Case 4: Major Magazine Publisher

Introduction
63

Problem Statement Narrative

Your client is a Major Magazine Publisher. Currently, they own a Women’s magazine (similar to Cosmopolitan) and a Personal Finance
magazine (similar to Fortune). They are considering launching a new magazine about Fine Living, targeted to Wealthy Males (similar to
GQ). What is the market size, and should they do it?

Overview for interviewer

This is a straightforward case, covering Profitability, Go/No Go Investments and Market Sizing. Information will likely be given at the
beginning of the case, and then more throughout the case, as calculations are made.

Information to be given with handout

Is there a goal that the company is trying to reach with the launch of the new magazine?
Yes, the company would like to hit $10M in annual revenue.
Does the company have the resources to launch a new magazine?
Yes.
I the
Is h new magazine i offered
ff d only l in
i print,
i or online
li as well?
ll?
It will be offered only in print.
In what ways can the magazine be purchased?
It is offered as a yearly subscription - 12 issues per year.
It can also be bought retail - one issue at a time.
What is the target geography for the magazine?
It will be offered in the U.S. only.
What are the costs of the magazine?
Costs can be ignored in this analysis.
 Case 4: Major Magazine Publisher
Market Size
64

Potential approach to solving the case

Q1. Market Size
Q2. Profitability
Q3. Recommendation (Risks and Other Considerations)

Q1: What is the market size (in people)?

Information to be given if asked:
300M people in the U.S.
50% Male Æ 150M males in the U.S.
Age demos split evenly (Age 0-20, 21-40, 41-60, 61-80)
Market research shows that 10% of Age 21-40 demographic is Wealthy, that 10% of Age 41-60 is Wealthy and that 5% of Age 61-
80 is Wealthy
People under 20 are too young for the magazine
Calculations:
Can be split evenly by age group:
group
Age 0-20: 25% Æ 150M(25%) = 37.5M
Age 21-40: 25% Æ 150M(25%) = 37.5M
Age 41-60: 25% Æ 150M(25%) = 37.5M
Age 61-80: 25% Æ 150M(25%) = 37.5M
Can be broken down further byy target
g demographic
g p
Age 21-40: Assume that 10% are Wealthy Æ 37.5M(10%) = 3.75M
Age 41-60: Assume that 10% are Wealthy Æ 37.5M(10%) = 3.75M
Age 61-80: Assume that 5% are Wealthy Æ 37.5M(5%) = 1.875M
Total market size = 3.75M + 3.75M + 1.875M = 9.375M people, or rounded to 9.4M people
 Case 4: Major Magazine Publisher
Profitability
65

P t ti l approachh to
Potential t solving
l i the
th case
Q1. Market Size
Q2. Profitability
Q3. Recommendation (Risks and Other Considerations)

Q2: What is the market size (in $)?

Information to be given if asked:
There are two ways that the magazine can be purchased.
Subscription:
p 12 issues per
p year,
y , $3 revenue/issue
/
Retail: Assume 4 issues per year, $5 revenue/issue
Assume that the market is split 50/50 subscription and retail.

Calculations:
9.4M(50%) = 4.7M subscribers, 4.7 retail customers
S b
Subscription revenue = 4.7M(12
4 M( 2 issues)($3)
)($3) = $169.2M
$ 69 2M
Retail revenue = 4.7M(4 issues)($5) = $94M
Total market size = $169.2M+$94M = $263.2M
 Case 4: Major Magazine Publisher
Recommendation
66

P t ti l approachh to
Potential t solving
l i the
th case
Q1. Market Size
Q2. Profitability
Q3. Recommendation (Risks and Other Considerations)

Q3: Should they do it?

Information to be given if asked:
Market is not growing
Competition is made up of:
GQ: 60% of the market
Other magazines/fragmented: 40%
Survey data shows that we can capture 5% of the market

Calculations:
Potential revenue for client = 5%($262
5%($262.2M)
2M) = $13
$13.16M
16M
 Case 4: Major Magazine Publisher
Recommendation
67

The client should move forward with the launch of the new magazine
magazine. We expect to get $13
$13.6M
6M in
revenue per year, which is higher than the stated goal of $10M per year.
Recommendation

Costs need to be less than $3.6M. Costs can include fixed cost for a new manufacturing plant, R&D
for new topic, etc..
Need to consider cannibalization of Finance magazine revenues - may be targeting the same
Risks audience/have content overlap.
y g for client mayy be able to be achieved byy adding
Cost synergies g another magazine
g to the portfolio.
p
Synergies may include manufacturing, marketing and distribution.
 Case 5: Tulsa Hotel - OK or not OK?
Introduction
68

Problem Statement Narrative

Our client a major hotel chain. They are considering acquiring an existing hotel in Tulsa, OK for $20M and expect an ROI of
20% over three years. Should they make the investment?

Overview for interviewer Information to be given with

Once thehandout
interviewee has explained their
This is a profitability case. Discussion should quickly turn to P=R-C and the
framework, give them the following page. Also
various drivers of costs and revenues.
tell them the following:
Assume single occupancy (only one guest per
On the revenue side, price and volume (hotel occupancy) should be
room).
considered, with some discussion about different price and occupancy
If several rooms are reserved at once ((for a g
group
p
scenarios
i – isi this
hi a b
business
i hhotell or a vacation
i llocation?
i ?D Do occupancy
traveling together) a discounted group rate is
rates/prices vary throughout the week? Seasonally? The interviewee should
given to each group member.
also include other sources of revenue, such as a restaurant in the hotel,
Assume 50 weeks/year or 350 days/year in your
events, etc.
calculations. Round yearly profits to the nearest
On the cost side, fixed and variable costs should be discussed, such as hotel
million.
upkeep utilities,
upkeep, utilities labor,
labor insurance,
insurance booking system etc.
etc
Assume no seasonality in demand. Assume no
growth. Ignore time value of money.
Additional factors:
Changes in the economy and hotel industry that might affect number of
guests or guest WTP
Competitor response and potential for new entrants into the market
Specifics about our client such as synergies with other hotels in the chain,
name recognition, hotel management expertise
Risks such as lower than expected demand, entry of new competitors, etc..
 Case 5: Tulsa Hotel - OK or not OK?
Information sheet
69

