LOGIC AUC Retail Case Study 0307

STRATEGY CONSULTING CASE STUDY

LOGIC Management Consulting

CONTENTS 1

Background .......................................................................................................................................2

2

Project Planning...............................................................................................................................3

3

Internal Assessment ......................................................................................................................3

4

External Assessment .....................................................................................................................5

5

Key Strategic Questions: ...........................................................................................................10

LIST OF FIGURES Figure 1- Lines of Business ............................................................................................................................ 2 Figure 3-Simplified Organizational Chart ...................................................................................................... 3 Figure 2- Product Lines .................................................................................................................................. 4 Figure 4- Key Strengths and Weaknesses...................................................................................................... 4 Figure 5- Marrimekko Chart .......................................................................................................................... 6 Figure 6- Simplified Market Sizing Table ....................................................................................................... 7 Figure 7- Key Competitors ............................................................................................................................. 7 Figure 8- Retail Market Map ......................................................................................................................... 8 Figure 10- Consumer Finance Matrix ............................................................................................................ 9 Figure 14-Share of Installment Sales per Product Category ....................................................................... 13 Figure 15- Age Distribution of Installment Sales per Product Category ..................................................... 13

LIST OF TABLES Table 1-Net Sales per Product Category .....................................................................................................11 Table 2-Proft Margin per Product Category ................................................................................................11 Table 5-Share of Repeat Customer .............................................................................................................12

1

BACKGROUND

Imagine a Company XYZ that is a specialist retailer working in household appliances and consumer electronics. The company was founded in the early 2000’s and was the first of its kind in Egypt. In a market dominated by large government-owned department stores, many doubted the idea and thoughts it wouldn’t survive for long. However almost 20 years later, Company XYZ thrived to become a market leader in its industry while these department stores closed. The company is currently facing a series of challenges, the foremost is the declining industry margins driven by the customer expectations and rapid advancement of technology for the Original Equipment Manufacturers. This is coupled with growing competition both domestically and from the GCC. So in order to ensure the sustainability and profitability of the business, they need to design a strategy to not only mitigates against these increasingly challenging trends, but also to take advantage of them to rise above the competition. Through years of successful work with their brands and excellence in customer service Company XYZ has been able to exponentially grow their retail footprint, attract more brands, diversify its product offering, but also it ventured in new activities to better serve its customers. First, it established a service center to serve its customers; this business not only served as a revenue stream but also strengthened their brands’ equity. The second additional service that has been widely successful over the years, is its provision of credit to its customer. While this was a risky business decision, it proved fruitful until today.

Lines of Business

Figure 1- Lines of Business

Retail After Sales Service Installment Sales

This company’s complexity is further increased when looking at the corporate culture and organizational structure. Due to the complexity of the organization and the fast-paced nature of the industry, top management would change the corporate structure almost every year.

While this helped Company XYZ to adapt to the changing market dynamics and place the right people at the right place at the right time, it also had the drawback of creating ambiguity about career progression but also increased the risk of creating redundant departments or misallocating key functions to the wrong department, which could result in conflicts of interest, double reporting or having executives managing unrelated functions with different skill requirements. The structure in place during our assignment was the following:

Figure 2-Simplified Organizational Chart

2

PROJECT PLANNING

Once we got briefly introduced to the company and got an understanding of the issues they were facing, the first step was to develop a project plan that would serve the two objectives of the assignment, namely a strategy that would mitigate against the industry’s new challenges and beat the competition but would also be clear and comprehensive enough so that the whole organization is aligned on where they would all be heading for the next 5 years. The project was divided into 2 basic phases, first a DIAGNOSIS phase which included both an external and an internal assessment. These assessments served to give us as consultants a thorough understanding of the business internally as well as the market in operates in. This phase provided us with the tools to work on the DESIGN phase, in which we worked with their own taskforce team to identify opportunities for growth and generate ideas on how to capture these opportunities.

