Real voice case interview transcripts

Hey Alex, sure. So we got a client running a network of EV charging hubs across Spain over the past year 2022 to 23. They have seen a drop in profits. Our job is to figure out what's driving that decline, whether it's coming from the revenue side, cost side or some combination of both. And then we have to come up with concrete recommendations, what they should and could do to turn things around. Does that sound right to you?

Yes, a few. First, what's the client's primary goal here? Are they trying to get back to where they were in 2022 or are they actually trying to work toward a higher profitability?

Good point. Let me ask about the competitive landscape. Has anything changed on that front? Like are there new players entering the EV charging market in Spain? Or has pricing pressure increased from competitors, meaning they have lowered their prices, for example?

Okay, thank you. That was really helpful. So then I guess we know that it's not driven by new competitors coming in. So the question for me then would be if we have a sense of maybe the number of customers visiting the hubs has changed? Or is it the same number that is?

No, I think I have enough for now. So give me a moment to structure and collect my thoughts and then I think I will walk you through our structure, through my structure.

Okay, so we know that profits are down and profits are basically the revenue minus the cost. So I would like us to look at both sides. On the revenue side, I think about two things. How much volume are we doing? So number of charging sessions and coffee and retail transactions. And then what prices are we charging? Right? So that is the things to look at. On the cost side, I'd look at both fixed costs, things like rent and staff. And then variable costs like electricity. And then I would want a third branch to look at around the customer and competitive context. Who is coming? Are they coming less often? And is the higher cafe pricing actually pushing people away? Those three buckets, revenue, cost and customer behavior, should help us pinpoint where the problem is coming from.

Okay, so let me think through both sides. On the EV charging side, the revenue could be down if there are fewer charging sessions, maybe because EV adoption in Spain grew slower than expected, or because competitors open nearby hubs and pull customers away. And even if the volume is steady, revenue per session could be down if they cut prices or if people are charging less per visit, like shorter top-up charges instead of full charges. On the cafe and retail side, and this ties to what you mentioned, if their prices are noticeably higher than highway rest stops or shopping centers, customers might just grab a coffee somewhere else where they wait. So spend per visit could be dropping or footfall into cafe could be down if charging sessions are shorter. People don't stick around long enough to buy anything. And then on the cost side, electricity prices in Spain could have shot up between 2022 and 2023. That's something we need to look at. So if they increase, then our margin on every single charging session would be down. And then furthermore, we still need to look at the fixed costs like rent and stuff. If they could have gone up two, then that would be even a larger problem.

Not really. Looking at the graphic, it looks more like that the electricity cost actually stayed perfectly flat. So that is not it. We could then, you know, if we're talking about cost increases, other things that come to mind is the rental cost and the staff cost that could have risen. Maybe we should look into that.

Basically what we are saying is that the retail revenue is the one thing that really dropped. What we can see is that the general revenue even went up, but what really is problematic is the retail revenue.

So what we're seeing is that actually for charging, we had higher visitor patterns and we had a drop in retail. And that drop in retail was so significant that it overcompensated the increase in the charging. And so both together were still smaller than 2022.

Sure. So here's where it would land. The profit decline from 2022 to 2023 is coming from two places hitting at the same time. On the cost side, electricity prices in Spain. Hold on. Stop. Let me rephrase that. What we can see is that the profit decline is not coming from the electricity prices, but rather from the retail segments. So we have seen that the customer visits have dropped in the retail segment and that that was overcompensating even higher visitor numbers in the charging space.

We're here trying to help the client to rent a division of his gear resort to figure out a way to cut costs without affecting quality.

Can you tell me a little bit about the business model? Essentially, I guess this rental division we're talking about, they basically rent out ski equipment on a day or week basis to visitors, right? And do they, I guess they don't manufacture their own equipment, so they buy equipment in, right? I suppose.

Two questions here. Number one, just to confirm we're only looking into cost cutting but not on the top line revenue side. And number two, do they have a specific target in mind when it comes to cost reduction quantitatively or the magnitude of it?

I think we're good to proceed.