… On weekends Tulsa has 600 visitors/day and 50% stay in our hotel
† (The rest stay with friends/family, or at small bed and breakfasts)

… Group room rate is $120/night

… Individual room rate is $150/night
… On weekends 75% of guests are individuals (i.e. not groups)
… On weekdays 40% of guests are individuals
… Weekend hotel occupancy rate is 60%
… Weekday hotel occupancy rate is 75%
… It costs the hotel $30/room/night for each occupied room
… Fixed costs for the hotel are $5750/night
… Assume no growth, ignore time value of money
 Case 5: Tulsa Hotel - OK or not OK?
Question 1
70

Profitability Question
Should our client make the investment? (Do not remind interviewee that the client plans to invest $20M, or that they expect an
ROI of 20% over three years, this information was given up front and should be remembered)

Solution Method 1 Solution Method 2

Weekend
W k dd days: Weekend days:
da s
600 town visitors * 50% stay at our hotel = 300weekend guests 600 town visitors * 50% stay at our hotel = 300weekend guests
Average weekend rate=0.75*$150+0.25*$120=$112.5+ Revenues from individuals: 300guests*75%*$150/room = $33,750
$30=$142.5 Revenues from groups: 300guests*25%*$120/room = $9,000
Average weekend day profit /guest= $142.5-$30 = $112.50 Variable costs: 300 guests*$30/occupied room/day = $9,000
Weekdays: Fixed costs=$5750/day
Hotel is 60% occupied on weekends with 300 guests = 500 rooms P f /
Profit/weekend
k d day
d = ($33750 + $9,000)
$9 000) - $9,000
$9 000 - $5750=
$5750 $28,000
$28 000
in hotel Weekdays:
On weekdays, hotel is 75% occupied = 500*75% = 375 guests Hotel is 60% occupied on weekends with 300 guests = 500 rooms in hotel
Average weekday rate=0.4*$150 + 0.6*$120 = $60+$72 = On weekdays, hotel is 75% occupied = 500*75% = 375 guests
$132 Revenues from individuals: 375guests*40%*$150/room = $22,500
Average weekday profit / guest = $132-$30 = $102 Revenues from groups: 375 guests*60%*$120/room = $27,000
Total profits: Variable costs: 375 guests*$30/occupied room/day = $11,250
π/week = (300*$112.5*2) + (375*$102*5) – (5750*7) = Fixed costs = $5750/day
$218,500 Profit/weekday = ($22,500 + $27,000) - $11,250 – $5750 = $32,500
π/year = 50weeks*$218,500 = $10,925,000, round to $11M Total profits:
π over 3 years (assuming no growth/TVM) = 33M π/week = 2($28,000) + 5($32,500) = $218,500
20% ROI on 20M is 4M,, so require
q $12M π over 3 y
years to meet π/year
/ = 50weeks*$218,500 = $10,925,000, round to $11M
goal. π over 3 years (assuming no growth/TVM) = 33M
$33M>$12M, so invest! 20% ROI on 20M is 4M, so require $12M π over 3 years to meet goal.
$33M>$12M, so invest!
 Case 5: Tulsa Hotel - OK or not OK?
Question 2
71

Average Rate Question

Now instruct the interviewee to disregard the numbers given in question 1 and use only the information given in the following question:
Suppose that on each weekend day, 100 rooms are occupied at a group rate of $100, and 300 individual rooms are occupied at a rate
of $150.
$150 On each weekday,
weekday 200 rooms are occupied at the group rate
rate, and 200 at the individual rate.
rate There are 500 rooms in the
hotel. It costs the hotel $30/room/night for each occupied room.
What is the average revenue per customer per day for any day of the week? Round your answer to the nearest 10 dollars (e.g., if the
room rate is $147, round your answer to $150)

Suggested Solution

Average weekend day: (100*$100 + 300*$150)/(100+300) = ($10,000+ $45,000)/400 = $55,000/400 = $137.50

Average weekday: (200*$100) + (200*$150) /(200+200) = ($20,000 + $30,000)/400 = $50,000/400 = $125.00
Overall average rate: (2*$137.5 + 5*$125)/7 = ($275+$625)/7 = $900/7 = $128.57 = $130 revenue/room/night
 Case 5: Tulsa Hotel - OK or not OK?
Question 3
72

Strategy Question
Now suppose that our client would like to increase revenues at the hotel. What would be some ways that they could accomplish this?
Assume that costs are held constant.

