Crack the Case. D. Ohrvall

Interviewer Fact Sheet

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IntroIntroFactsFacts

(Tell(Te lthetheCandidateCandidateififAsked)Asked)

•Salons:

•Salons:

Loyalty – women tend to be loyal to their stylist/salon. Loyalty – women tend to be loyal to their stylist/salon.

Switching rates are < 20%. Switching rates are < 20%.

Salon Utilization – it takes roughly 5 years to reach Salon Utilization – it takes roughly 5 years to reach “full” utilization (usually “full” is defined as each “full” utilization (usually “full” is defined as each

chair being utilized 70% of the time). chair being utilized 70% of the time).

Competitor concentration – the industry is very Competitor concentration – the industry is very fragmented. Rejuva, the largest chain, only fragmented. Rejuva, the largest chain, only

controls a small portion. controls a small portion.

Failure rate – No actual data available; in general, Failure rate – No actual data available; in general,

most salons succeed if given enough time most salons succeed if given enough time

•Products:

•Products:

Breadth – MM product line includes a full range of Breadth – MM product line includes a full range of

haircare products (shampoos, conditioners, styling haircare products (shampoos, conditioners, styling products) and bath products (bath & shower gel, products) and bath products (bath & shower gel, soap).

soap).

Quality – currently carried by high quality Tokyo Quality – currently carried by high quality Tokyo retailers, including Murui-Murui and Seibu. retailers, including Murui-Murui and Seibu.

Manufacturing – all products are manufactured in Manufacturing – all products are manufactured in

Hong Kong, with the exception of soaps, which are Hong Kong, with the exception of soaps, which are manufactured in Japan.

manufactured in Japan.

Competition – there are few competitors; it is a very Competition – there are few competitors; it is a very

fragmented industry fragmented industry

•Investors:

•Investors:

Financing – one investor is driving the funding, so the Financing – one investor is driving the funding, so the

team wants to meet his demand team wants to meet his demand

Team – The three entrepreneurs are smart and Team – The three entrepreneurs are smart and driven, but have little domain experience driven, but have little domain experience

On-Track Indicators

Clear logic – parses the data into distinct groups and knows what s/he is looking for with each piece of analysis

Common sense – shows a strong understanding of the challenges of a startup and the need to focus on drivers of value through clear prioritization

Speed– quickly creates a plan to plow through the data and develops a P&L to evaluate the salon potential

KeyKeyInsightsInsights

(Do(DoNotNotTellTe lthetheCandidate)Candidate)

•Salons are too expensive to launch at

•Salons are too expensive to launch at

first: Opening salons is a way to push first: Opening salons is a way to push

products and increase brand awareness, but products and increase brand awareness, but

the initial capital outlay for the salons is high. the initial capital outlay for the salons is high.

It takes up to five years to reach full It takes up to five years to reach full

utilization.

utilization.

•Leverage the existing brand rights to

•Leverage the existing brand rights to

products: The brand rights to MoMo Mui products: The brand rights to MoMo Mui come with a silver lining, a fully developed come with a silver lining, a fully developed

product line. Although the packaging and product line. Although the packaging and

some formulations will change over time, the some formulations will change over time, the

product is already very successful as is. product is already very successful as is.

The focus will be on marketing it and The focus wi l be on marketing it and

determining how large the business will determining how large the business will

grow on product sales alone. grow on product sales alone.

•Near term product growth is critical to

•Near term product growth is critical to

success: There is a clear need to create success: There is a clear need to create value early for investors and for those value early for investors and for those involved in building the business. The plan involved in building the business. The plan

should focus on some near-term goals should focus on some near-term goals

around product growth and long-term goals around product growth and long-term goals

around salon build-out. around salon build-out.

Off-Track Indicators

Creative without content – spends too much time pondering the need for this kind of product without doing the math

Slow with numbers – does not recognize the need to round up and make simple assumptions

Has “blinders” on – fails to question the deal as it is suggested; does not explore the product-only path or some form of a hybrid approach

Case at a Glance

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Part

A

Case at a Glance

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Case at a Glance

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Part

C

Range of Answers

Wait to see what direction the Candidate takes the conclusion. If you have time, feel free to discuss

•Pursue the salon openings and meet the investor’s demands

-To achieve the required return, an aggressive number of salons must be opened in the first 3 years

-Similar to the sample math, at least 12 salons must have been opened and be at their 5 year profit steady state to meet the investor’s goals

-If the profit and loss for one salon is different from the sample answer, adjust the salon count accordingly

-Good business judgment would question if this is the only route to success

•Suggest selling products for a few years before opening new salons

-Since opening salons is so capital intensive and slow to provide a strong return, we should compare it to other alternatives

-To meet the 6 year target with this approach, MM would have to capture about 3-4% of the prestige women’s market. Is this reasonable?

Yes, when you consider that there are few national brands that are well marketed

Yes, when you consider they have 6 years to achieve it

No, when you consider the limits of their present line (mainly hair care products)

•Suggest selling products in year one and then opening salons (hybrid)

-This is probably the best option as it gives you something to focus on in year one that is already proven (product sales); you can eventually add salons, which are more complicated

-A good discussion point here is that new entrepreneurs have a steep learning curve.

Handout Guide

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Candidate: Do you have data on the industry? Interviewer: Here’s some market information for the last year.

Interviewer: How would you go about sizing their market?

Good Approach: Since we are going after a very specific market I would first want to define it (who’s in “prestige”). Then I would want to know how big that market is in the US.

Candidate: What do you know about competitors? Interviewer: Here’s some information on the number

of competitors in this industry.

Interviewer: What does this information tell you? Key Insight: No one competitor dominates this

market. It is very fragmented. We see some evidence of a chain doing well, but there won’t be any strong competitors to edge us out.

Candidate: Does the company know where it wants to locate salons?

Interviewer: Here’s a preliminary location map that the team put together.

You Might Ask: How do you think they came to highlight these areas?

Main Insight: Per capita income threshold (team used $125k), concentration of competitor salons (not an issue)

Handout Guide

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=MM sells to retailer or salon

=Retailer sells to end customer

=MM sells directly to end customer

Manufacturer

MoMo Mui North America

Candidate: Do you have data on the products or the market for products?

Interviewer: Here’s some information about the women’s prestige product market.

What portion of the prestige market do you think MM can capture?

Good Approach: 10% seems large, considering that the category includes products MM may not carry. 5% would imply $10M annually for revenue. MM’s bottom line take will vary by channel.

Candidate: Do you have any product margin data? Here are some margin estimates by retail channel.

Interviewer: What portion of MM’s product sales do you think will come through each channel? What would that imply for total profit?

Good Approach: Margins are highest in direct sales, the area that MM will least emphasize. Margins vary little by channel.

Candidate: How much profit does a typical salon generate in a year?”

You Might Ask: At what rate do we have to open salons to reach our investor’s target of $3M of profit per year?

Main Insight: Need to open at least 13 salons over 3 years in order to meet the investor’s target with salon-only strategy.

Main Insight: This table shows one approach to rolling out salons. You can see that to reach the $3M goal, several salons must be opened in years 2 and 3. Opening too many in year 1 may stress the small organization too heavily.