Our client, Fresh Basket, is a multinational food company. They have multiple lines of products in various geographies. Their sales and profit margins are good. However, they wish to explore if they can increase profitability of the company from the existing lines of business and in the geographies in which they are already present.
This is an interviewer led case, so the interviewer should guide the candidate through the process. It requires some understanding of economic concepts like price elasticity. For candidates who do not have a background in economics, the interviewer would need to handhold more through the case process.
- The growth in wholesale food segment typically keeps pace with the GDP in most economies.
- This market also has high entry barriers as brand, distribution network and production require significant time and capital investment.
About the client:
- Fresh Basket has a varied range of products across the high end and the low end of the spectrum.
- Hotels and restaurants are its primary customers.
- The company primarily operates in three regions - Europe, Middle East and Asia.
- There is competition in each of these regions. In most cases the market is fragmented or at-least is a duopoly.
2. Market Analysis
- Fresh Basket's market share in the different markets
- Competitive dynamics in each of the regions
- Changes in market shares of the players from 2014 to 2017
- The business seems to have significant economies of scale. This would explain the increase in market share in Europe, as well as the decrease in market share in Asia and Middle East.
- The drop in market share in Asia could possibly be because of the fact that Asia has several fast growing economies. The market is still evolving with a loss leadership strategy being played out by new entrants.
- Freshbasket is the market leader in Europe and has consolidated its market share further from 2014 to 2017. It is likely that competition would be less intense in this region as the competitive dynamics have already been established. Freshbasket is likely to have a significant cost advantage over others due to economies of scale.
- The above information, if viewed with the lens of increasing profitability, would lead us to the conclusion that Freshbasket could potentially become a price leader in Europe and would be able to influence the prices in the region.
3. Pricing Strategy
- The gross-margin vs demand elasticity relationship for Freshbasket's product lines does not follow the negative linear curve.
- The pricing strategy for the products in Quadrant I seems intuitive. Those products have low demand elasticity, therefore it makes sense that the gross margins for those products are high.
- Similarly, the pricing strategy for the products in Quadrant III also seems intuitive. Those products have a very high demand elasticity, it seems prudent to keep the gross margins low and to maximize sales.
- For the products in Quadrant II, although the demand elasticity is high, the margins have still been kept high. If the company were to reduce prices, there would be a significant increase in sales and the total profits would increase.
- For the products in Quadrant IV, the margins have been kept low, even though the demand elasticity is low. If the company were to increase margins and increase prices, it is unlikely to change sales and the total profits would increase.
- The pricing strategy would be different for different regions keeping in mind the competitive dynamics. In Europe, for example, the company could act as the price leader as it has significant market share.
- The pricing strategy for the products in Quadrant I and Quadrant III should be continued.
- The prices for the products in Quadrant II should be reduced in order to increase sales.
- The prices for the products in Quadrant IV should be increased in order to increase profit margins.