Suggested responses
The goall iis to b
Th brainstorm
i id
ideas to iincrease revenues. PPushh iinterviewee
i to provide
id as many id
ideas as possible.
ibl
Answers might include:
Increasing room price, perhaps positioning hotel as a luxury destination
Partnering with a local convention center to attract large groups of guests, or building their own conference center
Accommodating wedding receptions or other large social gatherings
Conducting an advertising campaign
campaign- with a travel agency, online, on TV, etc.
Expanding the hotel to accommodate more guests
Opening a restaurant in the hotel, or adding additional dining options if interviewee assumed there was already a restaurant

Breakeven Question Breakeven Question

In order to increase profits, your client is considering launching a three $1.5M over 3 years = $500,000 per year spent on the campaign
year advertising campaign. The campaign will cost $1.5M. Use From question 2a, the average revenue/room/night = $130.
information from question 2 in your calculations. Do not use any Variable cost/room/night = $30
information from question1. Ignore fixed costs. Profit/room/night = $100
$500,000/$100
$ , /$ = 5,000
, additional gguests/year
/y
How many additional
H ddi i l guests will
ill need
d to stay at the
h hhotell ffor our
5,000/350 = about 15 additional guests per night
client to break even?
Should they launch the campaign? Since the hotel occupancy is 400 on both weekends and weekdays,
and the hotel has 500 rooms, this increase seems reasonable
 Case 5: Tulsa Hotel - OK or not OK?
Recommendation
73

Our client should acquire the hotel because its projected profits exceed the expected ROI by
$21M.
However, if the $20M investment could be used for another project with an even higher ROI, the
other project should be prioritized ahead of this one. ( Bonus answer!)
Recommendation Our client should also launch the advertising campaign because the required additional 15 guests
per night
p g to breakeven seems reasonable. Some other options p to increase revenues might
g include
partnering with a conference center or contracting with a travel agent to attract additional guests.

Some potential risks include:

National or global economic downturn could reduce business travel and tourism in general
A new unfavorable local economic environment in Tulsa could lead to businesses leaving the
area and reducing business/visitor traffic (e.g. higher local taxes on businesses)
Risks A competitor could build a large hotel in Tulsa
Government could impose new taxes on hotel profits, reducing projected ROI
 Case 7: FoodCo
Introduction
81

P bl statement
Problem t t t narrative
ti
Our client is a private equity firm which has invested in FoodCo, a family-owned $19M branded frozen ethnic foods manufacturer
operating out of the Northeast. They would like our help to determine how FoodCo can triple their profitability over the next 2 years.

Overview for interviewer

The interviewee may ask some clarifying upfront questions related to the goal of tripling profitability, and then they should develop a
framework of potential areas to explore. This will likely be divided into areas such as the external Market, Revenues, and Costs.

Additional information related to the client’s goal

This information may be provided upon request:
• The $19M figure is revenues
• Profit is currentlyy $
$3M (so
( the target
g is $3M
$ * 3 = $9M)
$ )
 Case 7: FoodCo
Profitability enhancement
82

B i t
Brainstorming
i ideas
id for
f increasing
i i Profitability
P fit bilit
The candidate should present a framework to tackle the problem.

Market: Assume that there are no major changes.

Revenues
• Price: we don’t have any flexibility; benchmarking has determined that the ideal price is being charged to customers.
• Revenue Streams: For the purposes of this case assume that we produce ethnic food sold in “cups” e.g. a cup of noodles. This is the sole
revenue generating stream.
• Quantity
• Increasing this and expanding is an option,
option but what are the implications?
• We can’t build more operations centers. “We know that there is a lot of unmet demand but we are extremely capital
constrained and can’t look to increase production by opening a new plant.”
• Other ideas
• Expanding nationally through retail and food service channels
• Expanding into new products, customers, and channels – organically or through acquisitions
Point the interviewee towards efficiency gains through cutting costs

Costs
• Have the interviewee brainstorm a list. These could include food materials, storage (including refrigeration), logistics, labor, and
packing materials
• Once
O the
th candidate
did t comes up with ith a preliminary
li i lilistt off costs,
t say th
thatt our tteam ffound
d th
thatt a majority
j it off costs
t could
ld b
be categorized
t i d into
i t
four areas: Labor (50%), Equipment (25%), Administrative (20%) and Other (5%)
• Ask them which area they would target to find savings. This should point to labor as is this more controllable and an unusually
large cost driver for this type of business. Show the following chart.
 Case 7: FoodCo
Profitability enhancement
83

Prompt: What are some ideas to improve efficiency?

The key should be to reduce repair time, which is controllable. Ask for further ideas of how to do this.
Indicate that through training and reconfiguration of equipment we can reduce repair time to 5% if we invest $500,000. Should we do
this?
Answer:
Labor Cost Base is $19 - $3 = $16. $16 * 50% = $8M
Savings from reduction = 22% - 5% = 17%. 17% * $8M = $1.36M
So yes, we should invest.
 Case 7: FoodCo
Follow up question
84

B
Bonus
You may want to push the candidate here if they don’t realize this -- efficiency savings translate into higher production volumes. Ask them
to calculate what this increase would be and how it translates to revenues. For simplicity assume that all savings (in percentage terms)
translate directly to the same % increase in volume (e.g.17%).
Revenue Growth = $19M * 1.17 = $22.23M

Wrap-up
Ask for the overall recommendation. Sample:
B reducing
By d i repair i time
i through
h h training
i i andd equipment
i reconfiguration,
fi i we can b bothh reduce
d costs and
d grow revenues bby 17%
17%. Af
After the
h
$500K investment, this means a total of roughly $7M profitability. This is not enough to reach the two year target, so we would have to
look at other sources/options for growth and expansion.
 Case 5: Tulsa Hotel - OK or not OK?
Introduction
68

Problem Statement Narrative

Our client a major hotel chain. They are considering acquiring an existing hotel in Tulsa, OK for $20M and expect an ROI of
20% over three years. Should they make the investment?

