NEXTRETAIL

Digital Marketing Medium difficulty

Retail Interviewer-led case

This case focuses on the marketing strategy of a retail company. The client is looking to improve their
gross margin, which is not growing despite strong sales growth.

The case tests all elements of the interview scorecard. It includes several questions testing a candidate’s
digital marketing expertise and is suitable for those applying for consulting roles specialized in this area.

Problem definition
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Our client, NextRetail, is a small regional retailer in the UK. Its product portfolio includes fresh food (e.g.,
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fruit and vegetables), packaged food (e.g., canned food), and other non-food items (e.g., cleaning
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products). Its business model involves buying from producers and selling to consumers in a few cities,
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through e-commerce and brick-and-mortar stores.

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NextRetail operates in the discounter category, and it faces fierce competition from other local players,
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who also offer relevant product discounts to attract demand.

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The company has been gaining market share and increasing revenues for the last five years, but
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recently its profitability has eroded.

The CEO of NextRetail has hired you to determine why its profitability has declined and how it
can be improved to levels achieved five years ago.

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Question 1 (Structuring)

What key areas would you analyze to identify the reasons for profitability decline?

Possible answer
1. Cost increase
a. Variable costs
i. Increase in prices from suppliers
ii. Higher transportation/distribution costs
b. Fixed costs
i. General expenses
1. Overhead

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2. Advertising

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3. Technology

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4. Central operations
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ii. Store operations

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1. Increase in rent of retail space

2. Higher labor costs
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3. Higher energy costs

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2. Revenue (Note: Revenue and market share have grown, so this is likely less important than
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exploring costs; at the same time, it is possible that prices have dropped, cutting into
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margins, while volumes have increased enough to still grow revenues. Understanding this
interplay is important to assess what actions they might take going forward.)
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a. Volume: quantity of products sold

i. By product category
ii. Consider if share growth is in a declining market, i.e., drop in absolute volume of products
sold despite growth in market share
b. Price
i. Lower average selling price
ii. Higher promotional discounts/markdowns
c. Product mix: change in mix towards lower-margin products or channel

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Question 2 (Numeracy)

How much gross margin improvement is needed to reach levels achieved five years ago?

Additional information

• Direct candidate to Exhibit 1 for information needed to tackle this question

• Gross margin = Total gross profit / Total revenue

Possible answer

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1. Calculate NextRetail’s total revenue (post discounts), cost, and gross profit five years ago.

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a. Total revenue = units sold x (average price per unit - average discount per unit)

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b. Total cost = units sold x average cost per unit

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c. Gross profit = Total revenue – Total cost

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Total
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Fresh food Packaged food Non-Food

Total revenue (m£)

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43.75 52.5 37.5 133.75

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Total cost (m£) 31.25 37.5 25 93.75

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Gross profit (m£) 12.5 15 12.5 40

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2. Calculate NextRetail’s total revenue (post discounts), total cost, and profit for the current fiscal year

Fresh food Packaged food Non-Food Total

Total revenue (m£) 80 99 36 215

Total cost (m£) 62.5 75 25 162.5

Gross profit (m£) 17.5 24 11 52.5

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3. Calculate the gross margin improvement required
Gross margin 5 years ago = Gross profit / Total Revenue = 40 / 133.75 = ~30%
Current gross margin = Gross profit / Total Revenue = 52.5 / 215 = ~25%
Improvement required = ~5 percentage points

A 5 percentage point increase in gross margin from 25% to 30% to reach levels achieved five years ago
seems reasonable.

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Prep Course
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Exhibit 1 – Next Retail sales data five years ago and for the current fiscal year

Five years ago Current fiscal year

Fresh Packaged Non- Fresh Packaged Non-

food food Food food food Food

Units sold
25 15 10 50 30 10
(M units)

Avg. price
2 3.5 4 2 3.5 4
(£/unit)

Avg. cost
1.25 2.5 2.5 1.25 2.5 2.5
(£/unit)

Avg. discount
0.25 0 0.25 0.4 0.2 0.4

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(£/unit)

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 Question 3 (Judgement and insights)

Considering Exhibit 1 and the results from Question 2, what could explain the profitability
decline?

Possible answer

We have identified two reasons behind the Gross Margin decline:

1. Effective price is lower due to higher promotional discounts/markdowns

a. Discounts in fresh food decrease profitability from 0.5 £/unit to 0.35 £/unit (-30%)
b. Packaged food: £1 to £0.8 (-20%)
c. Non-food: £1.25 to £1.1 (-12%)

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2. Change in product mix: a shift towards fresh and packaged food, which are lower-margin products
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a. Sales mix five years ago:

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i. Sales revenue = £133.75M

ii. Fresh and packaged food sales = 43.75 + 52.5 = £96.25M (72% of total sales)
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iii. Non-food sales = 100% - 72% = 28%

b. Current fiscal year sales mix:
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i. Sales revenue = £215M

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ii. Fresh and packaged food sales = £179M (~83% of total sales)
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iii. Non-food sales = 100% - 83% = 17%

Although the discount had a very negative impact on the gross margin, it very likely helped fuel the ~60%
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increase in revenue that we observed over the past five years. Given that the cost per unit of our products
hasn’t changed, I would like to investigate why such high discounts were needed for growth:

1. Was this a deliberate growth strategy by NextRetail?

2. Did increased competition force NextRetail to resort to discounts for continued sales growth?

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 Question 4 (Digital Marketing Expertise)

NextRetail wants to optimize its discount policy, both on its website and in brick-and-mortar stores. The
company plans to use personalized promotions to reduce total discount volume and keep demand
stable. To offer personalized discounts, NextRetail will develop a segmentation model for its clients.

