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Kugela Grocers - Case 10 (IC2)

Case 10 (IC2) -- Kugela Grocers

CLIENT SITUATION

Our client is Kugela Grocers (KG), a grocery store chain with 250 locations across Lithuania with
revenue of LTL 925M (Lithuanian litai) and profits of LTL 28M. KG is respected for their guaranteed
low pricing on thousands of food and home products in a no-frills shopping environment. KG is
looking to new store locations, and is considering crossing the border to expand into Latvia. Should
they do it?

NOTES FOR INTERVIEWER

(Phase 1) Ask: What’s your hypothesis on whether moving into Latvia is wise? Why is that?

(Phase 2) Ask: What do you believe will be the key factors you must investigate to test this
hypothesis?

INSIGHT Candidate mentions the match

#1: between KG’s offerings and the
needs of the Latvian grocery
shopping population.

Relevant facts (reveal one-

by-one when asked)

1) KG feels that opening many more stores in Lithuania will begin to cannibalize its own revenue, so
it’s looking for better opportunities elsewhere.

2) KG’s core capabilities include negotiating with Lithuanian food suppliers to get low prices and
passing those low prices onto consumers.

3) The Latvian Grocery market is just a bit smaller than the Lithuanian market; both markets have
been growing at about a 2% annual growth rate.

4) KG has a market share of 12% in Lithuania and is the #2 player to another chain (Lithuanian
Market) with a 33% market share. Latvia’s grocery market is fairly fragmented, with dozens of
players and just one player with a market share above 10%. That player is called Latvian Lore and
they have a 30% market share.

5) Say to candidate: Let’s talk about those customer segments. Take a look at Exhibit 1 (Reveal
Exhibit 1) as I define the nicknames we’ve given to the segments here. The “Cheap Staple-ers” are
committed to finding rock-bottom prices to feed their families; most of their grocery bill is comprised
of hearty, cost-effective staples (e.g. bread). The “Value Explorer” may venture out to try a couple
new items with each grocery trip—particularly when the new items are available at a bargain. The
“Foodies” view eating as entertainment; they cook and entertain guests frequently, and their
pantries are stuffed with the most delicious options available.

It appears that Latvia has a

INSIGHT significantly higher proportion of
#2: the population belonging to the
Foodies segment and a lower
proportion belonging to the Cheap
Staple-ers segment.
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KG’ approach to offer rock-bottom

INSIGHT pricing in a no-frills environment
#3: may not be as successful in Latvia
6) (Phase 3) Let’s talk about as it is in Lithuania, given the
the products that our stores
reduced proportion of Cheap
offer by viewing Exhibit 2
(Reveal Exhibit 2). While Staple-ers in Latvia.
looking at this exhibit, could
you please convert the average prices from Latvian lati (LVL) into Lithuanian litai (LTL) such that we
have a nice apples-to-apples comparison and then tell me what all these data mean?

7) It’s fair to say there is little price variation across or different players.

KG’s prices on staples such as

INSIGHT milk, bread, and eggs are indeed
#4: better than the competition in
Lithuania, but still higher than
Latvian Lore.

KG’s prices on non-staples such as

INSIGHT tofu and balsamic vinegar;
8) Latvian Lore can pull off #5: however, are significantly lower
these low prices because it than Latvian Lore’s prices. This
has established its own
relationships with a wide
may present a different kind of
variety of food suppliers grocery opportunity in Latvia.
nearby in the country; and
because of their scale.

Ask: Can KG beat Latvian Lore on price in staples?

Given KG’s current margins of

about 3%, and the average
Latvian Lore prices on staples
INSIGHT
being more than 3% lower than
#6:
KG’s prices, it’s unlikely KG could
succeed in Latvia with their low
(Phase 4) Given all that, let’s
say KG was considering
prices on staples approach until
launching a different kind of they can attain the local
grocery store concept in relationships and scale of Latvian
Latvia. If they were to do
that, what kind of products
Lore.
should new KG grocery
stores in Latvia feature?

Candidate lists at least five items

that sound like they belong in an
INSIGHT
upscale or unique grocery store (a
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#7: store like Trader Joe’s, Whole

Foods, or Fresh Market in the
United States) Examples might
(Phase 5) KG’s CEO wants to
include organic fruits and
get a quick update from us a vegetables, fresh-baked sweets,
couple minutes before his portable snacks, flowers, unique
conference call starts with
the folks at the Latvian prime
wines, and artisanal cheeses.
minister’s office. What should
we tell him?

CALCULATIONS

1) Candidate derives the conversion multiplier between LVL and LTL by multiplying the LTL / USD
and the USD / LVL ratio. So (3.71 LTL per USD X 1.85 USD per LVL) = approximately 6.86 Lithuanian
Litai per Latvian Lats. (Rounding to 7 is fine)

2) Candidate multiplies this conversion ratio (7) by each of the products that Latvian Lore offers as
follows:

Latvian Lore
Latvian
Item in Litas (LVL
Lore
X 7)

Half liter of Balsamic

LVL 0.29 LTL 2.03
Vinegar

Loaf of bread LVL 0.07 LTL 0.49

Dozen Eggs LVL 0.07 LTL 0.49

2 Liters of Milk LVL 0.05 LTL 0.35

Half kilogram of Tofu LVL 0.15 LTL 1.05

3) Candidate computes KG’s current operating profit margin by dividing the profit by the revenue
(28M / 928M0 = 3.0% profit margin.

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