Zenith Gas - MyConsultingCoach
Case

Case prompt

Zenith Gas is a national distributor of Liquified Nautral Gas (LNG) to homes & corporations. The management is curious about rise of alternative vehicle fuels to diesel & petrol.


They are now contemplating entering retail market for LNG filling stations. CEO wants help in deciding whether Zenith Gas should do this?


Comments

In this interviewer-led case the interviewee should be guided through the case by the interviewer.


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: What areas would you explore to determine whether to enter the market for LNG?

Exhibit 1 


 
Compare additional profit with required investment:
  1. Profitability: estimate additional profit for the client with the market entry compared to the as-is scenario
    1. Revenues: estimate the size of the market and how much volume the client can expect to sell; identify the right price point based on similar products in the market
    2. Costs: understand the additional fixed and variable costs required
  2. Investment: consider all costs to be incurred for developing LNG filling stations

      If needed, share Exhibit 1 with the interviewee


      1. Size of Market

      Key question: How would you estimate the total market size for LNG retail vehicle in 2020? 

      Interviewee should walk through the approach for calculating overall market size prior to sharing the exhibit


      Total market size in revenues = # of Vehicles * Tank size in gallons * Fill frequency * Price per gallon


      Share Exhibit 2 & 3 with the interviewee to estimate market size

      Exhibit 2 


       

      Exhibit 3 


       

      Ask interviewee to do use the exhibits to calculate market size in 2020 overall & for each customer segment.


      Number of vehicles in 2020 = 120% of 100M = 120M


      Number of vehicles with LNG = 10% of 120M = 12M


      Annual revenue of each segment:

        • Commercial Trucks: 25% of 12M * 100 gallons * 3 fills / week * 52 weeks * $2 = $93.6 B
        • Privately Owned Vehicles: 60% of 12M * 20 gallons * 2 fills / week * 52 weeks * $2 = $29.9 B
        • Farm Use: 10% of 12M * 30 gallons * 1 fills / week * 52 weeks * $2 = $3.7 B


        Total Annual Revenue = 93.6 + 29.9 + 3.74 = $127 B (~$130 B)


        Key insight:

            • An attractive market by 2020 and with increasing government support
            • However, Profits & Break-even period needs to be considered before making any decision


          2. Profits & Payback

          Key question: Assume initial investment of $15B and required payback of 5 years. Can client achieve this benchmark? 

          Ask interviewee approach to calculate payback period


          Payback period / Break-even Period = Initial Investment / (Revenue – Operating Costs)


          Share exhibit 4 upon request

          Exhibit 4 


           

          Calculations:

              • Revenue per year = 20% of $130B = $26 B
              • Net profit per year = 10% of $26 B = $2.6 B
              • Payback period = 15 / 2.6 = ~5.75 years


            Key insight:

                • Client objective of having payback period of 5 years is NOT met


              Key question: What should the client do? 

              A strong interviewee should proactively discuss ways to reduce payback period even without prompting


              Look for interviewee breaking payback period improvement into logical steps and then generate ideas into each bucket. Check here for business judgement & creativity


              Payback period can be improved by:
              1. Increasing revenue
              2. Decreasing operating cost & initial investment


                1. Increasing revenue (illustrative)

                    • Increase price of fuel
                    • Sell more goods (convenience stores)
                    • Sell other fuels
                    • Allied services – e.g. carwashes
                    • Sign volume deals with business to increase market share
                    • Change location mix for stations to better target


                  2. Decreasing cost (illustrative)

                      • Partner with existing stations to reduce investment
                      • Franchise the format to distribute investment burden
                      • Lease land instead of purchase


                    3. Final recommendation

                    Key question: CEO of Zenith gas is about to enter the room for a quick update on project, what would you tell him? 


                    Zenith Gas should enter the market for retail LNG filling stations

                        • Attractive market – growth & large ($130 B)
                        • Increasing government support
                        • Zenith has capability to serve this need


                      However, since the payback period is higher than the 5-years target (5.75 years), Zenith must make strong steps to minimize costs of both investment & operation


                      Possible risks:

                          • Drastic decreases in cost of substitutes
                          • Disruptive technology
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