Newbury Supermarket to Optimize Store Offerings

Case Type: business competition, competitive response; supply chain optimization; operations strategy
Consulting Firm: LEK Consulting first round full time job interview.
Industry Coverage: retail; supermarket.

Case Interview Question #01279: Newbury is a small town in Berkshire, England, which is the administrative headquarters of West Berkshire. Together with the adjoining town of Thatcham, 3 miles (4.8 km) distant, Newbury forms the principal part of an urban area of approximately 70,000 people.

Our client Newbury Mart is a large supermarket with 20 aisles in the town of Newbury, England. They’ve been the local market leader for more than 50 years; however in the past 3 years they have seen growth stall, and a new local supermarket take their market share. Newbury Mart now has only 30% market share and growth is pretty much flat. What’s wrong? How do you help the client fix the problem?

Additional Information: (to be provided only after relevant questions)

* Client’s Costs Structure
– COGS = 60%;
– Maintenance = 9-10%;
– Labor = 15%;
– Marketing / Distribution = 2%

* Competitor growing at 6% a year

* Simplified visual of a store aisle:
– 30 ft. for Bread
– 10 ft. for Hair Gel
– 20 ft. for Frozen Meals
– 20 ft. for Canned Tomatoes, with unit volumes, revenue & profits

Possible Answers:

There are a number of potential issues that the interviewer could be looking for the candidate to analyze here and this is a situation where it is important that you have a good structure to systematically work through the options.

I would be concerned that leaping in and analyzing the margins on shelf space doesn’t necessarily cover off all the issues — it also may not explain why one supermarket is growing and the other is not.

I would approach this case as follows:

First, I would like to understand the differences between our client’s offering and that of our competitors to determine the drivers of our competitors’ growth.

Then, once we understand the factors driving their growth I would like to explore the ways in which our client could modify its strategy to increase its growth rate.

Looking firstly at the differences between our client and our competitors, I would like to know the following:

* What is the relative market share of each of our competitor’s and how has this been growing?

* What is the difference between the products and services we offer and those offered by our competitors?
– Do they offer different categories of products?
– In which categories have their sales been growing?

* In what offer ways are our competitors differentiated from us?
– Have they been opening more stores?
– Are their stores in areas that have a faster growing population?
– Do they target a demographic segment that has been growing?
– Are they growing sales through alternate channels (e.g. online)

Hopefully from asking these questions the candidate would get some information as to the higher margins that competitors are earning by stocking different product ranges and an analysis of the profitability improvements resulting from this change could follow.

If you are giving this case as an interviewer I recommend that you think through prepared answers to the questions set out above to give the case more life. Exactly what answers you give doesn’t matter provided they drive the candidate to the conclusion that margin by product category is an important difference.

Through simple calculations, if you shifted 10 ft. of shelf-space from Bread to higher-margin Hair Gel, you might have higher profits of $30/week/aisle.

* $30/week/aisle * $50 average basket size = $1,500/week/aisle
* $1,500/week/aisle * 20 aisles/store = $30,000/week
* $30,000/week * 50 weeks/year = $1,500,000/year extra profit

We’re talking real money here, from a simple aisle optimization!

Candidate Notes:

Demand elasticity was a significant factor here. I nailed that; but failed to calculate some #s properly.

Actual Outcome of the Case:

New competitor had figured out optimal shelf-space issue by optimizing:

* Elasticity of sales to shelf-space
* Consumers changing demands towards prepared foods
* Competitive offerings.

Conclusion: Our client Newbury Mart had to figure out the same & put into their own cost/reality model to make this work.