Supermarket turnaround

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Information that can be shared if inquired: 

Sparx customers are mainly middle to upper-middle-class people in big British cities. The supermarket marketing department does NOT work currently with customer segmentation. The overall market for supermarkets has been steadily increasing at a 4% yearly rate in Britain.

Here the interviewee should inquire about the customers:

• Segmentation
• Needs
• Market trends

The following areas should be further analyzed to crack the case:

Main products, Company image, Distribution channels, Supplier network (concentration)

Information that can be shared if inquired: 

Last year, revenues have been on average £11 per customer and week. Sparx had 1 million customers last year. The number of clients has remained stable in the last years, but the average spent per customer and week has declined. More expensive products that Sparx offers usually have also higher profit margins.

There is no concentration of suppliers (therefore supermarkets have more bargaining power than suppliers). Sparx has only one distribution channel: the physical stores. There is no internet shopping.

Costs have totaled £600 m last year. Costs have decreased in the last years, but much less than revenues.

The typical Sparx supermarket contains about 100 different products.

The interviewee should come to the conclusion that revenues were £572 m last year, assuming a year has 52 weeks.

Main conclusions

• Price distribution of products concentrated on the low-end (lower prices):
  • 10% hard-discount
  • 40% low-price
  • 30% medium-price
  • 20% high-end products.

This has not changed lately. This shopping basket should be compared against main competitors later in the case analysis

It is important that this comparison is NOT done here! Each area of the framework should be analyzed at a time and NOT be mixed.

• Sparx only relies on the physical stores as a distribution channel (no internet delivery). This should also be compared with competitors.

Information that can be shared if inquired: 

While Sparx sales have been shrinking in the last 3 years, Prisma’s and Byite’s revenues increased with a CAGR of 9% and 7% respectively. Profits have also been rising. Prisma, Byite, and Sparx are active in the same cities and neighborhoods in Britain. A recent survey with customers of at least one of the three leading chains showed that 90% of clients who buy at Sparx and another leading chain (Prisma or Byite) prefer the variety of high-end products at Prisma or Byite.

While Sparx focused on its physical stores, Prisma and Byite started using the internet as a complementary distribution channel. Only products with more added value and less volume/weight are available online. Sales online, which have a slightly larger profit margin than at the store, have increased at 15% per year for both Prisma and Byite.

Prisma and Byite used to have, five years ago, about the same shopping basket as Sparx.

The analysis of competitors and their trends should enable the interviewee to crack the case:

• Main competitors and market shares
• Reach of the problem Sparx is facing
• Competitor’s price-product distribution
• Competitors’ strengths
• Competitors’ distribution channels
• Competitors’ suppliers

Main conclusions

• The two main competitors are profitable and increasing revenues at 7% and 9% yearly, stealing Sparx’s market share.
• The performance difference CANNOT be explained by a local market trend as Prisma, Byite, and Sparx are active in the same cities and neighborhoods in Britain.
• 90% of clients who buy at Sparx and at another leading chain (Prisma or Byite) prefer the variety of high-end products at Prisma or Byite. They must be then buying high-margin products from the competitors instead of at Sparx.
• To top it off, both main competitors have been taking advantage of the internet as a new, high-margin distribution channel while Sparx hasn’t.

The analysis done has uncovered valuable information.

We can conclude that Sparx revenues have been eroding and its market share is quickly taken away by the two main competitors because:

• Sparx has the wrong price positioning. Customers belong to the middle and upper-middle classes and want to have more variety of higher-end products. Since the arrival of hard-discount competitors, the two other main competitors have quickly adapted and focused on the higher-end products (as competing with hard-discounter would be a sure defeat because of their lean cost-structure). Prisma and Byite have higher prices and margins than Sparx.
• Sparx has neglected a new distribution channel: the internet. The two main competitors have been exploiting this channel which has even a higher margin than the physical stores. Internet sales have increased 15% per year for Prisma and Byite.

Some possible recommendations for the client:

• Restructure its offerings, going gradually to higher-end products and abandoning hard-discount products that have almost no margin.
• Increase the shopping experience the customers get in the local shops to improve the image of Sparx.
• Initiate a pilot internet delivery service in one city in Britain. With the feedback from this pilot service then expand to the whole country like the two main competitors Prisma and Byite.

Possible answer:

Let us first analyze the new revenues with this strategic change. A change from £1 to £1.1 represents a 10% increase in price. Then, according to the price elasticity, the demand of product units will decline 5%.

If the average price was £1, then the customer used to buy 11 units per week (average expenses per customer per week of £11, as stated in session “available information”).

After the increase in price, clients will buy only 10.45 units. That is, the new revenues will be of approximately £11.5 per week.

In a year this represents revenue of £598 m:

Revenue = £11.5 * 52 weeks = £598 m

On the costs side, the only change will be the increase of 5% of purchasing costs, which were previously £360 m:

Purchasing costs = 60% * £600 m = £360 m  

The cost will then increase £18 m to £378 m

New purchasing costs = £360 m * 1.05 = £378 m 

The total costs increase to £618 m:

New total costs = £378 m + £240 m= £618 m

Conclusion

The client will still not be profitable, but its loss will decrease
from £28 m

Old loss = £572 m - £600 m = £28 m  

to £20 m.

New loss = £598 m - £618 m = £20 m