20150603 Case Competition - Estudiantes

Case Competition

Developing a Strategy

for SANTO

McKinsey & Company |

Intrucciones para competidores

Caso

Contents

1


Case Competition: Instrucciones para competidores (1/2)

2

El objetivo de esta competencia es que los estudiantes experimenten el trabajo de consultora. Buscamos que los estudiantes pongan en prctica sus habilidades y

conocimientos i) analizando el problema, ii) estructurando una solucin, y iii)

argumentando la recomendacin.

SOURCE: McKinsey

Ustedes forman parte del equipo de consultora que SANTO, la divisin de hipermercados del Grupo Segura, contrat para ayudarlos a desarrollar dicha

divisin de hipermercados.

En la siguiente seccin encontrarn la propuesta (LOP, letter of proposal) que fue aprobada por SANTO y el Grupo Segura para este fin

Tambin encontrarn material con informacin relevante para el desarrollo del caso

Su objetivo, usando esta informacin y cualquier otra informacin que consideren relevante, es ejecutar dicha propuesta

La recomendacin de su equipo se debe dar en una presentacin de PowerPoint de mximo 8 pginas (sin incluir portada, tabla de contenido y trackers). La

presentacin debe ser en espaol

La presentacin debe ser auto-contenida y debe explicarse por s misma. La primera etapa de evaluacin se enfoca nicamente en la presentacin escrita, as

que toda la informacin que se quiera comunicar debe estar contenida aqu

Objetivo de la

competencia

Objetivo del caso

Gua para la

presentacin

Categora Descripcin


Case Competition: Instrucciones para competidores (2/2)

3

Todas las lminas deben ser claras, cumpliendo con los siguientes elementos:

Un solo mensaje por lmina

Este mensaje debe ser transmitido explcitamente por el ttulo de la diapositiva en un lenguaje claro y conciso

Cada lmina debe contener las fuentes de donde se obtuvo la informacin

Explicar claramente cualquier clculo o cifra (bien sea de manera directa o con pies de pgina) la idea es que cualquier persona que tome la lmina tenga suficiente informacin para entenderla sin requerir explicaciones adicionales. Esto

incluye las unidades empleadas y el periodo de tiempo utilizado para las cifras

Las grficas deben servir de apoyo fundamental para ayudar a transmitir el mensaje de la diapositiva. Las grficas deben ser diseadas cuidadosamente para

transmitir el mensaje de la manera ms contundente y sencilla posible.

El uso de colores no debe ser una fuente de distraccin ni de confusin deben ayudar a diagramar y transmitir una idea

Algunos elementos que pueden ser usados en la presentacin, pero que no necesariamente son requeridos:

Tabla de contenidos con la estructura de la presentacin

Resumen ejecutivo donde se sintetizan los principales puntos de la presentacin

Indicador de la seccin de la tabla de contenidos de la presentacin que se detallar a continuacin (esto tpicamente lo llamamos un tracker)

SOURCE: McKinsey

Gua para la

presentacin

(cont.)

Categora Descripcin


Cronograma del Case Competition

SOURCE: McKinsey

Entrega del

caso a resolver

Preguntas a

consultores

Entrega de la

presentacin

Viernes 05/06

El caso se enviar por correo al

integrante (lder)

que registr al

equipo

Este ser hasta el mircoles 10 (ltimo

da de inscripcin)

Cada grupo tendr asignado un

consultor que los

ayudar a resolver

dudas sobre la

resolucin del

caso

Entrega por correo de las

presentaciones

* Debern indicar qu horario

pueden asistir en

la presentacin

final

Anuncio de los

finalistas

Presentacin

final

Viernes 19/06

Email a todos los lderes de

los equipos

anunciando

los finalistas

Presentacin final de 30 minutos

frente a jurados

(no tienen que

presentar todos

los integrantes)

12 pm

6 pm

2 pm 4 pm

Durante la

semana1pm

Domingo 14/06

Mircoles 17/06

9 am 12 m

4



Caso

Letter of proposal

Company background

Competitive landscape

Customer segmentation

Financial performance

Expert memo

Contents

6SOURCE: McKinsey


Case Competition: Letter of proposal (1/3)

7

CONFIDENTIAL

Memorandum to

Pedro Prez, CEO of Grupo Segura

From

Carolina Gonzales

DEVELOPING A STRATEGY FOR SANTO

It was a pleasure to meet with you last week to further discuss how we can assist SANTO, the hypermarket

division of Grupo Segura. Based on our conversation, there is a great deal to do to develop this division and we

look forward to working with you to build a sustainable competitive advantage for SANTO in the Peruvian grocery

retail market. As promised, this short note outlines the scope and a possible approach to meet this objective.

