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Management Consulting Case Study: Wine in Boxes

By Nandini Khemariya · Published · Updated

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Management Consulting Case Study: Wine in Boxes

Unit economics decide this management consulting case study. A winemaker sells the same grapes in two packages, and only one of them makes money. The interesting part is that the fix has nothing to do with price.

Introduction

  • Our client is the CEO of an Australia-based winemaker that is the market leader in its country.
  • Recently, profits have been decreasing, and the CEO believes that this is due to losses in the boxed wine division.

Factors to Consider

  • Assessing the profitability of each division
  • The types of costs associated with each product
  • The pricing and target customer for each product
  • The use of the same grapes for both products

Background Information

  • The company is currently losing money.
  • Sales are split evenly between the two divisions.
  • Bottled wine sells for AUS$5 per unit; boxed wine sells for AUS$10 per unit.
  • Bottled wine contains 750ml; boxed wine contains 3 litres.
  • Both products carry an overhead of AUS$0.50 per unit.
  • Raw material costs are AUS$2 for bottled wine and AUS$8 for boxed wine.
  • Packaging costs AUS$1 for both products, while other variable costs (distribution and labour) are AUS$1 per bottle and AUS$2 per box.

Analysis

  • If the grape cost for bottles is AUS$2, for boxes it is AUS$8 (a 1:4 ratio).
  • Profit per bottle is AUS$1.50; each box loses AUS$0.50.

Conclusion

  • The company should try to source lower-cost grapes for its boxed wine product line.
  • The current raw material cost ratio is 1:4 when comparing bottled wine against boxed wine, but the price ratio is only 1:2.
  • Boxed wine targets a different market segment and may not require the same quality (and cost) of grapes as bottled wine.
  • Lowering the raw material cost for boxed wine could make the line profitable.

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Frequently asked questions

What is the wine in boxes case about?

An Australian winemaker is losing money and the CEO suspects the boxed wine division. The case tests whether you can build the unit economics of each product and find the real cause.

How do the unit economics compare?

A bottle sells for AUS$5 with AUS$3.50 of costs (AUS$2 grapes, AUS$1 packaging, AUS$0.50 overhead) plus AUS$1 of distribution and labour, so it earns about AUS$1.50. A box sells for AUS$10 but costs AUS$10.50 (AUS$8 grapes, AUS$1 packaging, AUS$0.50 overhead and AUS$2 distribution and labour), so it loses AUS$0.50.

Why is boxed wine unprofitable?

Grapes. A box holds four times the wine of a bottle and uses four times the grape cost, but sells for only twice the price. The same premium grapes are going into a product aimed at a value customer.

What is the recommendation?

Source cheaper grapes for the boxed line. Boxed wine serves a different segment that does not need bottle-grade fruit, and cutting the raw material cost is enough to turn the division profitable without touching the price.


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Written by

Nandini Khemariya

Management Consultant

All articles by Nandini Khemariya

Relevant tags:

#CaseStudy #CaseInterview #ManagementConsulting #UnitEconomics #ProfitabilityCase #ConsultingPrep #MBB

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