Stretch: an Australian pet-food maker, from margin squeeze to price rise to rollout

With volume and revenue flat, the fall must come from costs, and in pet food that often means ingredients. My hypothesis is that an input cost rise explains most of the fall, and that the answer is a targeted price rise plus cost work, not a volume push.

1. Step 1: Size the fall

   What a strong candidate does: Candidate: "Profit fell from AUD 24 million to AUD 12 million, so it halved:"

   Fall in operating profit (%): (24 - 12) ÷ 24 × 100 = 50

2. Step 2: Read the bridge

   What a strong candidate does: Candidate: "The bridge shows ingredients took AUD 10 million of the AUD 12 million fall. Freight and promotions are small, and price and mix helped a little. So ingredients explain this share of the fall:"

   Ingredients as a share of the fall (%): 10 ÷ 12 × 100 = 83.33

3. Step 3: The cost per kg

   What a strong candidate does: Candidate: "Over 60,000 tonnes, which is 60 million kg, the ingredient rise is about 17 cents a kg, on a price of about AUD 5 a kg. That is only about 3 percent of the price, which suggests a small price rise could recover it." Interviewer: "The CEO agrees and wants to raise prices. Let us look at pricing."

   Ingredient cost rise (AUD per kg): 10,000,000 ÷ 60,000,000 = 0.1667

4. Step 4: Switch to pricing: the rise needed at flat volume

   What a strong candidate does: Candidate: "The question is now what to charge. Three parts: how much we need, how customers react in each channel, and the net effect on profit. If volume held, recovering AUD 12 million on AUD 300 million of revenue needs:" Interviewer: "The CEO wants 8 percent everywhere, to be safe. Here is the channel data." (The interviewer shares the channel table: supermarkets 40,000 tonnes and elasticity of minus 3; pet specialty 20,000 tonnes and elasticity of minus 0.5. Contribution today is about AUD 1.50 a kg on a price of AUD 5.)

   Price rise needed at flat volume (%): 12,000,000 ÷ 300,000,000 × 100 = 4

5. Step 5: How much volume an 8 percent rise can lose

   What a strong candidate does: Candidate: "An 8 percent rise adds 40 cents a kg, so contribution rises from AUD 1.50 to AUD 1.90 a kg. The rise pays as long as we lose less than this share of volume:"

   Break-even volume loss for an 8 percent rise (%): 0.4 ÷ (1.5 + 0.4) × 100 = 21.05

6. Step 6: Pet specialty stores

   What a strong candidate does: Candidate: "With elasticity of minus 0.5, an 8 percent rise loses about 4 percent of volume, well under 21 percent. Contribution in the channel changes by:"

   Change in specialty contribution (AUD a year): 20,000,000 × 0.96 × 1.9 - 20,000,000 × 1.5 = 6,480,000

7. Step 7: Supermarkets

   What a strong candidate does: Candidate: "With elasticity of minus 3, the same rise loses about 24 percent of volume, more than the 21 percent break-even. Contribution changes by:" Interviewer: "So the CEO's 8 percent everywhere?" Candidate: "I would not do it. In supermarkets it loses about AUD 2.2 million a year. I would raise specialty prices 8 percent and hold supermarket prices while we fix cost."

   Change in supermarket contribution (AUD a year): 40,000,000 × 0.76 × 1.9 - 40,000,000 × 1.5 = -2,240,000

8. Step 8: Switch to rollout: how long it takes

   What a strong candidate does: Interviewer: "The CEO accepts. Specialty stores need new price lists and talks with the sales team, which can cover about 150 stores a month. There are 900 stores. How would you roll it out?" Candidate: "Now the question is sequence and speed. Store by store, it takes:"

   Months to reach every specialty store: 900 ÷ 150 = 6

9. Step 9: The cost of delay

   What a strong candidate does: Candidate: "Each month of delay costs about one twelfth of the AUD 6.48 million gain:"

   Gain lost per month of delay (AUD): 6,480,000 ÷ 12 = 540,000

10. Step 10: Start with the two big chains

    What a strong candidate does: Interviewer: "Two specialty chains sell 60 percent of specialty volume." Candidate: "Then I would agree the new prices with those two head offices in the first month. That locks in most of the gain at once:"

    Annual gain secured from the two chains (AUD): 6,480,000 × 0.6 = 3,888,000

11. Step 11: The gap that remains

    What a strong candidate does: Candidate: "The price rise recovers about AUD 6.5 million. The rest must come from cost: ingredient contracts, recipe changes that keep quality, and freight. The gap is:"

    Profit gap left after the price rise (AUD a year): 12,000,000 - 6,480,000 = 5,520,000

Raise prices 8 percent in pet specialty stores only, starting with the two big chains, and close the rest of the gap through cost. First, ingredients explain about 83 percent of the AUD 12 million fall in profit, about 17 cents a kg. Second, an 8 percent rise pays unless volume falls more than about 21 percent: in specialty stores (elasticity of minus 0.5) it adds about AUD 6.5 million a year, but in supermarkets (elasticity of minus 3) it would lose about AUD 2.2 million, so hold supermarket prices. Third, agreeing prices with the two chains that hold 60 percent of specialty volume secures about AUD 3.9 million a year in the first month; the other stores follow over about six months. The main risks are that elasticity estimates are wrong and that rivals do not follow. Next steps: open talks with the two chains, set an ingredient cost target to close the remaining AUD 5.5 million, and track weekly volume by channel after the rise.

Risks a strong answer names: The elasticity estimates may be wrong, especially in specialty stores if rivals hold their prices; Supermarkets may ask for better terms if they learn specialty prices rose; Ingredient costs may rise further before the cost work delivers.

Next steps: Agree new prices with the two large specialty chains in the first month; Set a cost program target of about AUD 5.5 million a year across ingredients and freight; Track volume by channel weekly and review the supermarket price after three months.