CONTEXT FOR THE EFFORT

SANTO has successfully built a strong presence in the eastern and central Peruvian grocery retail market, but is

experiencing declining market share, fewer customers, and a decline in average profitability. Consolidation by

international players, changes in consumer preferences and changes in the grocery retailing environment have

made the competitive landscape more difficult for SANTO. The Peruvian market has seen a strong growth of the

SOURCE: McKinsey



8

discounters such as Makro, and competition in that sector is likely to continue to intensify in the next few years.

Thus, you face greater competition from domestic and international players and also increasingly demanding

consumers.

Increased competition

SANTO appears to be at risk of getting caught in the no-mans land of the evolving grocery retail landscape.

Domestic and international players in the industry are challenging incumbent regional grocers like SANTO with

scale advantages and new value propositions. Given that the grocery retail industry in Peru is more fragmented

than grocery industries in rest of Latin America, experts expect further consolidation in the industry. This only

increases the pressure on SANTO to create a clear, sustainable market position in an intensely dynamic retail

landscape that may be moving toward an era of 4 to 5 behemoths that will compete aggressively using their scale

advantages in operations and marketing.

More demanding customers

Over the last few years, consumers have grown increasingly willing to take advantage of the offers from nationally

branded entrants or international players, such as Walmart. These customers are demanding a clear value

proposition to demonstrate loyalty to any particular grocer, and are increasingly seeking convenience as well as

high quality and value for money in choosing a primary market.

In light of these pressures, you have recently raised the need to begin a dialogue around the strategic issues facing

SANTO. In particular, you have stated that you would like to define an integrated set of actions to establish a

sustainable competitive advantage for the company for the next 5 years.

SOURCE: McKinsey



9

More specifically, you have expressed the aspiration of attaining 3.5% operating margins1 in the near term, and

building a base for continued growth in the longer term. McKinsey & Company is pleased to submit this proposal to

assist SANTO in achieving its strategic and financial goals.

We believe McKinsey & Company is distinctively qualified to serve SANTO on its strategic challenge. We will bring

to the project deep experience with food retailers and grocery companies across Latin America on a broad range of

strategic, financial, and organizational issues; the structured problem-solving approach, objective fact-based

analytical capabilities, and the integrative perspective of top management that are the hallmark of McKinseys

approach to consulting.

PROJECT OBJECTIVES AND SCOPE

In our earlier discussions, we agreed that McKinsey will help to diagnose the situation and identify levers to get

SANTO back on track. Therefore, we believe the objectives for the project can be summarized as follows

Conduct an in-depth analysis on the sources of SANTOs performance gap relative to competitors

Generate options and assess most attractive strategic alternatives for SANTO to improve its performance and gain competitive advantage

Identify potential implementation challenges and develop an implementation plan to ensure effective and sustained change

1 Operating margin defined as EBITDA / Revenue

SOURCE: McKinsey



Caso

Letter of proposal

Company background




Expert memo

Contents

10SOURCE: McKinsey


Company background Grupo Segura

11

Overview

Grupo Segura was founded in 1984 with its first supermarket in northern Peru

SANTO is a hypermarket division of GrupoSegura

It is a privately- held company, run by the Perez family

Its functions are only in Peru; primarily in northern and central Peru

Grupo Seguras CEO: Pedro Perez

Geographic presence

Financial statistics

Sales: 2.5 billion USD Net profit margin: 4% Total number of stores: 380

Hypermarkets:15 Supermarkets:200 Discount:165

Sales by format (% of 2013 sales)

