Grocery Wholesaler

1. Quantitative analysis

     1.1. Diagnosis

             1.1.1. Numeric driver and magnitude

             1.1.2. Root cause of the problem

     1.2. Initiatives

2. Qualitative analysis

     2.1. Risks and mitigation

3. Recommendation

Based on the information provided, the driver of GroceryWholesaleCo's decline in profitability is its distribution costs in the USA, which have increased by 73% over the last three years.

The marginal increase in both sales and cost of sales, along with the sharp increase in distribution costs in the USA, indicates that GroceryWholesaleCo has shifted to less expensive products, which was offset by higher sales volume. The root cause of this change can be traced back to the tight economic situation in 2023 that led US customers to prefer purchasing cheaper products, while customers in the client's international markets seem to be unwilling to compromise on nutrition.

• GroceryWholesaleCo wants to continue catering to US customers at 2023 sales volume but does not want to expand operations in the USA due to unprofitable operations.
• By reassessing operating costs in the USA, GroceryWholesaleCo assumes it can reduce distribution costs and selling and administrative costs by 5% each.
• Even without further capital expenses, GroceryWholesaleCo assumes that sales volume in its international markets will increase by yearly 20%.
• GroceryWholesaleCo assumes that the 2023 business-as-usual net profit margin in international markets will remain stable in the future.

Given that GroceryWholesaleCo is neither certain nor willing to wait for US customers to shift back to more expensive products, they should try to compensate for the lower profits by focusing more on international markets, which provide significantly higher growth than the USA. By doing so, the client can also reduce their reliance on the US market in the future.

It will take three years or until 2026 for global profits to return to the 2021 level of $2,000M, prior to the change in preference of US customers.

• Competition: Focusing more on international markets could lead to increased competition from local and international players. To mitigate this risk, GroceryWholesaleCo should differentiate its offerings, maintain strong relationships with suppliers, and invest in marketing and brand development.
• Supply chain disruption: Focusing more on international markets could increase risks to the client's supply chain, such as disruptions due to geopolitical events or natural disasters. To mitigate this risk, GroceryWholesaleCo should develop a robust supply chain risk management strategy, diversify its supplier base, and invest in supply chain resilience.
• Currency fluctuations: Shifting its focus to international markets could lead to increased exposure to currency risk. To mitigate this risk, GroceryWholesaleCo should consider implementing currency hedging strategies to minimize the impact of currency fluctuations.
• Regulatory and political risks: International markets may have different regulatory environments and political risks that can affect GroceryWholesaleCo's operations. To mitigate these risks, the client should monitor the markets closely and adjust accordingly.
• Cultural and customer preferences: Changes in customer preferences and cultural norms across international markets can impact the success of GroceryWholesaleCo's products. To mitigate this risk, the client should monitor the markets closely to understand the unique preferences of each target market and tailor its product offerings accordingly.

• First of all, the root cause of GroceryWholesaleCo's decline in profitability is the shift to less expensive products by US customers due to the tight economic situation in 2023, which has resulted in higher distribution costs and a loss in the USA. In contrast, customers in the client's international markets seem to be unwilling to compromise on nutrition.
• To turn the situation around, I would advise GroceryWholesaleCo to focus more on its international markets, which provide significantly higher growth than the USA, in order to compensate for the lower profits. By doing so, the client can also reduce their reliance on the US market in the future. Our calculations show that it will take only until 2026 for global profits to return to the 2021 level of $2,000M, prior to the change in preference of US customers.
• In implementing this strategy, GroceryWholesaleCo should keep in mind risks such as increased competition, supply chain disruption, currency fluctuations, regulatory and political risks, and changes in cultural and customer preferences. Appropriate mitigation strategies, such as differentiated and market-specific offerings, developing a robust supply chain risk management strategy, implementing currency hedging strategies, and continuous monitoring of international markets’ regulatory, political, cultural, and market environment, should be considered to ensure success in international markets.
• As next steps, I would advise GroceryWholesaleCo to develop a comprehensive expansion plan, addressing the identified risks and their mitigation strategies, to ensure sustainable growth in its international markets.