Case
Joe's Cafe
Case prompt
Your school friend runs a popular food joint in the neighborhood by the name Joe's Cafe. You are having coffee with him one day at the Cafe and he shares that he is worried about his business. The profits are stagnating despite the growth in overall revenues. He asks for your advice as he is aware that you are a consultant. You agree to look at his books of accounts and help him.
Detailed solution
Paragraphs highlighted in orange indicate hints for you on how to guide the interviewee through the case.
Paragraphs highlighted in blue can be verbally communicated to the interviewee.
Paragraphs highlighted in green indicate diagrams or tables that can be shared in the “Case exhibits” section.
Suggested case structure
Key question: Why are profits stagnating?
Brainstorm with the interviewee on a possible structure to solve the case.
Below would be the steps to solve the case:
- Background: The candidate should attempt to understand the products, sales, revenue mix and margin trends.
- Analysis: The candidate should analyze the information shared to get to the underlying reason for the stagnating profits.
- Recommendation: The candidate must give a concrete recommendation on the basis of the above analysis.
1. Background
The interviewee should inquire about the products and the past performance in terms of sales, revenue mix and margin trends in order to get a better understanding of the business.
If asked, the below information can be shared verbally with the interviewee:
- The company looks at its products along two product lines:
- Beverages
- Sides
- Beverages include coffee, tea and other cold beverages.
- Sides include both savory items such as sandwiches, burgers and baked items as well as baked goods such as cakes, croissants etc.
- The Cafe is located on a busy street close to several large offices and commercial complexes.
- Joe had spoken to a few of his friends who run similar businesses in other parts of the country and has gathered the following industry information:
- The market for beverages is largely stagnant in a location unless new developments come up in the vicinity. It is a seasonal business with peaks during summers and winters, but stagnant trend overall.
- However, the market for sides (freshly prepared food and baked goods) has seen an increasing trend in other similar joints. The key is to keep innovating the menu.
- The largest coffee chain - CafeDay has had a store in the area for the last 5 years and Joe's Cafe had lost its business initially when the store opened. However, now both the Cafes have their own customers. There are no other direct competitors.
- Joe's Cafe has its peak traffic during the lunch hours (12:30 - 2:30 pm) and evening hours (5pm - 6:30 pm). It is popular for its selection of sides.
Share Table 1 with the candidate to give him the financial performance of the past 3 years
Exhibit 1
The candidate should try to get to the segment which is responsible for the stagnating profits. A great candidate would solve for the growth rate & gross margins immediately. If required, prompt him/her to calculate the growth over previous year and the gross margins for the two different business segments.
After the candidate has finished the calculations, share Table 2 with the candidate which gives the key metrics.
Exhibit 2
The interviewee should reach the following conclusions based on the data shared:
- The overall revenue for the business has been growing at ~10%. However, the profit has remained the same. Therefore the overall margins are declining.
- The revenue from beverages has been stagnating for the last three years. However, this is in line with the industry.
- The revenue margin from the beverages segment has remained stable.
- The revenue from the sides has been growing and is the driver for the overall growth in sales.
- However, the margin from sides has been declining and is responsible for the stagnation of profits despite the growth in overall sales.
2. Analysis
The candidate must try to deep dive into the sides business segment in order to understand the reason for the drop in margins. They should look into the product mix and material/labor costs for the products.
If asked, the below information can be shared verbally with the interviewee:
- Product mix has largely remained the same within the sides segment.
- All the items on the sides menu including the sandwiches are prepared in advance and heated on request after an order has been placed.
- However, two new 'made to order' products have been introduced in 2016: sweet potato fries and pulled pork burgers.
- The sweet potato fries are made in batches and are only available in the evening. The pulled pork burgers are custom made after an order has been placed and are available only during lunch hours.
- The cost of material/labor has not changed in the last 3 years.
As there have been two new product introductions, the candidate must ask for more information in order to understand the profitability of these products.
Share Table 3 & 4 with the candidate with the details of the new products.
Exhibit 3
Exhibit 4
The candidate should use the information from the tables to calculate the margins for both the products.
Pulled Pork
Labor Cost per burger = (3 hrs X $20 per hour) / 30 burgers
Labor Cost per burger = $2 per burger
COGS = Material cost + Labor Cost
= $4 + $2 = $6 per burger
Margin = Price - COGS
= $5.5 - $6 = ($0.5) per burger
Margin per day = ($0.5) x 30 = ($15)
Sweet Potato Fries
Labor Cost per portion = $20 per hour / 16 portions per hour
Labor Cost per portion = $1.25 per portion
COGS = Material cost + Labor Cost
= $1.5 + $1.25 = $2.75 per portion
Margin = Price - COGS
= $4 - $2.75 = 1.25 per portion
Margin per day = $1.25 x 100 = $125
Key insight
The sweet potato fries are profitable. However, the pulled pork burger is loss-making at a unit level.
The sweet potato fries are profitable. However, the pulled pork burger is loss-making at a unit level.
3. Recommendation
Prompt the candidate to come with solutions to overcome the issue of the loss-making product.
Some of the potential solutions to the issue could be:
- Remove the product from the menu. However, this would lead to a drop in sales and hence is not viable.
- Increase the price of the burger to ensure that the burger is profitable at a unit level. However, this would depend on the price elasticity.
- Reduce the price of materials that go into the burger by tweaking the recipe.
- Reduce the per unit labor cost. This would be possible only if more burgers can be prepared and sold in the same amount of time.
- Currently the Cafe sells 30 burgers with 3 hours of dedicated employee time which means a per unit labor cost of $2
- In order to break-even, the labor costs would need to be reduced by $0.5 - the current amount of loss per unit. So the target labor cost per unit is $1.5
- Therefore the sales would need to increase to 40 burgers ((3 hrs x $ 20 )/ $1.5) or time taken to prepare 30 burgers need to come down
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