28

Hypermarket

Supermarket 56

Discount17

Focus of case

SOURCE: McKinsey


Grupo Seguras retail store format growth

12SOURCE: McKinsey

170 166 166 165

185 189 194 200

380

2013

15

Discount

366

11

367

12

373

13

2010

Supermarket

2011

Hypermarket

2012

SANTO

Number of stores


Grocery market share of key players in Peru

13

Percent share, 2013

3Flaco

5Petso

7

Joes8

Winograd12

Buitragos

14

Other 49

Jimbos

2

Segura

Total=83.3 USD billion

Focus of case

SOURCE: McKinsey



Caso

Letter of proposal

Company background




Expert memo

Contents

14SOURCE: McKinsey


Key trends in Peruvian grocery retail

15

Peru has enjoyed strong economic growth mixed with high unemployment Consumers value price, service, and product range as decision points on

purchases

Discounts are bringing price pressure to bear

Planning regulations restrict the building of large stores formats Opening hours are restricted to 80 hours a week Selling below cost is banned A new tax reform that will increase taxes 10% is in process

The Peruvian market has consolidated rapidly in recent years but still remains one of the 5 least consolidated markets in America

Domestic and international companies are aggressively pursuing opportunities

Private label penetration is relatively low Growth in private label is slower in food than in non- food

Purchasing remains decentralized; regional or store-level buying accounts for most of the market, even among the large foreign retailers

Price and

consumer

trends

Regulations

Industry

consolidation

Brands

Centralized

buying

SOURCE: McKinsey


Future industry trends

16

Peru- grocery retailing prospects Future- industry trends and

forecasts

The grocery market is expected to become more

concentrated as international

players expand into new

geographies

Service and convenience will play an increasingly important

role driven by growth in the

number of working women,

increase in per capita income,

and lack of time for shopping

Discounters will continue to grow

Growth in food spend (25%) will underperform growth in

overall consumer retails spend

(30%) between 2013 and 2017

Market size

USD billion

108102

9791

8381

17E16E15E2012 14E13

SOURCE: McKinsey


Retail Pentagon: a useful framework for determinig a retailers value

proposition

17

PriceBrand Identity

Consistent and

distinct positioning

relative to

competition

Providing

appropriate value for

what you offer; clear

and consistently

communicated

Environment that makes

shopping easier and more

enjoyable, and showcases

merchandise, seamless multi-

channel interfaces and offerings

Distinctive product

selection that gives

customer a clear point

of view on what to buy

Efficient and effective

service, including service

offerings, tailored to

customers needs

Features and layout

that helps expedite

customers shopping mission, services and

amenities to avoid

inconveniences

Product

authority

Service(s)

Experience Convenience

Our beliefs

To be successful you need to be famous for something

A retail proposition can be truly distinctive on only one

or two dimensions

Whatever the proposition, the role of price must be

clear

Industry baseline standard must be achieved on all

dimensions

SOURCE: McKinsey


Different retail store formats

18SOURCE: McKinsey

Hypermarket

Description

One-stop shop for all needs (e.g., health and beauty, clothes, home entertaining, sport and leisure, etc) with an even split between food

and non-food items

Brand product offering of food and some non-foods items, such as gasoline, hot counters

Superstores

Older traditional grocery stores with no standard layout and a focus on foods items

Supermarkets

Price-focused format with a narrower product range selling a large % of private label goods

Discount

Smaller format in high-density areas with a focus on convenience and lunchtime items

Metro/ Express

Family-run small format stores typically selling fresh products Mom & Pop


Growth of modern retail store formats in Peru

19

11

12.378

2009

2.947

8.386

10.358 10.786

350

10

9.081

346

2.054

8.094

1.934

330

3.213

11.848

3.366

15.902

12.298

Supermarkets

Discount

12

15.583

2013

391369Hypermarkets

11,3

13,5

11,0

4,3

Growth CAGR

%

SOURCE: McKinsey



Caso

Letter of proposal

Company background




Expert memo

Contents

20SOURCE: McKinsey


Customer segments based on shopping habits

21

Pure price

Description

Judge retailers exclusively on price but value convenience Care little about range or in-store experience Discounters are primary store

High willingness to shop around for best possible deals Cherry-pickers; take advantage of attractive offers at multiple storesValue hunter

Pick single store to buy most groceries Price is key consideration ; convenience, quality, in-store

experience, and extensive product range also important

Value loyalists

Do not care about grocery shopping; spend less on grocery than other segments

Value convenience and in-store experience Tend to remain fairly loyal to primary store

