Case

Fine Coasters

Difficulty: Intermediate

Topics:

Case prompt

FineCoasters (FC) is a company producing artisanal, printed ceramic coasters. It operates on the US market, and has its own distribution network. The company’s product is built around its proprietary thermal regulating technology, which allows coasters to absorb the heat from hot beverages and better protect tabletops.

After its success in the coaster market, FC wants to use the same heat absorbing technology to expand into the ceramic tea set market and produce thermally regulating teacups etc. It is initially interested in launching the product on the US market only.

The company has employed us to assess the potential market and inform them whether we recommend going ahead with the launch.

Detailed solution

Paragraphs highlighted in orange indicate hints for you on how to guide the interviewee through the case.

Paragraphs highlighted in blue can be verbally communicated to the interviewee.

Paragraphs highlighted in green indicate diagrams or tables that can be shared in the “Case exhibits” section.

Identify the problem

The case entails entry to a new market (ceramic drinking set market) with a new product. The candidate should ask structured questions to determine the company’s objectives, the market and the company’s fit.

The company would like to achieve a revenue of $200m in the first two years.

The client has also asked us to estimate the market. Some market data is provided.

There are two key segments in the market - consumers and restaurants/tea houses:

- The consumer sector is predicted to increase by 5% for the next 2 years as an ongoing pandemic is encouraging customers to entertain at home

- The commercial sector is declining by 4% for the same reason, with government regulations limiting the opening hours of restaurants and tea houses

- Market research has indicated that there are currently 300,000 establishments who purchase ceramic drinking sets once every three months. The minimum drinking set purchase is20 per establishment, but because establishments purchase in bulk, they usually get discounted prices

- We don’t have any information on the number of consumers

The key issue then is whether the client should attempt to enter the whole market or focus on a specific segment.

Lead the Analysis

To determine the answer candidates can make the following calculations to estimate total market size as well as the size of different segments.

Market estimate

Number of establishments x number of sets per establishment x number of sets sold per establishment per year

300,000 x 20 x 4 = 25m tea sets ordered per year

However, in the following year (year 1) there will be a decrease of 4%, so 25 x 0.04 = 1m orders

25-1 = 24m orders in year 1

The same will be roughly the case for year 2:

24m - 24m x 0.04 = 23m tea sets

Candidates can estimate the number of consumers based on total population:

US population can be estimated at roughly 300 million. Tea is not particularly popular as opposed to coffee so we can assume about 30% of that population will drink tea and order tea sets.

Any similar estimations would also be acceptable, as long as the candidate has a strong rationale

Therefore:

300 x 0.3 = 90m people will be drinking tea.

However, not every tea drinker will own their own tea set. Only one set will be required per household. We can then further segment, assuming an average of 2 people per household.

Therefore 90/2 = 45m households will order tea sets.

In year 1 45 x 0.05 = 47.5 ≈ 48m

In year 2 47.5 x 0.05 = 49.8 ≈ 50m

Households will typically not purchase a new tea set every year. We can estimate the average lifespan of a tea set as 2 years, meaning we can expect about half of those households to order a tea set every year.

So, in year 1: 48/2 = 24m

In year 2: 50/2 = 25m

A standard tea set is sold for an average of $50

The commercial market would therefore be 47m x $50 = $2.35bn in years 1 and 2

The consumer market would be 49m x $50 = $2.45 bn in years 1 and 2

Total market = 2.45 + 2.35 = $4.9bn

The market penetration to achieve the target would therefore have to be 200m / 4.9bn ≈ 4%

The candidate should then go on to look at competition and the state of the market.

Competition

The market is fragmented, with many small players. The candidate can be shown the graph in Exhibit 1.

There are normally no barriers to entry to this market but, in our client’s case, the way heat-regulating material is produced means there are regulatory checks to make sure that there are no toxic residues on the items which might make them unsafe for drinking.

Performing these checks increase costs by 20%. This is reflected in the price, which is 10% above similar items with no heat regulation.

Therefore, the candidate can conclude that the market is easy to enter and, although the item price will be slightly higher than market, the thermal regulation will make sure the product is differentiated enough to be noticed.

The candidate should then inquire about the company itself and potential synergies.

The company and synergies

The following information can be provided:

Because the company has been producing high-quality ceramic coasters it is a good fit for the market and does not need to invest further. It can also use its existing distribution network to sell tea sets.

However, coaster production is taking up 100% of factory capacity, so 20% would have to be freed up to produce the units necessary

The candidate should inquire whether the loss in revenue from producing 20% fewer coasters would be made up by the revenue from tea sets

The candidate can be given the following information:

FC produces 100 million coasters per year. Coasters are sold in packs of 5 and priced at $20.

Therefore 100 / 5 x 20 = 400m revenue per year; 400 x 0.2 = $80 million revenue lost from coasters

100m – 80m = $20m extra revenue per year if producing tea sets

Extra complication

As previously mentioned, restaurants and tea houses would require a 10% discount on average when purchasing tea sets, lowering initially estimated revenues.

Also, market research shows they would not be particularly interested in the product’s USP (the thermal reduction) and would simply buy the cheapest product available, since it is meant for general use.

Lowering the asking price by 10% would not make the product profitable, so this is not an option. However, market studies also show that the thermal regulation function is highly attractive to consumers.

The candidate can then suggest that the commercial sector be discounted and recalculate the necessary market penetration rate in order to achieve the desired revenues for the consumer sector only.

Therefore, taking just the consumer:

200m / 2.45 bn = approx. 8% market penetration, which is in line with competitors.

Deliver the recommendation

The candidate can deliver the following recommendation:

We recommend that FC should go ahead and enter the ceramic tea set market.

FC will only be priced slightly higher (at $55) and will be able to sell their tea sets to consumers as they present a highly desirable feature.

The product should be marketed towards consumers and not restaurants and tea houses, since selling to the latter would require discounts that would make the product unprofitable. By targeting only consumers the company would require a market penetration of 8%, which is relatively low and in line with other competitors on the market. The consumer market is also a better fit since it is predicted that it will continue growing.

The loss in revenue from reducing the production of coasters will not be an issue, because tea sets will make up for it and yield more revenue across the two-year period.

Exhibits

Exhibit 1 US Tea Sets Market

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