Case Type: improve profitability; math problem.
Consulting Firm: ZS Associates final round job interview.
Industry Coverage: food and beverage.
Case Interview Question #00453: The client Classico is a wholly owned subsidiary of The H.J. Heinz Company (NYSE: HNZ). Best known for its ketchup (tomato sauce), condiments, frozen food, and soup products, Heinz is a billion dollar food company headquartered in Pittsburgh, Pennsylvania, United States, and employs 
more than 30,000 people world wide as of 2011.
The client Classico specializes in the manufacturing and preparation of high quality sauces. The client is based in the U.S. and caters only to the U.S. retail stores. Recently, the client has seen an increase in their volume of sales (by 20%). However, their profits have declined 10% in the same period. Your consulting firm has been brought in to investigate the issue. More specifically, the client wants you to address the following two questions:
- What is the cause for the decline in profits even though the unit volume increased?
- What can be done to reverse this trend?
Additional Information: (to be given to candidate only if asked)
The interviewer should wait to let the candidate ask for the following information before giving it to them.
1. Revenue
- Products sold: Pasta sauce, tomato sauce, and salad dressing
- Overall price change: None
- Channel sales (volume, price): Only retailers, no problems here
- Product mix change: None
- Competitive pressure: None
- Substitutes: No new substitutes or change in customer taste
- Market conditions: No problems here
- Quality: No problems here
2. Cost
- Manufacturing cost: No change here
- Distribution cost (by channel): No change here
- Promotion cost: This has gone up!
3. Other Relevant Information
- Promotion cost is an important component of total cost in the food industry. The client started providing a 15% discount per product (across all products) for 40% of its products during this period.
- For the sake of simplicity, assume that all products are sold at the same price per case and the discount is across all 40% of its products.
Suggested Approach:
I am tilt
what doesn’t make sense for me is normally the product discounted get increase not the opposite as per the calculation the product none discounted increased from 60 to 80!
Please can someone explain the product split after promotion? I believe there is a mistake.
if volume goes up to 120units and 40% is discounted, split should be 48units @ 85 and 72 @100
or we can assume that the extra 20units purchased will all be on the discounted 40%.
so 20+ 40% of 100=60. 60units @ 85 and 60units @100.
Sorry, but it’s not clear. You now have 1,200 units (1,000* 1.20).
(1) Price for 60% stays the same i.e. $100. Revenue : $100 * 60%*1,200 units = $72,000
(2) Price for 40% is 15% discount i.e. $85, Revenue : $85 * 40%*1,200 = $40,800.
So total Sales on value (1) + (2) : $112,800
Cost can not stay the same because you sold more products (variable costs!). Am I right?
I am confused about % of products offered discount. Why are we doing 100*X%? Is it not 120 * X%?
Break even analysis with 15% discount: 2000 = 120*(1-X)(100-80) + 120 * X * (85-80) ==> X = 22%
Had similar answer for reduced profit too. I thought 40% of 120 products (NOT 40% of 100) are offered discount which means 48 are offered discount.
Think about this way: you have 100 different product, on average you sell 100 of each before the promotion, thus sales volume = 10,000. Since now you’re offering discount for 40% of the 100 different product, you are able to sell 120 of each (again, on average), total sales volume = 12,000
Thank you for the clarification.
I may be having a moment but can you please help me understand the formula/approach used to identify the % discount & % of products that’s optimal for breaking even?
$2000 = 80 * ($100 – $80) + 40 * [100 * (1 - X) - $80], X = 10%
$2000 = (120 – 100 * X) * ($100 – $80) + 100 * X * ($85 – $80), X = 26.67%
Also, the case mentions that costs have changed at the questioning stage, is this correct given that the problem appears to be revenue related based on price change and volume? Many thanks for any help.
You can set up a data table like the one provided in the “Answer” section.
1. Basically, original price is $100, if you have a discount of X%, the new price will be $100*(1-X%), and the cost remains the same at $80, then the profit will be $100*(1-X%) – $80.
2. If you have X% of products on sale for $85, and the rest of the products are still sold at the original price $100, then the profits will come from two parts: on sale products which have sales volume of (100*X%), no-discount products which have sales volume of (120 – 100*X%).