Overview for interviewer Information to be given with

Once thehandout
interviewee has explained their
This is a profitability case. Discussion should quickly turn to P=R-C and the
framework, give them the following page. Also
various drivers of costs and revenues.
tell them the following:
Assume single occupancy (only one guest per
On the revenue side, price and volume (hotel occupancy) should be
room).
considered, with some discussion about different price and occupancy
If several rooms are reserved at once ((for a g
group
p
scenarios
i – isi this
hi a b
business
i hhotell or a vacation
i llocation?
i ?D Do occupancy
traveling together) a discounted group rate is
rates/prices vary throughout the week? Seasonally? The interviewee should
given to each group member.
also include other sources of revenue, such as a restaurant in the hotel,
Assume 50 weeks/year or 350 days/year in your
events, etc.
calculations. Round yearly profits to the nearest
On the cost side, fixed and variable costs should be discussed, such as hotel
million.
upkeep utilities,
upkeep, utilities labor,
labor insurance,
insurance booking system etc.
etc
Assume no seasonality in demand. Assume no
growth. Ignore time value of money.
Additional factors:
Changes in the economy and hotel industry that might affect number of
guests or guest WTP
Competitor response and potential for new entrants into the market
Specifics about our client such as synergies with other hotels in the chain,
name recognition, hotel management expertise
Risks such as lower than expected demand, entry of new competitors, etc..
 Case 5: Tulsa Hotel - OK or not OK?
Information sheet
69

… On weekends Tulsa has 600 visitors/day and 50% stay in our hotel
† (The rest stay with friends/family, or at small bed and breakfasts)

… Group room rate is $120/night

… Individual room rate is $150/night
… On weekends 75% of guests are individuals (i.e. not groups)
… On weekdays 40% of guests are individuals
… Weekend hotel occupancy rate is 60%
… Weekday hotel occupancy rate is 75%
… It costs the hotel $30/room/night for each occupied room
… Fixed costs for the hotel are $5750/night
… Assume no growth, ignore time value of money
 Case 5: Tulsa Hotel - OK or not OK?
Question 1
70

Profitability Question
Should our client make the investment? (Do not remind interviewee that the client plans to invest $20M, or that they expect an
ROI of 20% over three years, this information was given up front and should be remembered)

Solution Method 1 Solution Method 2

Weekend
W k dd days: Weekend days:
da s
600 town visitors * 50% stay at our hotel = 300weekend guests 600 town visitors * 50% stay at our hotel = 300weekend guests
Average weekend rate=0.75*$150+0.25*$120=$112.5+ Revenues from individuals: 300guests*75%*$150/room = $33,750
$30=$142.5 Revenues from groups: 300guests*25%*$120/room = $9,000
Average weekend day profit /guest= $142.5-$30 = $112.50 Variable costs: 300 guests*$30/occupied room/day = $9,000
Weekdays: Fixed costs=$5750/day
Hotel is 60% occupied on weekends with 300 guests = 500 rooms P f /
Profit/weekend
k d day
d = ($33750 + $9,000)
$9 000) - $9,000
$9 000 - $5750=
$5750 $28,000
$28 000
in hotel Weekdays:
On weekdays, hotel is 75% occupied = 500*75% = 375 guests Hotel is 60% occupied on weekends with 300 guests = 500 rooms in hotel
Average weekday rate=0.4*$150 + 0.6*$120 = $60+$72 = On weekdays, hotel is 75% occupied = 500*75% = 375 guests
$132 Revenues from individuals: 375guests*40%*$150/room = $22,500
Average weekday profit / guest = $132-$30 = $102 Revenues from groups: 375 guests*60%*$120/room = $27,000
Total profits: Variable costs: 375 guests*$30/occupied room/day = $11,250
π/week = (300*$112.5*2) + (375*$102*5) – (5750*7) = Fixed costs = $5750/day
$218,500 Profit/weekday = ($22,500 + $27,000) - $11,250 – $5750 = $32,500
π/year = 50weeks*$218,500 = $10,925,000, round to $11M Total profits:
π over 3 years (assuming no growth/TVM) = 33M π/week = 2($28,000) + 5($32,500) = $218,500
20% ROI on 20M is 4M,, so require
q $12M π over 3 y
years to meet π/year
/ = 50weeks*$218,500 = $10,925,000, round to $11M
goal. π over 3 years (assuming no growth/TVM) = 33M
$33M>$12M, so invest! 20% ROI on 20M is 4M, so require $12M π over 3 years to meet goal.
$33M>$12M, so invest!
 Case 5: Tulsa Hotel - OK or not OK?
Question 2
71

Average Rate Question

Now instruct the interviewee to disregard the numbers given in question 1 and use only the information given in the following question:
Suppose that on each weekend day, 100 rooms are occupied at a group rate of $100, and 300 individual rooms are occupied at a rate
of $150.
$150 On each weekday,
weekday 200 rooms are occupied at the group rate
rate, and 200 at the individual rate.
rate There are 500 rooms in the
hotel. It costs the hotel $30/room/night for each occupied room.
What is the average revenue per customer per day for any day of the week? Round your answer to the nearest 10 dollars (e.g., if the
room rate is $147, round your answer to $150)

Suggested Solution

Average weekend day: (100*$100 + 300*$150)/(100+300) = ($10,000+ $45,000)/400 = $55,000/400 = $137.50

Average weekday: (200*$100) + (200*$150) /(200+200) = ($20,000 + $30,000)/400 = $50,000/400 = $125.00
Overall average rate: (2*$137.5 + 5*$125)/7 = ($275+$625)/7 = $900/7 = $128.57 = $130 revenue/room/night
 Case 5: Tulsa Hotel - OK or not OK?
Question 3
72

Strategy Question
Now suppose that our client would like to increase revenues at the hotel. What would be some ways that they could accomplish this?
Assume that costs are held constant.