I think there are two buckets of course to look into. One bucket is related to the skiing equipment and the other bucket is related to the other type of course. When it comes to the skiing equipment, I think there are three components to look at. One, it is about maintenance or the cleaning of the equipment before it rents to the other person. The second one is really the repairing of the broken equipment, which in essence is the parts that is required to repair the equipment. The third one is really buying new equipment. As I was also imagining that a very important part of the business model is to buy as cheap as possible new equipment and then rent it out at a higher price. For the other bucket, I will be looking into general administrative costs. This is obviously linked to the full-time employees headcount of the rent and division. There's also a component about rent that we may or may not have to pay to the parent company of the skiing company, of the ski resort company. And the third one is really any utilities like electricity, water that may incur from running the business. So therefore, where we want to prioritize our effort is in the first bucket on the skiing equipment, because I think that's a huge driver of the cost.

I think it's along the same line of the structure I outlined to you earlier in terms of the scheme equipment, because it's about maintenance and cleaning part of this. It's also secondly about repairing the equipment. Here we have to be mindful of both the parts, which is sort of a physical goods required, right? To fix the equipment, but also the process around it. Maybe there's certain things we can do with optimizing the process to make it more with less lead time, right? downtime and therefore really push up the utilization of our staff for repairing. The third bucket of course is of course the equipment that come in which try to lower the price we negotiate with the suppliers to get a more favorable offer when we purchase this equipment. And then of course the other bucket is as I mentioned general administrative, the rent and utilities. Given the magnitude of around 10% cost we're looking into, which is not a huge number, it's not like 50%, right? So I will probably start with the skiing equipment related cost.

I would hypothesize that we should prioritize looking into equipment purchase and the maintenance cost simply because it is a huge maturity of the cost which grows proportionately larger as we move on to larger equipment. The bucket said I would prioritize less is safe inspection, insurance, cleaning, training because they are flat across all sizes. So that's my current hypothesis.

So the formula I have for each category is basically the number of scats rented out multiplied by the total cost of that particular category divided by the... So basically it's the cost multiplied by the volume of it. So for adult XL, it is 1000 multiplied by 900. That gets us to 900,000. For the adult category, it is 7000 multiplied by 540. So that gets us to 3.78 million. And then for junior is basically 2,000 multiplied by 361, which is 722,000. So when you add these numbers up, we will get to 5402,000, which is 5.402 million annually.

So the per set cost for adult XL is 900. Per set cost for adult is 540. And the per set cost for junior is 361.

Can you repeat again the reduction percentage or reduction applied?

The cost for junior is 293.

We should think about the storage costs and then after that, the potentially the maintenance costs and the equipment purchase costs as well. But we have to be careful there to not impact the quality of the equipment often.

We recommend to reduce the insurance and training costs for the equipment with minimal impact to the quality of the equipment we offer. The impact of this for junior equipment is around 50% cost reduction, but it's disproportionately less for the adult and adult XL. And it's broadly in line with our 10% target that we have in mind in terms of overall cost reduction. The next step to investigate is to see if there are further cost reduction opportunities in equipment purchase and maintenance which are the huge key drivers without impacting the quality. And that's what we recommend for the next phase.

Our client today is Meridian Entertainment. They are a live entertainer in the US. They own the Soundstage Theatre, which is a 2000 seater in Nashville. They have been playing the Nashville Legends for eight years and they feel that it's becoming boring now. So to improve their revenue, they have contacted McKinsey and we are going to solve the problem for them.

Yes, they did mention that the show has become stale. Do we see a drop in customers or revenue or what side of profitability do we see a decline and where should we focus on?

Okay, so our client is Meridian Entertainment and they operate multiple theatres, right? So is our focus today only on the soundstage theatre?

No.

Okay, so there are three key pillars that I'm considering today. Because you mentioned that the revenue and profits have plateaued, I have divided my frameworks into revenues, costs, and market attractiveness. Under the revenue framework, I would like to know and delve deeper into the number of customer footprint in the theater, what is the average ticket fare that they are paying. And in the cost segments, I would like to delve deeper into the wage that the actors get paid, the cost of taking acting classes and practice sessions in the theater. And because it is the entertainment industry, how much Meridian Entertainment pays for the marketing segment as well. And under the market attractiveness framework, I would like to understand if this is a very company specific trend or is the overall market taking the hit when it comes to live entertainment. I would also like to see if there are any specific competitors who have seen a behemoth rise in the last two, three years. And I would also like to see if we can cater to a different audience segment. So the National Legends has been playing for eight consecutive years. Is there any mix and match of plays that we can try and to garner more attention to a different customer segment is also something that I want to think through. Is the bucket analysis good enough? Can I proceed to the next segment? Thank you.

