 2.5% business, unless they can steal customers from #1 U.S. Food Service, which is unlikely in an industry of this nature.