What data can they use to create the model?

Additional information

• Until now, NextRetail’s discounts were generic and the same for all customers
• Customer segmentation involves splitting clients into groups with similar characteristics

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• NextRetail has a loyalty card program and has been storing information about customers since

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2010. It can also access all transaction data from its stores and website since 2010

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Possible answer
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1. Internal customer information, from NextRetail loyalty program and general transaction data
a. Demographic information
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i. Age
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ii. Gender
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iii. Ethnicity
iv. Family size
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v. Estimated family income

vi. Note: A great answer might recognize potential sensitivities around offering differing
discounts based on these factors
b. Geographic information
i. Home address
ii. Distance from customer location to NextRetail stores
c. Behavioral information
i. Average purchase
ii. Average discount per purchase
iii. Top items purchased at full price and discounted
iv. E-Commerce/brick-and-mortar split of customer purchases
v. Frequency of purchase
vi. Time of purchase (hour of the day, day of week…)

2. External data to complement internal data and target clients who are not part of the loyalty program

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a. Competitors’ locations
b. Distance from customer location to competitors’ stores
c. Industry-wide top products/categories per neighborhood
d. Purchasing power estimates per neighborhood
e. Product reviews data from 3rd party sites

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Question 5 (Digital Marketing Expertise)

After defining the client segmentation, NextRetail has launched a personalized digital advertising
campaign: for every customer segment (e.g., low-income students, affluent middle-aged mothers…),
they have defined a set of ads, which they have displayed in 4 online channels (NextRetail’s Blog,
Google search, Instagram, TikTok). Each ad will promote a specific discount. For future campaigns, they
want to consolidate their investment in 2 channels.

How would they select the two channels that generate the highest return on investment?

Additional information

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• Channel return on investment = (net profit of investment/cost of investment)

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• Net profit of investment = Sales post-campaign – Sales pre-campaign – Cannibalization effect

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• Cannibalization effect happens when the promotions decrease sales of non-promotional products
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Possible answer
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1. Attribute sales across campaigns

a. Online sales
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i. Last touchpoint before purchase

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ii. First touchpoint before purchase

iii. All touchpoints until a purchase
iv. Linear attribution: even distribution of sales amongst all visited channels
1. Time-decay: more credit is given to touchpoints that are closer to the purchase event
2. U-shaped: most credit is given to first and final touchpoints
3. W-shaped: most credit given to first, middle and final touchpoints
b. Brick-and-mortar sales
i. Identify using software (e.g., location extensions, Google in-store visits)
ii. Identify using a loyalty card
iii. Identity using coupon codes

2. Calculate profitability per campaign, followed by ROI

a. Net profit of campaigns
i. Sales post-campaign: identify final volume and price for customers who took the discount

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 i. Sales pre-campaign: baseline volume and price for the same customers before the online
campaign
ii. Cannibalization effect: estimate cannibalization rate of other products based on customers’
pre-campaign baseline behaviour
b. Cost of campaigns:
i. Cost of campaign design
ii. Cost of campaign display
1. Cost-per-click (CPC) * # clicks
2. Cost-per-thousand impressions (CPM) * total # impressions in thousands
3. Cost-per-acquisition (CPA) * # online transactions

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 Question 6 (Creativity)

Aside from launching a personalized digital advertising campaign, in what other formats can the
company offer customized promotions?

Possible answer

1. Digital notifications
a. NextRetail app
b. Other Apps (e.g., ads in Spotify)
c. Email promotions
d. SMS messages

2. Print
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a. Personalized discount vouchers on checkout
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b. Discount catalog adapted to store / neighborhood

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3. In-store promotions
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a. Personalized advice from Employees

b. Use of personalization technology (e.g., geofencing)
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Question 7 (Synthesis)

What would be your final recommendation to the client?

Possible answer

NextRetail wants to understand the reasons behind their decline in profitability and potential ways to
improve it to levels achieved 5 years ago.

The decline in profitability stems from higher promotional discounts and changes in product mix towards
lower-margin products (fresh and packaged food).

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To close the resulting ~5 percent point gross margin gap (to match the gross margin levels from 5 years

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ago), NextRetail should implement personalized discounting. This could be in the form of:

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1. A personalized digital marketing campaign, optimized to retain only the most profitable channels.
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2. Digital notifications in NextRetail’s app, other apps, through SMS etc.

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3. Print and in-store personalization discounting campaigns.

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As next steps, we recommend that NextRetail use pilots to explore which form(s) of personalized
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marketing offer the highest ROI and kick off implementation.

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