Should I calculate the annual ticket revenue for Nashville legends?

So if I multiply 240 with the total revenue per show, I'm getting the total value of 330 million in a year. That's our collection. Is the analysis right?

Each segment by 240. The first segment having an upper average show revenue of 60K, multiplying it by 240, we get about 14.4 million. For the second category, we have a total of 15.36 million. And for the third category, we have 32.3.24 million. So that gives us a total of 34 million approximately.

The cost segment. So the total cost of operating the whole theater is 6.25 million in a year. The maximum amount of spending goes to the performer contract with about 80% of total cost. And it is followed by paying the crew and staff, which is about 720K, followed by 240K for marketing, followed by production costs of 144K. And the long tail segment consists of a meager 100K for both housekeeping and utilities. So I would like to look deeper into why the performer contracts, why we pay a very hefty amount for performer contracts. 5 million is a huge number. So I'd like to dig deeper into that.

The hypothesis, so I believe that switching right now is not a good option. Even though Nashville Legends operates at a higher cost and the cost for TikTok star is much lesser. When it comes to profits, we do make a higher profit than TikTok star, which is about 1.2 million greater than theirs. And there was also an additional switching cost. So even though we would appeal to a younger audience, it would take about four years to breakeven. But at the same time, since there is a higher buzz in the social media for TikTok star, that is one reason to pivot. But I don't think with the data that we have, it's enough for us to decide whether we have to pivot or not. So I would like to have more data on the cost of maintaining the model. Or do we need it? I think 3.6 million is the switching cost. And it would take about three to four years to break even. So it's a pretty neutral stance and we have to look into other factors and the stability of the trend for the next two or three years before deciding to pivot.

There are three key levers that I would like to focus on. The first one being potential partnerships with food and other entertainment collaboration companies because one driver for the theater industry has always been a complete entertainment package filled with entertainment as well as the food segment. So I would like to find potential partnerships for food and beverage. The second lever that I would recommend is to drive bus, especially during the holiday season, to aim for a house full footfall and have the entire 2000 seater filled during the holiday seasons and Christmas seasons. And my third lever of suggestion would be social media marketing, partnering with multiple distribution channels and creating constant interaction and attention, driving higher bus to the overall entertainment segment is my third suggestion so that we don't have to revamp our entire operational model, But gain the benefits just by attracting more customers and catering to a more niche and a very attentive audience group.

All right. So Meridian Entertainment can continue with playing the Nashville Legends. It has been a legacy entertainment model that we have for about eight years. And if we were to move to TikTok star, we need three to four years to break even, which is not feasible right now. But instead, we can look into potential collaborations with food and marketing companies and also drive bus during the holiday season to aim for a household footfall and also look into other key elements of entertainment and focus on reducing costs with the entertainment contracts as well and look into alternative entertainment contracts. So that would be my suggestion.

Our client GreenBite has an EBITDA of $42 million that has decreased to $30 million in the span of one year from 2023 to 2024 despite revenue growth. And we'd like to understand why EBITDA has decreased and how to increase it in the next year.

Are there any internal changes that have happened in the past year that we should be aware of? For example, trying a different business model or offering new products?

What types of snacks does GreenBite sell?

Where does GreenBite sell these products? Is it in stores? Is it in restaurants?

Great. Is the main objective to understand why EBITDA has decreased between these two years? Is there like a breakeven target we want to reach in the next year?

Great. I'd like to understand why Green Bites EBITDA has decreased through three analyses. First, I'd like to understand what's going on in the general market. What is the market sentiment of chips, crackers, and protein bars, and have they changed in the past year? We know that GreenBite has strong revenue growth, so it's expected that with the increase in convenience channels that we actually are selling more, but it'll be important to know if there are market share considerations long term to be aware of. Here is where I think the main concern comes from, which is the cost to make these different products. My questions would be you know is the cost of goods sold in the value chain changing in some way So is it that raw materials or the manufacturing process or the distribution and shipping costs are rising very rapidly I'd like to take a look at what those financials look like to address the change in cost for our product offerings. And then finally, I'd like to think about other considerations. For example, product sentiment change. Are chips, crackers, and protein shakes, are they seeing gross regulation changes in the food space? We know that the food pyramid has changed this past year with health and FDA considerations. So I'd like to address also those types of risks. With that, do we have information about the costs of these products?