3

INTERNAL ASSESSMENT

To develop a solid relevant strategy, we needed to get a good grasp of the core capabilities of Company XYZ. The first step was to look in details at their product lines. The company is working in 5 different product categories as shown in Figure 2 below

Figure 3- Product Lines

Mobile and Laptop (ML)

Audio Visual (AV)

Ventilation (V)

Personal Care (PC)

Kitchen Appliances (KA)

Product Lines

The largest sales by far were for Kitchen Appliances (KA), not only was this their first product line but these were also big ticket items, meaning that each sale generated a large sum of money. Because of the reasonably high margins they were also the largest contributor to profit. Meanwhile, the highest growth was attributed to Mobile and Laptops (ML) which had almost double the growth of the second highest growing product. However, the issue with that product line was that margins are extremely low due very high competition. When looking at the profit margins, the obvious star was Personal Care (PC). While its contribution to revenue wasn’t that impressive, it had the second most important contribution to profit, after Kitchen Appliances. For more details please refer to the annex. While conducting interviews at the start of the assignment, one of the areas we probed about was what people perceived as the strengths and weaknesses of Company XYZ. The following summarizes the key strengths and weaknesses discovered during the internal assessment: Figure 4- Key Strengths and Weaknesses

4

EXTERNAL ASSESSMENT

Now that we had a firm understanding of the Company XYZ’s inner workings, we needed to turn our attention to the market. This would be done through a series of steps, first we would analyze the environment using the PEST framework. Then, we would size and segment the market, analyze the competition and finally we would highlight the key trends in the market. The key highlights from the PEST analyses that were used to guide the strategy are: P: Political instability in the recent years caused major uncertainty in Egypt and the region, increasing risks of operating in the retail and manufacturing industries E: Egyptians are borrowing more money explaining increases in consumer spending, yet there is high potential for growth as indicated by the low personal loans to GDP ratio S: Consumer spending shows a rising trend that has a very stable cyclical spending pattern, and is forecasted to slowly recover in real terms T: Internet penetration has produced a more informed consumer-base changing the dynamics of the consumer/seller relationship Following the PEST exercise, market sizing would be the first milestone in determining where to play. By segmenting the market by product category and socio-economic customer segments, not only were we able to measure the overall market share of Company XYZ, but also get a grasp on which product categories and what customer segments should be the focus of the strategy we were to design. But, accurate data on consumer demand is scarce in Egypt. Therefore, the market size had to be modeled used several proxies to obtain a realistic estimate upon which the strategy can be built upon. The product categories corresponded to the products sold by Company XYZ, while customer segments were based on socio-economic factors such as income, education, area of residence… According to this segmentation, the “A” customer segment corresponds to the highest socio-economic segment. A key issue when sizing their particular market was that a large share of it was part of what is called the grey economy. These were largely represented in the form of shops in Abdel Aziz Street in Downtown Cairo. This street is a hub of appliances and electronics stores that in many cases were unregistered, did not always pay their full taxes or customer duties, and may at times have sold counterfeit products. In our market assumptions, we used the marriages and appliances renewals as the key drivers for sales in the market. We also added the usage patterns of the different market segments and the average price points per each product the client is selling. After coupling that with external information about the sales in the market, we found that the total market for the targeted products is around EGP 27 Billion as shown in the “Marrimekko” chart below. The advantage of this graph is that it shows multiple dimensions at once without being too confusing. Basically, the boxes on the Y axis represent the size of market for each product category, while the size of the boxes on the X axis represent the size of the customer segment,

meanwhile, each of the center boxes’ area represent the size of the market of a certain product category for a certain customer segment. Figure 5- Marrimekko Chart

While the above graph was good at showing all the data gathered, we needed to further simplify it to make it useable. As such, we grouped together the most similar product together as well as simplified the customer segmentation. First, we excluded the DE segment as they mostly buy their products from the grey market and out of interest to the client. Second, through some consumer research we found that part of the C1 segment have similar purchasing habit than the AB segment while the rest were still more conservative and were more similar to the C2 segment. So the resulting customer segments were “AB + Aspirer C1” and “C2 + Conservative C1” The following table is the simplified version of the market sizing table:

Figure 6- Simplified Market Sizing Table

KA+PC

ML+AV+ V

Once this market was sized, we still needed to assess the competition to get a grasp of which markets were more attractive. The following table gives a brief overview of the competition analysis: Figure 7- Key Competitors Key Competitors

Website Ranking

KA, PC, AV, ML and V

AV and ML

PC and ML

PC, AV, ML

Through both the internal assessment and the previous phases on the external assessment we find a number of trends that were worth highlighting and would be key to the strategy we were to develop. For the retail and commercial business we found that there was a: -

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-

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Shift towards organized retail. Consumer were putting heavier emphasis on convenience and customer experience, which were absent or low in the case of stores in Abdel Aziz street Noticeable increase in the use of internet and social media in the shopping cycle. Consumers appreciated the convenience and ease of getting information that were synonymous with the internet experience. It was also important to note that while the online channel of Company XYZ ranked below that of several competitors, their social media presence was far better than any other competitor Threat of foreign entrants, mainly from GCC based competitors. There were 3 notable threats, the first company was leveraging on their repairs and maintenance programs, the second on their large megastores that provided unrivaled product variety and finally the third relied on their premium stores and top notch customer experience. The latter also hosted a very popular online marketplace in line with the likes of Amazon and Alibaba. Expected market consolidation. Several indicators pointed towards a consolidation of the market where only the bigger players would survive. These indicators were increased deregulation and privatization, increasing competition plagued with lower and lower profit margins, increased regulatory costs, products’ whose lifecycle is nearing maturity and finally due to the impact of the internet.

