Campus Cafeteria Shut Down by Food Service Workers’ Strike

Case Type: improve profitability.
Consulting Firm: Accenture Strategy first round full time job interview.
Industry Coverage: food & beverages; restaurant & food service.

Case Interview Question #01353: Dunkin’ Donuts is one of the largest coffee and baked goods chains in the world. Its products include donuts, bagels, other baked goods, sandwiches, and a variety of hot and iced beverages. You’re an MBA candidate at Harvard Business School. The manager of the on-campus Dunkin’ Donuts coffee shop comes to you for advice.

Last quarter a food service workers’ strike shut down the campus cafeteria for nearly three weeks. The manager of the on-campus Dunkin’ Donuts thought this would be great news for the business – in fact the coffee shop was packed. Now that the numbers are in, however, he finds that even though the coffee shop had record revenues, it made a loss for the quarter. What happened?

Possible Answers:

1. Case Overview

This is a business operations case of the declining-profits variety. In this one, the interviewer is looking for your business intuition and for your ability to apply this intuition in chasing down the answer to the problem. The candidate should layout the case structure in terms of the two levers of profitability (profits = revenues — costs = price * quantity – costs).

This case question would be appropriate for undergrads as well as MBAs and advanced degree candidates.

2. Suggested Response

Candidate: There are a variety of things that could cause revenues to go up while profits went down. I’m not sure which is the most likely – maybe the manager was skimming some money off the top? Just kidding! The first thing I’d like to know is whether there were any other unusual expenses during the quarter.

* Did costs go up? Was there a write-off of some sort?
* Was the coffee shop dealing with expenses carried over from a previous period?
* Did it have to hire on additional labor at a premium or pay overtime to serve all those additional customers?

Note: It’s often a good idea to make sure that you have the whole picture. Case interviewers will often leave out critical details to get you to start off in the wrong direction. In addition, they may be trying to see if you will actually step back and take a critical look at the situation before you dive in. In a case such as this one, where there could be a number of possible explanations, it’s good to see if you can get some more hints from your interviewer. At the same time, the candidate has already provided some structure to her answer by focusing on the cost/expense side first.

Interviewer: I’m a little bit curious as to why you would immediately assume there was something illegal going on. However, in answer to your question, no. There weren’t any extraordinary expenses in the quarter. No lawsuits for bad food, no acquisitions of new equipment. What else could have happened?

Candidate: Hmm. Well, if there weren’t any unusual expenses, I’d want to look at the other pieces of the costs and revenue equation. On the revenue side, we assume that sales volume went up significantly as a result of the campus cafeteria closure. Since revenue equals price times quantity, I wonder if the prices the coffee shop charged for its products went down. Did it change its pricing structure?

Note: Since her first approach didn’t yield any results, the candidate is taking a step back and becoming a little more systematic in her approach. Although she might have been better off labeling it as such, she seems to be backing into a framework based on the “profits = revenues — costs” equation. One good thing is her mention of the revenue equation.

Interviewer: No, the prices remained the same.

Candidate: Then we need to continue looking at the other pieces of the cost and revenue equation. You said there weren’t any extraordinary expenses, but what about changes in the normal expenses of the operation? Did raw material prices go up? Did rent, utilities, or trash-removal costs go up as a result of increased volume? How about spoilage?

Note: The candidate still hasn’t figured out exactly why the profits went down, but she is doing a good job of systematically exploring various reasons why this might have occurred. Also, she is doing a good job of explaining how she is thinking through the problem. Thus, the interviewer knows that she isn’t just bopping around from scattered thought to scattered thought.

Interviewer: No, these all remained relatively stable on a per-unit basis.

Candidate: Something clearly changed from the previous quarter. Since we have ruled out changes in prices and significant changes in expenses, then there was something else going on. We know that sales went up. We also know that customer flow went up and that people who usually eat at the campus cafeteria were coming to the coffee shop. Therefore, it’s possible that this new customer group was different from traditional customers.

One strong possibility is that they were ordering different items from traditional customers. Specifically, since they were using the coffee shop as a substitute for their usual cafeteria dining, it’s possible that they were ordering more food than the traditional customer.

Note: The candidate has systematically worked her way toward a possible explanation. By thinking out loud, she reveals that she didn’t immediately know the answer. However, she has demonstrated a relatively logical approach to problem solving and hypothesis testing that will be useful as a consultant.

Interviewer: That’s correct. There was a new type of customer with a new purchasing pattern. But what does that tell you about profits?

Candidate: I would assume that many of the new customers came in to get food. Therefore, the product mix sold during the quarter probably changed. Since we know that there weren’t any extra-ordinary expenses, and since we know that profits went down, we have to assume that the coffee shop was sucking wind on the food business.

Interviewer: Bingo!

Note: The candidate has come up with the correct answer by systematically going through the problem and focusing on the various components of the key profitability equation. In addition, she has demonstrated to the interviewer that she can think logically and use a framework effectively.

3. General Summary Comments

Many case interviews will ask about a situation in which profits are declining. Although many of these questions may be more complex than this one, it is a good idea to keep the profit and revenue equations (profits = revenues — costs = price * quantity – costs) foremost in mind as you work your way through them. In this case, a change in product mix was the key. Another typical problem may deal with fixed and variable costs.