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Medium Profitability

Too Dollar Store

#Retail #Discount Retail
ProHub Comment

This case focuses on profitability optimization through pricing strategy and product portfolio analysis. The core issue is straightforward: the firm is selling some products below cost while underpricing high-margin items. The case emphasizes quantitative analysis, with candidates needing to calculate profit impacts across multiple pricing scenarios to identify the optimal strategy.

Estimated Time 15 minutes
Difficulty Medium
Source Queen's
50 / 100
Your client is an owner of a chain of dollar stores across the United States. Although business has boomed as a result of the recession, and customers have shifted away from big box retailers to cheaper alternatives, the firm has found that profit growth has not done as well as revenue growth. Since revenue growth has started to slow, improving profitability has become a key priority for the client and they have hired us to investigate the issue.

Clarifying Information

  1. Overall retail sales growth has been 0.5% in the United States, with the discount store subsection growing at 4%; our client has grown at 5.5% CAGR over the past five years
  2. Historically, the main customer group for discount stores were poor households. However, over the last 4 years, the major source of growth for the category has been lower middle class households shifting their purchases towards cheaper alternatives
  3. Although revenues have grown at 5.5%, profits have only grown at 1%, compared to 3% for the discount store subsection overall
  4. Our client competes directly with three other major dollar store chains in the United States and is the smallest of the four companies (by revenue and by number of stores); it also competes indirectly with stores such as Walmart
  5. Two (including our client) use the all $1 strategy offering a limited selection of items, and two use the broader low-price strategy, pricing from $1-$5, allowing for greater product variety
  6. The largest cost area for the firm is COGS, which represents ~80% of sales on average, although this differs by product
  7. The top 5 SKUs make up 80% of the firm’s revenues and effectively all of its profits, once overhead is allocated by product line