www.preplounge.com
Roland Berger Case:
Onlinestar
Topic
Market analysis, Profitability
Difficulty
Intermediate
analysis, Growth strategy
Style
Candidate-led (usual style),
Real Case
Case Prompt
Onlinestar, an online retailer of furniture and garden products (core business), has grown
significantly in recent years as a result of an expansion of its product portfolio. The company
mainly imports goods from Chinese manufacturers but also operates its own production of cat
lavatories (special business) in Eastern Europe.
The company sells its goods via Amazon and eBay, and recently via an online shop on its website.
Despite this development, the financial ratios have deteriorated in recent years. In particular, the
gross profit margin decreased significantly. Combined with a significant increase in shipping costs,
this led to a negative result for the first time in the recently ended fiscal year and a resulting
strained financial situation. Against the background of expected stagnating sales for the current
financial year, short-term action is required.
The board of Onlinestar asks you for an analysis of the reasons for the negative result as well as a
derived recommendation for action. As a consultant, you should bring in your knowledge in online
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trading and develop solutions. In addition, the management board would like to receive a sales
and gross profit plan from you for the current financial year.
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Exhibits
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I. Background
Additional Information
Products
In response to pressure from investors to steadily increase sales, Onlinestar also added
products with a low sales value and a low gross profit margin to its product range in addition
to products with a high gross profit margin.
Note for Interviewer
Share Table 1 with the interviewee.
Note for Interviewer
Share Diagram 1 and Table 2 with the interviewee.
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The in-house production of cat lavatories was the sales and profit driver of Online star for
many years. Due to increased competition in this segment, Online star had to continuously
reduce sales prices to the level of material costs. The new opening of a modern production
plant by the competition is expected to reduce prices for cat lavatories further. The strained
financial situation of Online star makes extensive investments impossible, other cost-cutting
measures have been fully utilized. Therefore, no positive change in the gross profit margin is
expected over the next few years.
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Note for Interviewer
Share Table 3 with the interviewee.
Labor expenses in the production of cat lavatories and other operating expenses for the
production of cat lavatories amount to EUR 5 million per year in the past financial year.
Because of appropriate contracts, costs correlate with sales of cat lavatories with a
coefficient of 1. (Consequently: Reduction of turnover by 50% reduces costs by 50%,
reduction of turnover by 100% reduces costs by 100%, etc.).
Possible effects of cross-selling are not to be considered in later calculations.
Purchasing
So far, Online star has bought all furniture and garden products from many small Chinese
manufacturers. In the recent past, delivery delays of ordered goods have occurred more
frequently. In order to be able to deliver as quickly as possible, Online star has used fast
transport options - such as airplane transportation - for importing the goods. This led to
higher transport costs, which are attributed to the cost of materials at Online star.
Consolidation of suppliers to a maximum of five suppliers would result in a 20% reduction in
transport costs. Apart from the reduction of the transport costs by a consolidation of the
suppliers, the transport costs are independent of the ordered good value.
Distribution
In order to be competitive, Online star delivers free shipping. In the past, however, Online
star observed that shipping costs have increased disproportionately high to sales growth.
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Based on a conducted investigation, it was found that products with a gross profit margin of
less than 10% do not make a positive contribution to earnings due to high shipping costs.
Note for Interviewer
Share Table 4 with the interviewee.
Solution
In order to gain an overview of the situation, the interviewee should ask questions or get answers
on the following items: products, purchasing & distribution
II. Structure and qualitative analysis
Solution
The interviewee should be able to derive the following reasons for the decline in the gross profit
margin from the information provided:
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Increased sales of small items (by sales size) with low gross profit margin in core business
Increased transport costs for goods purchasing due to delivery delays in the core business
Increased competition in cat lavatories led to significant sales price reductions
Conclusion including an evaluation (If the interviewee does not provide a pro/ contra evaluation,
it should be asked for explicitly)
Adjustment of the product portfolio in the core business
Items in the core business below EUR 5 do not provide a positive earnings contribution
and should be removed from the product portfolio.
Evaluation: Benefits occur through the increase in the gross profit margin as lowmargin products are eliminated. A disadvantage could be that articles with a low sales
price encourage customers to make additional purchases (reduction of cross-selling).
Termination of production and sale of cat lavatories
Cat lavatories are a loss-maker as they do not generate gross profit but account for
personnel costs and other operating costs. Consequently, cat lavatories reduce profit.
Since costs for employees and other operating expenses can be eliminated, production
should be discontinued.
Evaluation: Benefits result from an increase in profit. Possible disadvantages, on the
other hand, are for example damage to reputation when ending production and
reducing staff.
Consolidation of suppliers to a maximum of five suppliers
The number of suppliers should be reduced in order to avoid delays of production and
consequently expensive special transports in the future.
Evaluation: Benefits are lower transportation costs. One possible disadvantage is the
higher dependence on products and prices of individual suppliers.
III. Quantitative analyses
Solution
Based on the results of the completed fiscal year, the sales and gross profit planning for the next
year should be prepared.
Sales planning
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Changes compared to the previous year's sales (EUR 660 million) result from a termination of
sales of cat lavatories (EUR 70 million) and the termination of sales of articles
Consequently, sales planning amounts to EUR 501.5 million (EUR 660 million ./. EUR
70 million ./. EUR 88.5 million).
Gross margin planning
Gross profit planning is carried out separately for each of the sales price categories.
Category Selling price <5 EUR: no longer part of the product portfolio, no gross profit
contribution
Category Selling price 6-10 EUR
Sales (previous year) EUR 590 million * share of sales [SP 6-10 EUR] (20%) * gross profit
calculation
Hide
margin [SP 6-10 EUR] (15%) = EUR 17.7 million
Category Selling price 11-30 EUR
Sales (previous year) EUR 590 million * share of sales [SP 11-30 EUR] (15%) * gross profit
calculation
Hide
margin [SP 11-30 EUR] (20%) = EUR 17.7 million
Category Selling price 31-70 EUR
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Sales (previous year) EUR 590 million * share of sales [SP EUR 31-70] (20%) * Gross profit
calculation
Hide
margin [SP EUR 31-70] (30%) = EUR 35.4 million
Category Selling price >70 EUR
Sales (previous year) EUR 590 million * share of sales [SP> 70 EUR] (30%) * gross profit
calculation
Hide
margin [SP> 70 EUR] (40%) = EUR 70.8 million
Consolidation of suppliers reduces transport costs by EUR 4 million (EUR 20 million * 20%)
In total, gross profit planning amounts to EUR 145.6 million
IV. Case result and recommendation to the client
Solution
The interviewee should combine the results of the qualitative and quantitative analysis and
make an overall assessment of the results
The interviewee should mention that two levers can improve the gross profit margin:
Adjustment of the product portfolio, including the termination of in-house production
and sale of cat lavatories
Consolidation of suppliers
The recommendations to the client are therefore as follows:
Discontinuation of sale of items with a selling price below 5 EUR
Cessation of production and sale of cat lavatories
Consolidation of suppliers to five suppliers
After implementation of recommendations, sales of EUR 501.5 million and a gross
profit margin of 29% (EUR 145.6 million in absolute terms) are expected for the
current financial year.
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