All these facts combined lead us to the following summary for the retail business: Figure 8- Retail Market Map

KA+PC

ML+AV+ V

To have a good grasp on how we could grow the consumer finance business we took a closer look at both demand and supply of consumer finance in Egypt. The first task was to understand why people go for consumer finance in the first place. While there are a multitude of factors in play, one of the key reasons was because of deficiencies in the banking sector in Egypt. These could be summarized in 3 key problem areas: financial sector infrastructure, market distortions and social/cultural barriers While we had proved the existing and growing demand for consumer finance, we couldn’t give any recommendation before studying the competition and understanding what gap Company XYZ was to fill. First we had to identify the types of competitors out there. There were three very distinct sets of competitors: Banks Retailers Sales Finance Companies (companies specialized in providing informal consumer loans) The result is plotted in the following matrix: Figure 9- Consumer Finance Matrix

This matrix showed that retailers, among which Company XYZ was a leader, did serve to fill a certain gap in the market. While banks had the lowest interest rates they also had very strict eligibility criteria, meanwhile, sales finance company were convenient and had very low edibility criteria but had very high interest rates and were known for their questionable ethics. So retailers could provide consumers with easy and convenient financing schemes while being cheaper and less abusive than sales financing companies.

5

KEY STRATEGIC QUESTIONS: Given the above information as well as the quantitative data in the annex, kindly assist the management of the company to solve the following dilemmas:    

How should they protect their market share in the key markets? Should they shift towards the online store format? If yes, how? Do they need to expand regionally, or do they need to focus on their local market? How can they optimize their product portfolio?

6

ANNEX

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Table 1: This table represents how much revenue the company generates from each product category but also the growth of each revenue stream Table 2: This table shows the profit margin of each product category and how much this margin has changed over the past 3 years Figure 11: This graph presents the sales by installment compared to the total revenue generated as well as the growth of each revenue stream Figure 12: This graph shows how much the interest rate on installment sales increase the profit margin of the company Table 3: This percentages in this table are the share of installment customers who had made an installment purchase in the previous year Figure 13: The first column shows how cash sales are distributed per customer segment, wihle the second shows the same for installment sales Figure 14: Each column represents how much of each product category’s sales are from installments and how much were with cash Figure 15: Each line shows how much a certain product category’s sales come from each age segment. The higher the line the higher the sales at that particular age.

Table 1-Net Sales per Product Category

Net Sales 2011 Household Appliances Kitchen Appliances Audio Video Electronics Mobiles and Laptops Small Domestic Personal Care Appliances AC Ventilation Grand Total

160,000,000 47,000,000 25,000,000 9,000,000 8,000,000 249,000,000

2012

2013 CAGR (2011-13)

145,000,000 50,000,000 30,000,000 10,000,000 10,000,000 245,000,000

210,000,000 80,000,000 60,000,000 18,000,000 12,000,000 380,000,000

*CAGR: Compounded Annual Growth Rate = ((Ending Value/Starting Value)^(1/n. of years))-1

Table 2-Proft Margin per Product Category

Profit Margins per Product Category

Kitchen Appliances Audio Video Mobiles and Laptops Personal Care Ventilation Figure 11-Annual Total and Installment Sales

Operating Profit Margin 5.0% 0.2% 2.5% 10.0% 8.0%

CAGR (2011-13) 0.0% 15.0% -10.0% 2.0% 1.0%

15% 30% 55% 41% 22% 24%

Figure 12- Installment Contribution to Profit Margins

Table 3-Share of Repeat Customer

Figure 1410-Share of Installment Sales per Product Category

Figure 13-Customer Segment per Payment Method

Others PC KA ML V AV

Figure 1511- Age Distribution of Installment Sales per Product Category

Kitchen Appliances

Mobiles & Laptops

Vent.

Audio Video

Personal Care