Wells Ice Cream Profits Down 20 Percent

Case Type: improve profitability.
Business Concepts Tested: Cost analysis; Competitive landscape; Creativity; Mental math.
Consulting Firm: KPMG Advisory first round full time job interview.
Industry Coverage: food & beverage; retail.
Quantitative Difficulty: Very Easy; Qualitative Difficulty: Medium; Overall Difficulty: Medium

Case Interview Question #01384: Our client Wells Enterprises, Inc. is a mid-sized ice cream store chain in the United States southeast region, based in Orlando, Florida. The chain sells the popular Blue Bunny ice cream. In addition to the Blue Bunny brand, Wells also sells 2nd St. Creamery, Bomb Pop and several private label brands.

You have been working with the VP of Sales & Marketing of Wells Enterprises to figure out why their profitability is down 20% in the last year. She has hired your consulting firm to find out why this is happening and how to fix it. What would you recommend they do?

Additional Information:

This profitability case is a mix of brainstorming with lighter quantitative analysis (mostly to identify glaring trends). The interviewer asked additional qualitative questions along the way (i.e. why do you think that is? Why is that number high?) and also acknowledged that the case was relatively vague.

Possible Answers:

1. Suggested Framework

a. Guidance for Interviewer

This case prompt is intentionally vague and the candidate should ask clarifying questions to get more information upfront to complete the framework.

This is a profitability case, but it is also important for the interviewer to identify that a root cause of the issue is a new competitor with an innovative new business model, i.e. Uber-like delivery of ice cream.

b. Additional Information if Asked

• The client’s profitability has decreased by 20% over the last year, but costs have remained flat.
• There are three main competitors in the market. All of them have experienced similar declines in profitability and market share in the last 5 years.
• This is because there is a new ice cream company in town with similarly priced ice-cream products but a new business model. They do not have retail locations, but instead partner with a ride-sharing service to distribute their product. The customer pays an extra $1 delivery fee per product to use the service. The extra $1 delivery fee goes to the ride-sharing partner but the interviewer should ask the candidate how they think it is split.

c. Sample Framework

(1) Profitability

• Profit = Revenue – Costs
• Revenue = # of units sold * price per unit
• Costs = Fixed Costs + Variable costs per unit

(2) Ice Cream Industry

• Competitive Landscape
• Customer Preferences
• Market Trends

(3) Internal Capabilities

• Distribution & Supply Networks
• Sales & Marketing
• Competitive Advantage
• Product Development

(4) Ways to Increase Profitability

• Introduce a new product
• Increase Sales & Marketing efforts
• Expand new distribution/supply channels
• Grow via a partnership (M&A, JV, Outsource)
• Cost cutting initiatives

2. Detailed Analysis

a. Areas for Analysis

Market

• There are three main competitors (ice cream chain stores) in the market and all of them have experienced similar declines in market share over the last year.

• There is a new ice cream company in town with similar prices/product but a new business model. They do not have retail locations but instead partner with a ride-sharing service to distribute their product. The customer pays an additional $1/pint for the delivery fee that goes directly to the ride sharing partner.

Company

• The client Wells is a major ice cream retailer in the Southeast region that purchases their ice cream from a distributor and sells pints at their retail store locations.
• They only sell pre-packaged pints (i.e. they are not like a Baskin Robbins that scoops ice cream cones/cups in the store).

Revenues

• Profitability has been down by 20% in the last year in same store sales.
• On average, each store sells 2,000 pints/month at a price of $6.25 each.

Costs

• Costs have remained flat
• Variable Costs: $1.45 / pint
• On average, fixed costs per store are:
– $5,000/month in labor
– $2,000/month in rent
– $1,000/month in utilities
– $1,500/month (other, including insurance and security)

Question #1. Calculate the average monthly profit for each store.

Solution:

Contribution Margin (CM): $6.25 – $1.45 = $4.80 per pint
Monthly Revenue per Store: $4.80 per pint * 2,000 pints sold = $9,600 revenue
Monthly profit = $9,600 – $9,500 in fixed costs = $100/month (1.04% profit margin)

The candidate should proactively mention that this is a very low figure. If not, prompt them on their thoughts to assess business judgment. Bonus if they calculate profit margin % and use it in their argument.

Question #2. How can the client increase those margins?

Solution:

• Fixed costs are extremely high, so look at ways to cut costs.
– The candidate should notice that labor is almost 50% of costs – how can the client lower this? By reducing hours, staffing less people in the stores, hire lower-skilled labor at lower wages, etc.

• Lower the price to increase volume
– However, do this if the client can cut costs first because the current margin is so small.

• Look at value-add opportunities and increase the price
– Can the client bundle with other items or add any other features to increase consumer’s willingness to pay (WTP): e.g. customizable pints – ordered online, package in the distribution center, pickup in store?

Question #3. The new ride-sharing ice cream competitor charges $6.25 per pint but also adds a $1 delivery fee. They are considerably more profitable than our client Wells Enterprises. Why do you think that is?

Solution:

The candidate should hypothesize that the competitor has a significant cost advantage (as the products are similar). Both companies charge the same price for a pint of ice cream so the difference comes down to this hypothesis.

The candidate should highlight the need to compare the cost structure between the client and the new competitor.

• Our client Wells Enterprises has very high fixed costs (rent, labor, etc.) because they operate out of retail locations without much value-added services.

• Competitor has lower fixed costs because they do not have retail locations and only sell their ice cream via the ride sharing service. Potential costs they might have are:
– Distribution/transport
– Inventory management system
– Rent and operating costs on their warehouse
– Fees associated with the ride-sharing service partnership

Note: The $1 delivery fee is given 100% to the ride sharing partner (to incent the partnership), but the interviewer should ask the candidate for their opinion first to see how they respond before explaining that the $1 is to incent the ride sharing partner.

3. Conclusion & Recommendation

Recommendation

• In order to compete with the new ride sharing competitor, our client Wells Enterprises must first increase its margins by reducing costs and finding ways to increase sales volume.

Rationale

• Currently each store only makes $100 monthly profit (or 1%), so the client need to increase that profit margin in order to invest in new ways to drive company growth and gain back market share from the competition.

Risks

• The current fixed costs (rent, labor, etc.) might be under long-term contracts and therefore the client cannot implement short-term reductions.
• There might be new entrants to the market with other new business models, products, etc. that might continue to steal into our client’s market share if they do not implement strategic changes quickly.

Next Steps

• Meet with the client to dive deeper into their cost structure to find ways to reduce both fixed and variable costs.
• Gather store-specific cost data (as it was presented in averages) to rationalize reductions or shutdowns.
• Consider reducing headcount in higher cost labor stores, or close stores with higher-than-average rent with lower-than-average sales.