Problem Definition
Our client, Easywood, is a bedroom furniture maker serving Germany. Last year, Easywood had revenues of around $20m and operating profit margins of around 20%. Easywood is not concerned about growth and profitability in the long term, but they are worried about cyclicality in the business. Business is good during sales times, but other times can be quite slow.
The CEO is considering entering the coffin market. He wants your opinion on whether this would be a good idea for Easywood.
Should Easywood enter the market for coffins?
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- If asked, please share that the client's objective is to find an additional source of revenue and profits that has more stability throughout the year than their core business
Question 1Structuring
How would you structure your approach to the question?
Hint · Structuring
Build 3–4 branches that are specific to this client and question, not a generic framework. Check they don't overlap and together cover the problem.
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Is the coffin market attractive?
- a. Is it big enough?
- b. Is it profitable?
- c. Does it have stable demand (i.e. no strong seasonality)?
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How much profit could Easywood make?
- a. What is the expected revenue?
- How many coffins can Easywood expect to sell per year (i.e., share of the market)?
- What price would the market tolerate?
- b. What are the expected costs?
- Variable costs: materials, labour, transport, etc.
- Fixed costs: machinery, warehousing, etc.
- a. What is the expected revenue?
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What risks should we be aware of?
- a. Strategic alignment/effect on brand. Are consumers reluctant to buy a bedroom set from a brand associated with coffins? Or, positively, do some consumers like the literal cradle-to-grave brand association?
- b. Operational capabilities
- c. Opportunity cost -- are there better alternative investments?
Question 2Numeracy
What do you expect the total value of the coffin market to be in Germany?
Hint · Numeracy
Write the formula before you plug in numbers, keep units and zeros explicit, and sanity-check the order of magnitude at the end.
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If asked, please share the following information:
- Total population in Germany = 80 million
- Average life expectancy = 80 years
- % of people using coffins: No data - a reasonable assumption can be made
- Average price of the coffin = $1,000
Once the candidate has completed their market sizing, ask an additional question: "Which of the assumptions in your market sizing are you least sure of, and could have the biggest impact on our assessment?" The answer should be either:
- The % using coffins instead of cremation without coffin (especially if they made a high % assumption)
- The evenly-distributed population, since in reality populations skew towards older demographics in Germany -- affecting the estimate for # deaths per year
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Life expectancy is 80 years. No. of people dying per year = 80 million / 80 years = 1 million
No. of people who have a coffin burial, as opposed to cremation without coffin: assumption at 80%. 80% * 1 million = 800,000
Given a price of a coffin at $1,000, the total value of the market = $1,000 * 800,000 = $800 million
Given the client has a current revenue of $20 million per year, a market size of $800m seems potentially attractive.
Question 3Judgement & Insights
What other data points would you need to determine the attractiveness of the coffin market?
Hint · Judgement & Insights
Read the exhibit title, axes and units first. Lead with the ‘so what’, then back it with one or two numbers.
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- Competitive landscape -- is there one large competitor or are there numerous small ones?
- Profitability of the current players -- is it a high margin market?
- Market trends -- is the market growing?
- Barriers to entry -- do current players have long-term contracts with distributors, for example?
Question 4Judgement & Insights
We've gathered the following data about the competitive landscape [share Exhibit 1].
Hint · Judgement & Insights
Read the exhibit title, axes and units first. Lead with the ‘so what’, then back it with one or two numbers.
What does this tell you about the attractiveness of this market? Beyond the exhibit, what else might make this market attractive for Easywood?
Exhibit 1Competitors in the coffin market
| Coffins sold (million) | Price per coffin ($) | Profit Margin (%) | |
|---|---|---|---|
| Player 1 | 0.45 | 1,000 | 30 |
| Player 2 | 0.175 | 1,200 | 35 |
| Player 3 | 0.175 | 800 | 25 |
Source: Easywood Furniture case file
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Based on our previous estimate of coffin sales, it looks like these three players comprise the total market. The market is therefore quite concentrated. It's likely scale in this market provides economic advantages, though given the client's existing size this could be surmounted.
From a profitability standpoint, the market does look attractive: All players are more profitable than Easywood's current profit margin of 20%. This appears to be a high-margin industry.
Beyond the exhibit, it's unlikely that the market for coffins exhibits dramatic seasonality -- we would expect death rates to be relatively stable throughout the year, though there may be some limited variation (e.g. due to weather).
Question 5Creativity
What factors should Easywood consider in assessing the feasibility of entering this market?
Hint · Creativity
Brainstorm in buckets (e.g. internal vs external, short vs long term) so ideas stay structured and you can see gaps.
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Economic factors
- Does Easywood have the required capital to invest in the new business?
- Are there really synergies between bedroom furniture and coffin making? Can we produce the latter economically, leveraging our existing capability?
- If Easywood gains further scale from this expansion, will it reduce their costs of materials more broadly (e.g., volume discounts on wood)?
Non-economic factors
- Does Easywood have the knowledge and capability to make and sell coffins?
- Where should Easywood position themselves in the market, i.e. mass market vs high-end?
- Are relationships with morticians required to sell coffins, or do consumers seek them out on their own?
- How will this new business venture affect Easywood's brand and reputation?
- Do Easywood staff have the capacity to take on the extra work and manage a second area of business?
Question 6Judgement & Insights
It turns out that the client does have the financial capital and capabilities to enter this market. However, the client has an additional concern regarding the effect entering this market might have on their brand, given the importance of their core furniture offering.
Hint · Judgement & Insights
Read the exhibit title, axes and units first. Lead with the ‘so what’, then back it with one or two numbers.
How would you solve for this?
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- The interviewer should keep probing until the candidate states the idea of creating a separate brand
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We could try various approaches to reduce the risk of a negative association with the brand, such as using our PR relationships to downplay coverage of the new business.
In practice, however, Easywood should create a new, separate spin-off brand specifically for the coffin aspect of the business. While this would require some up-front investment, it allows us to promote the new coffin business without compromising the core brand.
Question 7Synthesis
What is your final recommendation for Easywood?
Hint · Synthesis
Answer first: the recommendation, two or three reasons with numbers, then risks and next steps.
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We were asked whether Easywood should enter the market for coffins. I recommend that they do so, for the following reasons:
- Coffins is a $800M market with a profitability in excess of 20% in the industry. Capturing even 5% of this market would triple Easywood's current revenues of $20M
- The market is likely to have stable, rather than seasonal, demand. This was a core priority for the client.
- Operational feasibility does not look like a concern, given Easywood's expertise in making and selling furniture.
We should launch a separate brand to enter this market, to avoid any negative impact to our core furniture offering.
If we had more time, I would want to consider options for how Easywood could differentiate its brand in the coffin market, to compete against the major players, and understand the role morticians play in selling coffins to consumers.
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