This is interesting. It seems that we can diagnose the problem of EBITDA decline is not due to revenue since revenue seems to be growing year after year from $280 million to $290 million to $292 million. But rather, the problem seems to be the costs related to shipping and distribution to our different customer channels across grocery, convenience, and e-commerce. We see that the variable costs have changed from 2023 to 2024 only for the convenience customer channel, but has stayed the same for grocery and e-commerce. So with the convenience store channel increasing in revenue, what I'm thinking is happening is as we are selling more to different convenience stores, that is changing the variable costs here from $54 million and increasing it to $68 million, which is a net $12 million increase of our costs, Which seem to be eating at our general profits. My guess is that convenience stores are targeting different geographical locations. So in our value chain, we're incurring higher distribution costs. Do we have more information related to our distribution costs for that customer channel?

It looks like convenience channels revenue grew 7% but the contribution fell 22% from 2023 to 2024. And that variable cost inflation is the main driver here.

The two biggest EBITDA decline factors seem to be promo intensity and logistics inflation. In Green Bites snacks contributing to a negative $7 million impact in promo intensity and negative $5 million impact in logistics inflation, which is a total of negative $12 million impact. Other concerns also seem to drive this impact down, but those other concerns seem to be at the same impact level as the growth in price and volume and revenue captured. So my understanding is that although we have grown in the number of units sold and number of customers, that our promo is actually outpacing this growth and that we should probably dial back in our marketing and focus more on retaining customers long term who are already aware of the brand. Logistics inflation year after year, the shipping distribution and other parts of the value chain might be increasing to create these products. So we could also consider partnering with different suppliers or identifying cheaper routes for delivery to help decrease the value bridge negative impact from promotional logistics inflation.

It seems that our EBITDA has decreased by $12 million, which is a net decrease of about 29%. And promotions and logistics make up a large percentage of that decline. It actually makes up 100% of the decline from 2024 and 2023.

Great. So if we cut promo intensity and logistic inflations by 40% and 25% respectively, we have 60% times 7 million, which is 4.2 million, and 75% times 5 million, which is $3.75 million, which is a net negative of 7.95 million. For EBITDA, but if we recover 40% of $7 million and .25 times $5 million and add them together, we would recover $4.05 million. Which would still be a net loss in EBITDA of $3.9 million. So that would not be enough to address EBITDA growth and to make this company profitable.

Great. So we found a problem. GreenBite EBITDA declined from $42 million to $30 million. It seems to be due to costs related to promo intensity and other inflationary costs in the value chain. And currently they're driving our EBITDA down by a net together $12 million. And even if we decrease our initiatives for promo intensity and logistic inflations by 40%, 25% respectively, we would still be at negative EBITDA. So my recommendation is to think about either product diversification to increase revenue even greater, to consider customer channel remixing to reduce the cost burden in our convenience channel, to try to get at the EBITDA on top of promo intensity and logistic inflation costs cutting.

Urban Coffee, the client has experienced a decrease in profitability going from $24 million to $12 million over the course of one year. During the same time, there has not been a decrease in revenue.

Before I structure my analysis, I wanted to understand a little bit more about this case. So the client, their business, what are the products that they sell? How much do they sell? What are the prices? Geographically, where do they sell them to? And who are their customers and how do they segment? Second, I'd like to understand a little bit more about their costs, what their fixed and variable costs are, if there's any data on that. Third, I'd like to understand what some of their other variable costs are, how much marketing and promotion that they've been paying.

Have there been any recent changes in the operations or structure or product offerings of Urban Coffee?

No, I'd like to take a few minutes to structure my initial thoughts around this case.