Suggested responses
The goall iis to b
Th brainstorm
i id
ideas to iincrease revenues. PPushh iinterviewee
i to provide
id as many id
ideas as possible.
ibl
Answers might include:
Increasing room price, perhaps positioning hotel as a luxury destination
Partnering with a local convention center to attract large groups of guests, or building their own conference center
Accommodating wedding receptions or other large social gatherings
Conducting an advertising campaign
campaign- with a travel agency, online, on TV, etc.
Expanding the hotel to accommodate more guests
Opening a restaurant in the hotel, or adding additional dining options if interviewee assumed there was already a restaurant

Breakeven Question Breakeven Question

In order to increase profits, your client is considering launching a three $1.5M over 3 years = $500,000 per year spent on the campaign
year advertising campaign. The campaign will cost $1.5M. Use From question 2a, the average revenue/room/night = $130.
information from question 2 in your calculations. Do not use any Variable cost/room/night = $30
information from question1. Ignore fixed costs. Profit/room/night = $100
$500,000/$100
$ , /$ = 5,000
, additional gguests/year
/y
How many additional
H ddi i l guests will
ill need
d to stay at the
h hhotell ffor our
5,000/350 = about 15 additional guests per night
client to break even?
Should they launch the campaign? Since the hotel occupancy is 400 on both weekends and weekdays,
and the hotel has 500 rooms, this increase seems reasonable
 Case 5: Tulsa Hotel - OK or not OK?
Recommendation
73

Our client should acquire the hotel because its projected profits exceed the expected ROI by
$21M.
However, if the $20M investment could be used for another project with an even higher ROI, the
other project should be prioritized ahead of this one. ( Bonus answer!)
Recommendation Our client should also launch the advertising campaign because the required additional 15 guests
per night
p g to breakeven seems reasonable. Some other options p to increase revenues might
g include
partnering with a conference center or contracting with a travel agent to attract additional guests.

Some potential risks include:

National or global economic downturn could reduce business travel and tourism in general
A new unfavorable local economic environment in Tulsa could lead to businesses leaving the
area and reducing business/visitor traffic (e.g. higher local taxes on businesses)
Risks A competitor could build a large hotel in Tulsa
Government could impose new taxes on hotel profits, reducing projected ROI
 Case 7: FoodCo
Introduction
81

P bl statement
Problem t t t narrative
ti
Our client is a private equity firm which has invested in FoodCo, a family-owned $19M branded frozen ethnic foods manufacturer
operating out of the Northeast. They would like our help to determine how FoodCo can triple their profitability over the next 2 years.

Overview for interviewer

The interviewee may ask some clarifying upfront questions related to the goal of tripling profitability, and then they should develop a
framework of potential areas to explore. This will likely be divided into areas such as the external Market, Revenues, and Costs.

Additional information related to the client’s goal

This information may be provided upon request:
• The $19M figure is revenues
• Profit is currentlyy $
$3M (so
( the target
g is $3M
$ * 3 = $9M)
$ )
 Case 7: FoodCo
Profitability enhancement
82

B i t
Brainstorming
i ideas
id for
f increasing
i i Profitability
P fit bilit
The candidate should present a framework to tackle the problem.

Market: Assume that there are no major changes.

Revenues
• Price: we don’t have any flexibility; benchmarking has determined that the ideal price is being charged to customers.
• Revenue Streams: For the purposes of this case assume that we produce ethnic food sold in “cups” e.g. a cup of noodles. This is the sole
revenue generating stream.
• Quantity
• Increasing this and expanding is an option,
option but what are the implications?
• We can’t build more operations centers. “We know that there is a lot of unmet demand but we are extremely capital
constrained and can’t look to increase production by opening a new plant.”
• Other ideas
• Expanding nationally through retail and food service channels
• Expanding into new products, customers, and channels – organically or through acquisitions
Point the interviewee towards efficiency gains through cutting costs

Costs
• Have the interviewee brainstorm a list. These could include food materials, storage (including refrigeration), logistics, labor, and
packing materials
• Once
O the
th candidate
did t comes up with ith a preliminary
li i lilistt off costs,
t say th
thatt our tteam ffound
d th
thatt a majority
j it off costs
t could
ld b
be categorized
t i d into
i t
four areas: Labor (50%), Equipment (25%), Administrative (20%) and Other (5%)
• Ask them which area they would target to find savings. This should point to labor as is this more controllable and an unusually
large cost driver for this type of business. Show the following chart.
 Case 7: FoodCo
Profitability enhancement
83

Prompt: What are some ideas to improve efficiency?

The key should be to reduce repair time, which is controllable. Ask for further ideas of how to do this.
Indicate that through training and reconfiguration of equipment we can reduce repair time to 5% if we invest $500,000. Should we do
this?
Answer:
Labor Cost Base is $19 - $3 = $16. $16 * 50% = $8M
Savings from reduction = 22% - 5% = 17%. 17% * $8M = $1.36M
So yes, we should invest.
 Case 7: FoodCo
Follow up question
84

B
Bonus
You may want to push the candidate here if they don’t realize this -- efficiency savings translate into higher production volumes. Ask them
to calculate what this increase would be and how it translates to revenues. For simplicity assume that all savings (in percentage terms)
translate directly to the same % increase in volume (e.g.17%).
Revenue Growth = $19M * 1.17 = $22.23M

Wrap-up
Ask for the overall recommendation. Sample:
B reducing
By d i repair i time
i through
h h training
i i andd equipment
i reconfiguration,
fi i we can b bothh reduce
d costs and
d grow revenues bby 17%
17%. Af
After the
h
$500K investment, this means a total of roughly $7M profitability. This is not enough to reach the two year target, so we would have to
look at other sources/options for growth and expansion.
 Case 26: Plastic World
By: Milija Medic, Edited By: Peter Manoogian (Kellogg Class of ‘12)

Case Question

 Our client is a private equity firm interested in PlasticWorld, a plastic packaging manufacturer.
 PlasticWorld’s owners are requesting $25M. The offer is final. Should our client buy?
3
Quants.