Uninvolved

shopper

Require extensive product range, convenient store experience and low cost

Willing to shop around and compare price Buy private label infrequently

Demanding

shopper

Cash rich but time poor; interested in buying high quality products Favor streamlined stores; willing to pay extra for convenience

Quick quality

SOURCE: McKinsey


Different loyalty programs

Key characteristics Examples/where typically found

Targeted

tactical

programs

Targeted offers made to specific customer segments intended to shift

behavior or build relationship

Wide variety of retailers do this to some extent, including the coupon

program BBB already deploys

Frequency

card

The most basic form of reward program, usually in the form of buy nine coffees, get the next one free

High frequency, highly transactional businesses (e.g., local coffee vendor)

Discount

card

Typically, funnels all discounts in the store through a rewards card

High frequency with high degree of discounting already present

Points-/

spend-based

reward

Earn points, which can be exchanged for rewards

Based on the model built by airline industry and honed by credit cards.

Typically, requires strong margins and

high customer engagement with brand

Coalition-

based

rewards

Leverages network of other partners to accelerate earnings and offer

wider variety of redemption options

Coalitions have not developed in the U.S. to the same extent they have in

other markets (e.g., AirMiles in Canada)

Relationship

program

Provides distinguishing benefits to best customers (e.g., special

treatment)

Industries with clearly identifiable high-value customers. Airlines elite programs are the prototype

RETAIL

EXAMPLES

Source: McKinsey

SANTO currently does not have any loyalty program

22


Customer segments sizes

23

Peru

Chile

Ecuador

Colombia

Weight

total

Pure price

5

27

4

9

13

Value

hunter

17

22

8

13

14

Value

loyalist

16

8

7

14

12

Uninvolved

shopper

14

11

23

6

14

Demanding

shopper

22

9

17

21

14

Quick

quality

8

14

10

16

15

Other

18

9

31

21

18

SOURCE: McKinsey


SANTOs customer survey: attributes important to build customer loyalty

24

Main customer

requirements Most significant attributes

Time saving Proximity/convenience of POS terminals Faster checkout lines

Attribute importance index

Value standardized in scale of

0-10

Incentive for loyal customers

Presence of loyalty-building initiatives

Convenient and easy shopping

Convenient store layout Easy-to-find products on the shelves Products always available

Presence of service/quality

Offers a good level of customers service I find staff to help me

Value Always has a good and attractive promotions Offers good value prices on shopping list items Offers good value prices on fresh products

On-stop shop Wide product range in Fresh products Pet foods Regional products

Imp

ort

an

ce

of

cu

sto

me

r lo

ya

lty-b

uild

ing

att

rib

ute

s

3.5

1.4

3.3

2.5

1.8

3.1

2.2

1.5

1.8

1.3

1.0

1.3

0.9

0.7

SOURCE: McKinsey


SANTO: good attraction performance but limited customer

loyalty building capacity (1/2)

25SOURCE: McKinsey

Trial purchase

20

35

40

Buitrago WinograndSanto

Customer who have made at least one

trial purchase

% of total interviews

Repeat purchase

Mix of occasional and loyal customers


2030

9080

70

10

Winogrand

Loyal

Occasional

Santo Buitrago


SANTO: good attraction performance but limited customer loyalty

building capacity (2/2)

