Our client is a large retailer that is evaluating the opportunity to acquire a fast-growing consumer company in the apparel space called TuxedoRental.com (Tuxedo). They are preparing a final bid and have retained our consulting firm to offer an opinion as to whether Tuxedo is an attractive acquisition target.
Tuxedo's business model is simple: they offer men across the United States the opportunity to rent Tuxedo's online at a discount to what typical brick-and-mortar retailers charge. They offer three suit models: Milan (classic fit), Monaco (slim fit) and San Marino (looser fit). All rentals are one-week in length and cost $95, including two-day shipping.
Tuxedo is based in Sunnyvale, CA, where they have corporate headquarters for their 50 employees and a warehouse. All 3 models are available in standard sizes for men and Tuxedo rarely faces stock-outs.
Our client would like to know if TuxedoRental’s business model is sound to inform the decision of whether or not to acquire. If it is not, they would like to know what improvements can be made to the business.
In this interviewer-led case the interviewee should be guided through the case by the interviewer.
Suggested case structure
- Market size: How big is the market for Tuxedo rental? How many customers are there in the market and how often do they rent on average?
- Penetration: What is Tuxedorental’s market share?
- Profit/unit: What are the economics for each unit? Is there a chance to increase prices?
- Lifetime value: How will the above economics change over a medium to long term period?
1. Market sizing
2. Unit economics
3. Customer lifetime value
If needed, share with the interviewee the below definitions:
Customer lifetime value : Estimate the total revenue a customer brings in over their lifetime
Churn rate: The percent of customers who stop using the business each year.
4. Revenue growth opportunity analysis
- New customers- will this partnership tap into a new demographic of customers or convince customers who are “on the fence”?
- Existing customers- with this partnership increase occasions among existing customers?
- Price: Does this partnership increase the price we can charge for rentals? Is the designer popular with our target customer?
- Cost: What are the costs of this partnership? Will this cut into our already thin margins?
5. Ecommerce funnel
6. Executive summary
Sample points to share with client:
- Yes, you should acquire Tuxedo at a low bid and make some easy improvements to the business.
- As we evaluated the Tuxedo acquisition, we looked at many angles, including customer, company and competition (include detail behind each)
- In evaluating the market size, we estimated a $5.7B market which shows high potential
- Looking at current unit economics, net margin is quite low at $10 but there is an opportunity to increase this to $30 with minimal loss of customer interest
- Currently, acquisition costs outsize lifetime value so a price increase will be necessary to make the business profitable
- As we examine the eCommerce funnel, there is significant opportunity at checkout, as cart abandonment rate is 90%, leading to just a 1% conversion rate