Ruby Tuesday Sees Cost Increasing & Revenue Declining

Case Type: improve profitability.
Consulting Firm: McKinsey & Company 1st round full time job interview.
Industry Coverage: restaurant & food service.

Case Interview Question #00885: Our client Ruby Tuesday Inc. (NYSE: RT) is an American multinational foodservice retailer that owns, operates, and franchises a number of fast food restaurant brands. They are headquartered in Maryville, Tennessee, and operate more than 700 locations worldwide between their various concepts.

The majority of Ruby Tuesday’s fast food restaurants are on the East coast. 40% of their restaurants are located in service centers on highways, often in clusters of three to five. The client Ruby Tuesday has recorded astounding growth historically. In the past five years, however, costs have been increasing and revenues declining. Your consulting firm has been hired to determine how to address the problem. What would you do?

Possible Answer:

Note: This is a interviewer-led “pressure” case. Do not allow the candidate to formulate a structure. Rather than deliberating and answering, the candidate should be pushed to answer quickly.

Interviewer: Let’s start with a simple question related to costs. In 2014, our cost structure was 20% Property, Plant And Equipment (PP&E), 20% labor, 30% Cost of Goods Sold (COGS), and 30% miscellaneous. In 2015, PP&E has doubled, labor has stayed the same, COGS has dropped by two thirds (due to the use of beef substitutes) and SG&A has tripled. What percent of our cost structure is labor in 2015?

Candidate: Consider the problem in absolute values rather than percents. PP&E moves from $20 to $40, labor remains at $20, COGS changes from $30 to $10, and SG&A shifts from $30 to $90. The new “total cost” is $40+$20+$10+$90 = $160 now. Labor ($20) is 12.5% of $160.

Note: If the candidate cannot answer the question, remain silent for ten seconds. And then offer minimal clues. If the candidate produces the correct answer, ask him/her if he/she is sure. Force the candidate to declare he/she is sure before moving on.

Interviewer: OK. Let’s forget about costs. Let’s talk about revenues. Over the past fifteen years, the number of fast food restaurants owned and operated by the client has declined by 20%. Why do you think this is?

Candidate: Possible answers include: consolidation, changing demographics that do not cater to fast food consumption, or the emergence of other low cost options stealing share.

Interviewer: Even more concerning, in addition to fewer storefronts, our client’s revenues have declined by 30%. Take a look at the table below and tell me what you think. These are our four most prominent restaurant brands.

The candidate should see that while the total number of stores has declined, some stores have fared better than others. Notably, Nate’s Fat Dogs has maintained the same number of stores. The candidate should surmise that the new mix of storefronts may account for the more precipitous drop in revenue (when compared with the decline in store fronts). That is, some stores generate more revenue than others. If the candidate does not see that store mix is key, prompt him/her.

Interviewer: Yeah, you’re right about that. Rya’s Gourmet Pizza Pie generated the most cash when compared against the other restaurants. Why do you think this is?

Possible answers include higher average revenue per sale or a higher number of sales.

Interviewer: Actually both. We found that although customers spent more time eating in Rya’s than any other restaurant, later hours more than compensated. So why do you think the client closed storefronts rather than opening them?

The candidate should first note that high revenues are distinct from high profits. It could be the case that costs increased disproportionately. If the candidate does not realize this, prompt him/her.

Interviewer: What costs do you think were most relevant?

The candidate should recall the changing cost structure for all the stores. Although Rya’s is only one brand within the portfolio, the candidate should ask about PP&E and SG&A.

Interviewer: Actually PP&E costs were quite high. Rya’s uses an unusual type of coal oven capable of cooking pizzas very quickly. The service on the ovens was extremely expensive and they broke down all the time. Abruptly ask the candidate: how many pizzas do you think Rya’s prepares on a daily basis?

This is a generic market sizing and estimation question that can be approached in any number of ways. One approach is to begin with the number of restaurants in the chain, number of customers drawn by each (which will vary based on the day of the week and the number of individuals traveling on highways) and then speculate what fraction of a pizza each customer buys.

Interviewer: Great. Thanks for coming in! No formal recommendation is necessary.