P&G To Not Enter Retail Laundry & Dry Cleaning Business ...

Case Type: new business.
Consulting Firm: Booz Allen Hamilton (BAH) second round job interview.
Industry Coverage: household goods, consumer products; business services.

Case Interview Question #00524: The client Procter & Gamble (P&G, NYSE: PG) is a Fortune 500 American multinational corporation headquartered in downtown Cincinnati, Ohio and manufactures a wide range of household products, consumer package goods and personal care products. In fiscal year 2011, P&G recorded $82.6 billion dollars in sales.

Recently, Proctor & Gamble wants to enter the clothes washing and dry cleaning business in the United States. They want to set up a chain of retail shops that will offer clothes washing and dry cleaning services to consumers. They would want about $1 billion in annual revenues and 10% operating profits from this new business in 3 years. They have hired your consulting team to help them decide 1) whether they should go ahead with the clothes washing and dry cleaning business; 2) whether their expected revenues and profit margin is feasible. How would you go about it?

Suggested Approach:

This ?launching a new line of business? case is more about understanding how the candidate thinks about the problem. One way to look at it is to use Porter?s 5 forces structure but it is too common a framework that interviewers don?t like it very much. A simple but powerful way to look at is as follows:

• The first step will be to see if there is sufficient demand for the clothes washing and dry cleaning service and if the client P&G can obtain a significant market share to generate required revenues.
• Then even if there is sufficient demand, can they make the required profits?
• Next, what capabilities does the client P&G have to enter this business? Why can the client do this business better than the other competitors?
• Is the new business aligned with the brand image and vision of the company?
• If the company decides to enter the new business, what will be the mode of entry?

Additional Information: to be provided when asked

• The laundry and dry cleaning industry will grow 10% in 3 years from now (About 3.25% per year).
• The industry size in the U.S. is about $9 billion. Of this 60% is retail full service shops, 20% is industrial washing like uniform washing services and 20% is coin operated self-service.
• There are about 30,000 retail stores in the US. About 80% of them are mom and pop stores and the remaining are small chains.
• The most common and most profitable form of dry-cleaning business is the ?full plant?, companies that perform all of the processing on the premises.
• These ?full plant? firms often include additional pick-up and drop-off points that provide the main plant with goods to dry-clean.
• The client P&G has some of the leading laundry detergent brands in the US like Tide.

Possible Answers:

A good candidate will explore the following issues:

1. How many stores should the client P&G open (or acquire) to achieve their revenue targets? However, acquisition is very difficult as the industry is very fragmented. Provide the following details for calculation:

• On average a laundry and dry cleaning store operates 300 days a year
• Each day they process about 0.1 tons of clothes
• And they charge about $6,000 per ton of clothes

Calculation:

P&G should open at least $1 billion / (300 days * 0.1 tons per day * $6,000 per ton) = 5,556 stores in next 3 years to generate a $1 billion in annual revenue.

2. How much market share can the client P&G capture in 3 years?

In 3 years, the market size would be $9 billion * 60% * (1 + 10%) = $6 billion. To generate $1 billion from this means capturing $1 billion / $6 billion = 16.67% of market share.

3. Is it possible for the client to achieve that kind of a market share in 3 years given the fragmented and highly competitive nature of the industry?

Candidate should make a compelling argument indicating the strengths and synergies that P&G can bring to make it happen (like branding, advertising, marketing, promotions, technology, economies of scale, logistics and distribution)

4. How will P&G be able to make 10% operating profits? For this part of the case, provide the following details and ask the candidate to calculate operating profits on a per store basis. This margin is the current industry performance level.

• Cost of labor = $7 per hour
• 5 laborers per store and they work 8 hours on average per day
• Cost of detergents, washing solvents = $2,000 per ton of clothes
• Water, electricity and effluent treatment charges = 6.667% of revenues
• Annual rental for real estate = $15,000

Calculations:

The annual revenues per store = 300 days * 0.1 tons per day * $6,000 per ton = $180,000

Labor costs = 300 days * 8 hours per day * $7 per hour per people * 5 people = $84,000
Costs of detergents, washing solvents = 300 days * 0.1 tons per day * $2,000 per ton = $60,000
Water, electricity and effluent treatment charges = 6.667% * $180,000 = $12,000
Annual rental for real estate = $15,000
Total annual costs per store = $84,000 + $60,000 + $12,000 + $15,000 = $171,000

Profits = Revenues ? Costs = $180,000 ? $171,000 = $9,000, which is 5% of revenues.

5. Will the client P&G generate 2 times the industry profit margins to get 10% profits? In addition, is this business in line with the vision of P&G to be the leading branded consumer packaged goods company?

Possible Answer:

Typically 50% candidates say they think P&G should enter this business and 50% say P&G should not. More important than the answer, the candidate?s thought process and ability to substantiate their answer with confident arguments is what really matters in this case.

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