4
Structure

Case tracker Fit Questions Guide to interviewer

 Industry: Spend first 15 min on fit  The case primarily tests the ability to gain insight from
Financial Services quantitative data , value a company and find potential Org. Chg.
 Tell me something about Mkt. Share
 Level of Difficulty: improvements.. As such, it is a little bit more data-
yourself that is not listed Cust. Stgy
Medium driven than the average case.
on your resume.
 The interviewee should focus on the company value as
 Case Format:  What was the most the recommendation regarding the offer depends on it;
M&A difficult problem you and on feasibility of identified profit-improving changes.
 Concepts Tested: solved in your previous  The interviewee should be able to come up with the key
- Organizational job, business-wise? improvements if (s)he invests some effort in
changes understanding the price drop and its relationship to the
- Market share sales force incentives; as well as the innovation-related
- Customer strategy costs from the pressure from the customers and how to
push back.

© 2012 Kellogg Consulting Club -- All Rights Reserved 193

 Plastic World: Clarifying answers and case guide

Clarifying answers to provide Guide to handouts

PlasticWorld Characteristics Begin by handing out exhibit #1 after stating the case question.
- Makes plastic packaging for beverages, Exhibit 1 – Hand out after introducing case
cosmetics, household and automotive - What observations can be made from this P&L statement?
chemicals
- Products are top quality, they have 350 - Interviewee should calculate the profit margin (-6%), notice that
sets of molds, with different materials, sales volume is growing but revenues are dropping, and infer that
finish, colors, always innovating the cause may be pricing (more detail on next page)
- Overall product mix has not changed in - To check if it’s an industry-wide or company-specific drop in
recent years profitability, they should request competition profitability data
- The sales force is “the best in breed”, Exhibit 2 – Hand out if the candidate requests competition data
they hold market share, and they are
- Note that it’s a company-specific problem
compensated on market share
- Two years ago they invested further in - Push the interviewee to postulate what would be a realistic profit
equipment for product innovation margin for PlasticWorld based on this industry profitability data
(more detail on next page)
Customers
- PlasticWorlds’ customers exhibit strong Exhibit 3 – Hand out after discussion of Exhibit 2
loyalty - Sensitivity analysis indicates that the company would be worth the
offered $25M if the profit margin was brought from –6% to 0%
- They are experiencing increasing
pressures in their industries to innovate - Interviewee should investigate the profitability drop and the low
the plastic packaging prices further and suggest options to get PlasticWorld’s profitability
in line with the industry, and their feasibility

© 2012 Kellogg Consulting Club -- All Rights Reserved 194

 Plastic World: Key elements to analyze

Sales Force Incentives Profit Margin Improvement Feasibility

 Using Exhibit 1, What could be the reasons behind what  Use Exhibit 2 to conclude it’s a client-specific problem, use
is in the data? Exhibit 3 to discuss company’s value if the profit margin is
increased to the industry average.

Notes to interviewer Notes to interviewer

• Exhibit 1 – PlasticWorld has experienced a steady drop in  Exhibit 2 - the candidate should identify the profitability
revenues while the sales volume has been growing. problem is client-specific, all competitors are profitable.
• There are three major points to identify: 1) the profit  Exhibit 3 – the observation from the graph is that the
margin is dropping and negative; 2) given the unchanged company would be worth the $25M if PlasticWorld
product mix and increasing sales volume, the drop in increased profit margin from –6% to 0%. If the profit
revenues is caused by a reduction in prices; 3) margin reached the industry average, the company would
depreciation change – it was equipment investment. be worth $40M.
• The interviewee should find, asking independently or with  Now the question is how easily can the profitability be
your help, that sales force is compensated based on increased above zero (making the company worth more
market share. This gives the sales force incentive to drop than the $25M). The sales force incentive change is easy to
the prices. make.
• Interviewee should ask about the product quality and  Looking for other high-impact improvements, the dense
customer loyalty to discard price competition as the product line and constant innovation is the next largest
reason to drop prices. The products are high-quality and candidate. Eliminate some molds to cut costs, mindful of
customers are loyal, so most of them would buy even at a innovation pressures in PW’s clients’ industries.
higher price.

© 2012 Kellogg Consulting Club -- All Rights Reserved 195

 Plastic World: Solution and recommendations

Solution & Recommendations

 Our client should accept the $25M offer and boost the profitability (and value) of PlasticWorld.
 The client should engage in the following easy-to-implement changes:
 Compensate sales force based on company earnings instead of market share.
 Simplify the product line - eliminate some of the 350 molds to cut costs while leveraging the
superior sales force to maintain client satisfaction.
 Examine the industry best practices to find other areas for improvement.

Bonus/Guide to an Excellent Case

 An excellent interviewee will quickly identify the pricing as the issue behind the revenue decrease
and lay out potential causes for the price drop, finding the sales force incentive.
 Additionally, a strong interviewee will immediately notice that the company would be worth more
than $25M if its profit margin was at the level of industry average.
 A framework comprehensive enough to find the product line size problem would be a plus.

