Profit down on flat revenue: a coffee chain, strong and weak

Candidate: Let me play that back. Revenue held at AED 100 million, and profit fell from AED 10 million to AED 8 million, a 20 percent fall, so margin went from 10 to 8 percent. We want the cause and a fix. Two questions: is the goal to get back to AED 10 million next year? And did the number of stores change between the two years?

Communication 5 of 5: Plays the problem back with the numbers, sizes the fall, and asks two questions that shape the structure.

Candidate: Thank you. And are competitors seeing the same pressure on profit?

Candidate: May I take a moment to structure my thoughts?

Candidate: Profit fell AED 2 million while revenue stayed at AED 100 million, so cost must have risen by AED 2 million. My hypothesis is an input cost, most likely coffee beans, because they are a traded commodity whose price moves a lot. I would split cost into its buckets to find the one that moved, and then split that bucket into cups sold, grams per cup and price per kilogram. Could I see a cost breakdown for both years?

Structuring 5 of 5: Uses the flat revenue to go straight to cost, states a hypothesis with a reason, and names the first step and the data it needs.

Candidate: Total cost went from AED 90 million to AED 92 million. Every bucket is flat except coffee beans, which rose from AED 8 million to AED 10 million. That AED 2 million is the whole profit fall, so my hypothesis holds, and the question becomes why bean cost rose.

Exhibit reading 5 of 5: Finds the one bar that moved, ties it to the profit fall, and says where to go next.

Candidate: Bean cost is cups sold times grams per cup times price per kilogram. Flat revenue does not prove cups were flat, because a price rise could hide fewer cups. So may I ask: did the average price per cup or the number of cups change? And did the recipe or cup size change?

Structuring 5 of 5: Breaks bean cost into its three drivers and asks for the facts instead of assuming them.

Candidate: Then the whole rise is the price per kilogram. From 8 to 10 is a rise of 2 on a base of 8, so bean prices rose about 25 percent. This is an input-price problem, not a demand or pricing problem.

Math 5 of 5: The right growth rate on the right base, with what it means for the diagnosis.

Candidate: To recover AED 2 million on AED 100 million of revenue with the same cups, the average price rises 2 percent. For the risk: variable costs are beans at 10 and milk and ingredients at 12, so contribution is AED 78 for every AED 100 of revenue today. After a 2 percent rise it is AED 80 for the same cups. The rise still adds profit unless cups fall by more than the gap between 78 and 80 as a share of 80, which is about 2.5 percent.

Math 5 of 5: Both answers right, with units, narrated step by step, and the break-even stated as a risk the client can watch.

Candidate: Recover the bean cost rather than chase demand. First, the whole AED 2 million profit fall comes from coffee beans, whose price per kilogram rose about 25 percent while cups, prices and the recipe held. Second, rivals face the same bean prices, so a 2 percent average price rise is realistic, and it recovers the full AED 2 million if cups hold. Third, it still adds profit unless cups fall by more than about 2.5 percent. So I would fix part of next year's bean cost through longer supplier contracts or hedging, and pilot a 2 percent price rise in 10 stores for six weeks while tracking cups sold. The main risk is that customers are more price-sensitive than we think, and the pilot tests exactly that.

Synthesis 5 of 5: Answer first, three reasons with numbers, the main risk, and a pilot that tests it.