So because this is a question of profit, ultimately profit equals revenue, which is units sold times the price minus the costs. And those costs include fixed costs plus variable costs. And variable costs are the number of units sold times the unit costs. And that can include a whole host of different things like promotions, labor, distribution networks, and COGS. And so given this overall framework, I'd like to address three different buckets. First, I'd like to really look into costs. I'd like to start there because given that the top line has remained steady, I would hypothesize that the decrease in revenue is primarily coming from an increase in costs. So I like to understand if there have been changes in fixed costs Has the client been buying more retail property and increasing their capex Second I like to understand what the variable cost situation looks like Information earlier was given that the cost of labor has gone up I like to understand what that looks like Additionally has the client been investing more in their promotional campaigns Has the cost of their distribution networks changed or has the cogs of the underlying products that they sell changed In addition to costs, second, I'd like to really look into the channel economics. So the client sells multiple products in their stores, various food items as well as their coffee. What are the individual margins on those different items and can we understand more about how shifts there are affecting the bottom line? And three, I'd like to also take a look at the revenue side of the profitability equation. So what is the revenue mix? I know profit or revenue has remained constant and it's slightly increasing, but is that coming from a shift in the revenue mix? Are we selling more things that have lower margins for instance? So I'd like to understand that revenue mix. Additionally, I'd like to understand how much flexibility we have on price. So one way to restore profitability would be to increase price. So how elastic are our customers there? So overall, to really address this profitability question, I'd like to explore in order the three buckets of costs, channel economics and revenue.

So from this data, it looks like revenue has increased. It's increased by $30 million or 14%. But that 14% increase in revenue is outweighed by a larger increase in cost. So subtracting the revenue from the margins, we can see the cost for each of the years. We see that between 2022 and 2024, costs have increased $48 million or 30%. So given a 14% increase in revenue but a 30% increase in costs, that's how we're really getting to this $18 million decrease in profitability. Again, this justifies, I think, really looking into cost as the first bucket and understanding where the drivers of this cost increase are coming from.

So if we were to see a decrease in costs from 59% to 50% on $56 million in revenue, we would essentially see a $6.8 million increase.

So looking at this data here, it appears that the biggest impact in the increase in costs are coming first from labor costs, which are adding $8 million, then second food and promo costs, which each are adding $5 million. So overall we see $28 million in extra costs coming just from there. And so that gives us a great place to look. Potentially we can renegotiate our inputs to decrease the food costs. We can be a little bit more disciplined about the promotions that we're doing and identify low ROI promotions and cut those out. Labor can be a little bit tough. I don't think we can reduce hourly wages, but we can take a look at whether there is extra redundant labor that could be addressed. And between these three buckets, we might be able to achieve our 18 million boost backup and profitability.

So when we further segment the revenue channels for the client, we see that for coffee, roughly the revenue and cogs have been largely unchanged and as a result, the profit has not really changed, actually slightly gone up. For both the bakery and sandwiches, we see profit for each of them having gone down 4 million. For the bakery, we see both a decrease in revenue and a slight increase in COGS. But what's been interesting is in sandwiches, we see an increase in revenue of 11 million, but a much, much larger increase in COGS of 15 million in sandwiches. And so though the decrease in profit in bakery and sandwiches are both minus four, it seems like the absolute change in the cogs of sandwiches are a much larger kind of like relative change and something I would focus on first as one of the drivers to really address the profitability gap.

From the data, I would say that addressing the substantial increase in the cogs of sandwiches will be one of the first places to hone in on as a lever to drive profitability back up. So overall what we saw was a decrease of $18 million in profitability. That $18 million largely comes from an increase in the cost of promotions, labor, and logistics of $18 million, of which the largest contributor was an $8 million increase in the cost of labor. What we see is the largest increases in COGS are specifically in the sandwiches sector above like bakery for instance. There we're seeing an increase of $15 million in the COGS almost reaching the $18 million increase in overall cost of goods. Because the largest drivers are things like promotion and labor I would recommend that the client address a little bit more discipline in their promotional strategies identify promotional strategies that are low ROI and remove those Additionally, given the increase in the cost of labor, identify redundancies in labor or identify certain retail locations that could potentially be merged, for instance. That would drive down the cost of labor there. And third, given the cost of food and raw materials, specifically among sandwiches, identify whether new suppliers or new contracts can be made to find cheaper ways to source ingredients. Now the big risk here is by reducing the amount of labor present you might soil the customer experience. Additionally, changes in ingredients might similarly turn off customers and so there is a risk there. I would recommend that any changes that are made be made sequentially with constant feedback coming in from customers to identify whether certain changes are affecting the customer experience and therefore could negatively impact revenue going forward.