26

Santo

Have

visited a

shopping

mall

Know the

hypermarket

Have

visited a

hyper-

market

Have

made a

trial

purchase

Shop

occasio-

nally

Shop

regularly

Buitrago

Winogrand

99% 80% 45% 23%40% 3%

80% 54% 89% 57% 13%

98% 64% 39% 26%35% 8%

65% 60% 90% 74% 31%

76% 40% 35% 17%20% 9%

53% 88% 57% 85% 53%

Good capacity to attract/trial

purchase

High potential for improving

capacity to

build loyalty


SOURCE: McKinsey


SANTO: strong need to improve customer service

27

Benchmark

4-6

Santo

2-3

+100%

Level of service not the best,

particularly in departments where sales

are assistedAverage sales staff per 1000 square

meters

resulting in a lower average bill compared with industry peers

Average bill in USD

46

35

BenchmarkSanto

+31%

SOURCE: McKinsey



Caso

Letter of proposal

Company background




Expert memo

Contents

28SOURCE: McKinsey


SANTO income statement

29

USD millions

2010 2011 2012 2013

Revenues 774 738 704,3 691,5

Cost of goods sold -593,4 -570,1 -534 -523,2

SG&A -157,7 -154 -150,3 -151,1

EBITDA 22,9 13,9 20 17,2

Depreciation -11,2 -11,4 -13,7 -12,7

EBITA 11,7 2,5 6,3 4,5

Amortization

EBIT 11,7 2,5 6,3 4,5

Non-operating income 1 1 1 1

Intereset expenses -3,9 -3,8 -3,7 -3,4

Earnings before taxes 8,8 -0,3 3,6 2,1

Income taxes -2,7 0,1 -0,9 -0,4

Net income 6,1 -0,2 2,7 1,7

SOURCE: McKinsey


SANTO balance sheet

30

USD millions

2010 2011 2012 2013

Operating cash 15,5 14,8 14,1 13,8

Excess marketables securities 24 23,3 22,5 21

Accounts receivable 15,8 14,3 15 13,5

Inventories 39 36,8 36,8 38,3

Pre-paid expenses 8,3 9 8,3 6

Total current assets 102,6 98,2 96,7 92,6

Net property, plan & equipment 121,9 122,6 139,5 145,3

Other operating assets 9,9 11,4 10,1 11,6

Discontinued operations 13,5 13,6 15,3 14,9

Total assets 247,9 245,8 261,6 264,4

Short-term debt 39,8 39 38,3 39

Accounts payable 51,8 53,3 50,3 51

Accrued salaries 9,4 10,9 10,3 10,9

Total current liabilities 101 103,2 98,9 100,9

Long-term debt 42 42,8 43,5 43,5

Other operating liabilities 16,6 18,7 18,8 18,1

Total liabilities 159,6 164,7 161,2 162,5

Shareholders equity 88,3 81,1 100,4 101,9

Total liabilities and equity 247,9 245,8 261,6 264,4

Assets

Liabilities

and equity

SOURCE: McKinsey


Working capital/ revenue, %

ROIC analysis of competitors

31

3,9 3,6 3,5

PPE/ revenue, %

31,732,535,1

Depreciation, %

2,01,81,9

SG&A,%

18,418,0 18,0

COGS, %

75,175,275,3

Revenue/ invested

capital

2,72,6 2,8

EBIT, %

5,04,8 4,5

ROIC

8,2 8,38,9 (1 TAX1)

1/

Buitrago

Winogrand

Median competitors

SOURCE: McKinsey

1 TAX= 34%



Caso

Letter of proposal

Company background




Expert memo

Contents

32SOURCE: McKinsey


Expert Memo

33SOURCE: McKinsey

I understand that you have recently started work with SANTO, the hypermarket division of Grupo Segura. To

help your team along, I would like to share the Firms latest knowledge on trends in the Latin-American retail industry that also apply for the Peruvian market:

MARKET DYNAMICS

The Latin-American grocery market is rapidly consolidating. US retailers, such as Winograd, and Latin-American retailers, such as Buitrago, are seeking geographic expansion opportunities in fragmented markets

like Peru and Colombia

As the market consolidates, suppliers must be prepared for retailers to have increasing power to demand trade and other discounts in negotiations

Consumer lifestyles are changing. The rise in single households, the increasing number of working women, and the change in traditional family structures is driving a demand for convenience

RETAIL STORE FORMATS

While we see large growth in hypermarkets in the US, the same growth is not seen in Latin America. Tight regulation by planning commissions on building such large-style formats has made supermarkets and

discounters more feasible formats

Discounters have had a long history in Latin America. These companies enforce pricing pressures on other players in the market. Discounters rapid growth is due largely to the pace of their store openings

The divide between various store formats is blurring as discounters grow into supermarkets and supermarkets into hypermarkets

KEY SUCCESS FACTORS FOR NON-DISCOUNT GROCERS

Provide clear and consistent shopper communication from marketing and in-store signage to value cues Ensure Known value items are competitively priced and generate excitement by providing unbelievable

prices

Reinforce message of No compromises quality Minimize supply chain costs by pattering with suppliers Use technology to better understand and monitor customer behavior and preferences

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