© 2012 Kellogg Consulting Club -- All Rights Reserved 196

 Exhibit 1: PlasticWorld P&L statement in the past three years

2009 2008 2007

Sales ($) 18,824,000 19,180,000 19,650,000
Volume (units) 36,200,000 34,250,000 32,750,000
COGS ($) 9,050,000 8,900,000 8,650,000
SG&A ($) 7,500,000 7,200,000 7,300,000
Depreciation ($) 3,450,000 3,450,000 2,250,000
EBIT ($) -1,176,000 -370,000 1,450,000

© 2012 Kellogg Consulting Club -- All Rights Reserved 197

 Exhibit 2: PlasticWorld and Industry Peers Profit Margins

Industry Peers Profit Margins [%]

-10 -5 0 5 10 15

Competitor A

Competitor B

Competitor C

Competitor D

Competitor E

Competitor F

PlasticWorld

© 2012 Kellogg Consulting Club -- All Rights Reserved 198

 Exhibit 3: PlasticWorld Valuation by Profit Margin

PlasticWorld Valuation Sensitivity Analysis

50
45
company valuation [$M]

40
35
30
25
20
15
10
5
0
-10 -5 0 5 10 15
profit margin [%]

© 2012 Kellogg Consulting Club -- All Rights Reserved 199

 Case 27: Zoo Co.
By: Aneri Jambusaria (Kellogg Class of ’11), Edited By: Peter Manoogian (Kellogg Class of ‘12)

Case Question

 Our client is a zoo that is thinking about acquiring a famous zebra from an African preserve.
 It’s a huge investment, but they believe the new zebra would be a great contribution to their animal community. You have
been engaged to help decide whether this is a good idea. What would you consider when trying to help your client make
7
this decision? Quants.

5
Structure

Case tracker Fit Questions Guide to interviewer

 Industry: Spend first 15 min on fit  Even though the client is a Zoo, we're undertaking a
Financial Services similar process to what is done when underwriting an Invest.
 Describe a recent B/E
insurance policy. The case evaluates basic concepts, but
 Level of Difficulty: unpopular decision you Basic NPV
involves many calculations and use of financial and
Medium made. What was the
assessment techniques.
result?
 Case Format:  Key case objectives:
M&A  Tell me about a 1. Investment Valuation – Walk through the
 Concepts Tested: successful business valuation process for an asset
relationship you built 2. Breakeven Analysis – Determine the revenue
- Investments
with a client, boss, or increase needed for a positive NPV
- Break-even Analysis peer in your previous 3. Risk Assessment – Should the zoo should use an
- Basic NPV job. insurance contract to hedge downside risk?
 Rounding numbers is generally okay but should not be
done to the extreme as it will alter the results

© 2012 Kellogg Consulting Club -- All Rights Reserved 200

 Case 14: American Beauty Company
Introduction
123

Problem statement narrative

American beauty company is, as the name suggests, a high quality beauty products company. They have done very well both in US and
globally and enjoy great brand recognition. One of their major products is hair color. ABC manufactures high quality ‘use at home’ hair
color products. They sell through retail and drugstores, will all manufacturing in-house. They have an 800 number for customer support.
Recently they have been experiencing declining revenues and market shares. The retailers have complained about their products as the
competition Bell International takes over.
over The firm has been called in to advise ABC on what to do.do

Question 1:
How would you start thinking about this problem?
IIts an open ended
d d question.
i There
Th can b
be number
b off ways to approachh this
hi problem.
bl C
Crucial
i l here
h iis to llookk at the
h bi
big picture
i and
d come
up with three or four major areas that you would like to explore given this specific product, industry and the situation. Do not get caught in
the profitability trap due to mention of declining revenues.
A good answer would include following: Customer
Product Target market segment(s)
Attributes B d loyalty
Brand l lt
Ease of use Price sensitivity
Value proposition Important attributes
Price Typical customer behavior. What they like / dislike about
Benchmark against competition our product
& your value proposition Buying habits
Market share and trends Distribution channel
Distribution network
Shelf space & positioning relative to competitors
Share of distribution network compared to competitors
 Case 14: American Beauty Company
Question 2 and 3
124

Question 2: One of their biggest market segments is 18 – 55 yrs old women. But their share has been declining
recently Why do you think this might be happening? How would you approach this issue?
recently.
There might be a number of issues here. You could suggest doing a market research to break down the issue into brand awareness, trial %
and re-trial and acceptance %, access (distribution) to figure out which one of these may be critical for ABC. You can also suggest
benchmarking against competitor products.

Question 3: Using the data below, what sales are required for ABC to have 50% of the women’s market in 2 years?

Segment Size ($ Mn) Growth rate

W
Women 800 5 %
5 %
Men 200 20%
Teens 100 10%

It will be good to point out that based on this data looks like their biggest segment, women, is maturing fast.
Total Women’s
Women s Mkt in 2 yrs = 800 * (1.05)
(1.05)^22 = 882
50% mkt share = 441
 Case 14: American Beauty Company
Question 4
125

Question 4: What is the dollar market share for ABC currently? What will the mkt share be in 2 yrs?

You will need to ask for the current and future mkt share data. Current mkt share is as below. Assume they keep the same mkt share in 2
yrs.

Segment Size ($ Mn) Growth rate Current Mkt share 

W
Women 800 5%
5 % 50%
Men 200 20% 10%
Teens 100 10% 30%

It will be g
good to notice that ABC has quite
q low penetration
p rates in men’s segment.
g
ABC’s current $ mkt share = .5 * 800 + 0.1 * 200 + 0.3 *100 = 400 + 20 + 30 = 450
Total mkt in 2 yrs = 800 * (1.05^2) + 200 * (1.2^2) + 100 *(1.1^2 )= 882 + 288 + 121 = 1291
ABC’s mkt share in 2 yrs = 441 + 28.8 + 36.3 = 506.1
Mkt share % = 506.1 / 1291= 39.2%
 Case 14: American Beauty Company
Question 5
126

Question 5: The team also did a customer brand awareness and perception survey in the 18 – 55 yrs women segment
f ABC b
for benchmarking
h ki itits products
d t against
i t th
the competitor
tit BBell.
ll Th
The results
lt off th
the survey are in
i th
the table
t bl bbelow.
l Wh
Whatt
do you notice and what do you suggest ABC can do about it?
Survey 1: Brand awareness, 18 – 55 yrs, Women

Bell users 80% know about ABC
Non users  40% know about ABC, 60% know about Bell
ABC users 95% know about Bell

Survey 2: Perception of quality, 18 – 55 yrs, Women

Segment ABC is higher quality Bell is higher quality

ABC users 95% 85% 
Bell Users 70% 95%
Non users 55% 85%

You can see from the results of both the surveys that despite its high quality and brand recognition, the competitor Bell fares better
amongst customers in both dimensions whether users or non users.
ABC should focus on improving its brand awareness and perception of quality. For brand awareness, they have to focus on advertising. To
improve its perception of quality, they should invest in promotions, joint marketing efforts with retailers to push their product and trials.
 Case 14: American Beauty Company
Recommendation
127

A good recommendation will include the following major points

points:
Based on the analysis so far, it seems like the main reason for declining revenues and market shares is that
the competitor Bell has achieved better brand awareness and perception of quality in the market
compared to ABC. Hence ABC should focus on improving these through advertising and aggressive
promotions and marketing.
Recommendation Goingg forward,, it seems like ABC has veryy low p
penetration in the men’s segment.
g Theyy should target
g these
segments for future growth opportunities since the women’s segment seems to be maturing.
Also, the total market size of teens seems really low. There might be opportunities there to expand the total
market size through innovative products, increased usage and acceptance of hair color products.
7. Snow Tires – Market sizing (Source: Roland Berger)

Difficulty level: 3

Problem Statement
Your client is Wilson Tire, located between Montreal and Toronto on the 407 highway.
Mr. Wilson is attempting to size the market for snow tires in Montreal. Help Mr. Wilson
estimate the total market size and how many purchases might be made each year.

Potential Framework
1. This question might begin with an estimation of the total population of Montreal. This
total might include a student vs. full-time resident population.
2. Next, a person might consider number of cars per household or number of cars per
student. It might also be a good idea to consider the types of cars that will require
snow tires (i.e., 4-wheel drive might not require tires)
3. Special consideration might be given to students. For example, some students may
buy their tires out-of-state.
4. Finally, consider how often people install tires on their car and how many snow tires
people buy (2 or 4).

Suggested Solution

Candidate: I’d like to start by estimating the total population of Montreal, and
segmenting this into students and full-time residents.
I would say the population of Montreal is approximately 2 million. Since Montreal is
known to be a university town, I would say 30% of these are students. This makes 0.6M
students, and 1.4M full-time residents.
Interviewer: That sounds about right. What next?

Candidate: I would like to divide the full-time resident population by households.

Assuming that each household consists of 3 members on average, this means there are
approximately 0.5 million households. Further assuming there are 2 cars on average in each
household, that makes 1 million cars for the full-time resident population.
As Montreal is a city, and fairly easy to get around, I would estimate the % of students
with cars to be very low, say 20%. This makes 120,000 cars in total for the student
population.
Interviewer: Okay. What does that imply about the market for snow tires?

Candidate: Well, since some cars are 4 wheel drives, not all of the cars above will
require snow tires. Since Montreal is known to have harsh, snowy winters, I think the % of 4
wheel drives would be higher, approximately 20%. This leaves 96,000 student cars and
800,000 household cars that would require snow tires

Management Consulting Association 72

 However, not all of the population might purchase their snow tires in-state. For example,
most of the students with cars are likely to be from another province or state. Thus, I would
estimate 50% of students to purchase their tires outside of Montreal. This narrows the size of
the market to 840,000 (800,000 + 96,000*0.5).
Interviewer: Great. Is there anything else you would want to consider?

Candidate: Yes, I would look at how often people replace their snow tires. I know from
personal experience that the average is usually 3 years, depending on mileage. I would also
want to look at the number of snow tires consumers usually buy. However, I know that in
Montreal, cars are required to have 4 snow tires.

Interviewer: What do you think the final market size is?

Candidate: Since I’ve determined the number of cars needing snow tires in Montreal to
be 840,000, and the number of tires to be 4, it would be approximately 3.40 million. Dividing
this number by 3 (as tires are only replaced every 3 years) would give a market size of 1.13
million tires per year.

Interviewer: Good job. I will pass on your conclusions to Mr. Wilson.

Management Consulting Association 73

15. Social life – Market sizing (Source: Roland Berger)

Difficulty level: 4

Problem Statement
How many people have you interacted with over the last year?

Suggested Solution
Break into manageable subcategories and estimate them separately.
1. McGill – almost 10,000 students, faculty and admin, assume I interact with 5%, so
say 500.
2. Social Settings – Events occur once or twice per week, more around the holidays, so
say 100 events per year. The average number of people is on the order of 10 per
event. Same people at different events, assume I see the average person 4 times.
100 events * 10 people / 4 times = 250 people. Maybe 50 of these people are also at
McGill, so round down to 200 people.
3. Everyday activities – dry cleaner, supermarket, favourite pizza place, post office, etc.
I typically interact with a cashier and server, so assume 2 interactions per visit.
Assume 3 errands or visits per day = 20 locations per week, average visit interval is
once every two weeks, so there are 40 unique locations * 2 interactions = 80 people.
Round up to 100 to account for my neighbours, doorman, my doctor, dentist, and
other people I see over and over.
4. Random meetings – people who stop you to ask for directions, people you talk to on
the subway and people who attempt to steal your laptop or wallet - assume 2 people
per week or 100 annually.
5. Other meetings – people you meet on vacation, at sporting events, shows, etc.
Assume 50 people.
6. Total number of people in a year = 500 + 200 + 100 + 100 + 50 = approximately
1,000

Tips
Only count each unique person once (students who neglect this detail might come up
with ridiculous answers like 13,000).
!

Management Consulting Association 97