THE BCG
STRATEGY CUP
2015
Case assignment
Internet accounted for 3.0% of the Belgian
g economyy in 2011
In 2011, The Boston Consulting Group partnered with Google to evaluate the impact of the Internet
g
economy.
y A keyy analysis
y made over the course of that studyy was to size the impact
p
on the Belgian
of the Internet on the overall Belgian GDP
The
e result
esult o
of tthe
e study sshowed
owed a total o
of €
€10.8B
0.8 G
GDP ge
generated
e ated by tthe
e Internet
te et in Belgium.
elg u . O
Of tthiss
total online GDP, €6.5B was generated by consumption, which is referred to as 'digital consumer
spending' in this document. Investment (€3.8B), government (€2.1B) and net imports (€-1.6B)
made up the remainder
Digital consumer spending can be broken down into two drivers, namely 'online consumer
spending' and 'spending on access'. The former covers online shopping (incl. food, consumer
electronics
l
i and
d IT equipment,
i
travel,
l etc. including
i l di VAT) and
d accounts ffor about
b
two thirds
hi d off
Belgian digital consumer spending. The latter exists of all offline spending on means to access the
Internet. This includes spending on Internet-enabled hardware (interfaces and devices) that is used
for online access and spending on subscriptions
In this environment, Google is asking you to help them understand the drivers behind 'digital
consumer spending'
spending better by updating the 2011 figures to 2014
Recap: Sizingg and evolution of digital
g consumer spendingg
Thierry Geerts, Managing Director of Google in Belgium, and his team have asked you to answer
g questions:
q
the following
What is the total size of Belgian digital consumer spending in 2014 and what portion (in absolute
figures)
gu es) iss driven
d ve by each
eac of
o the
t e following
ollow g ele
elements:
e ts:
1. Online consumer spending, defined as the total amount spent by Belgian consumers
online, and
2 Spending on access
2.
access, defined as total offline spending by Belgian consumers on
accessing the Internet
What is the Compound Annual Growth Rate in Belgian digital consumer spending
from 2011 to 2014?
What annual growth rate would result in Belgian average online spending per e-shopper
e shopper reaching
the level of neighboring countries over the next five years?
• Assume that average spending per e-shopper in Belgium in 2019 will have reached today's
average
g spending
p
g level p
per e-shopper
pp of France and the Netherlands
Assumptions and gguidelines (I/II)
Question 1: digital consumer spending is divided in two branches - online consumer spending and
p
g on access
spending
Regarding online consumer spending, the following should be noted:
• To compute population by age group
group, assume the % of the population is the same in 2013 and 2014
• People between the ages of 0 and 14 years old are assumed to not be buying online
• E-shoppers are typically computed as a sub-set of people having used the Internet
in the last 12 months
• To estimate the percentage of Internet users in the 55+ age group who are e-shoppers, use the
figures for the 55-74 age group
• Average online spending per e-shopper is defined as the total amount spent online (incl. VAT)
divided by the number of e-shoppers
Regarding
g
g spending
g on access, please use the following
g assumptions:
• Spending on access is the amount spent offline that can be allocated to Internet usage
• Internet routers are solely dedicated to accessing the Internet and assumed to always be bought
offline
Assumptions and gguidelines (II/II)
Regarding spending on access, please use the following assumptions (cont'd):
• Three types of devices have access to the Internet: PCs, tablets and mobile phones
• Not all devices of each type are Internet-enabled
• People spend a portion of their time not using the Internet on each of their devices
(e.g. calling, etc.)
• For mobile phones, only spending on smartphones should be considered related to
Internet spending
• Two types of subscriptions enable Internet connection: fixed and mobile broadband
Question 2: use the following assumptions in computing the CAGR of average online spending per
e-shopper over 5 years (2014– 2019):
• Assume that in 2019 the level of average online spending per e-shopper in Belgium will reach
the current weighted average online spending per e-shopper of France and the Netherlands
• For the sake of simplicity, assume that VAT rates are equal in Belgium, France and
th N
the
Netherlands
th l d
Small businesses face critical decisions in determiningg whether
to create an online presence
Since you now have a view on the size of the Belgian online economy and its drivers
drivers, let's
let s gain
insight into the functioning of online companies. To do so, we will examine a representative
example of a Small and Medium-sized Enterprise (SME) and will be exposed to some of the typical
challenges these companies face when considering whether to establish an online presence or not
For this example, consider a shop that currently sells pre-packaged ingredients for a number of
pre-established recipes (e.g. quiches, pies, pizza). For example, this business sells fresh tomato
sauce, sliced mozzarella, oregano, etc. in the right proportions to prepare a fresh pizza at home
This business has been veryy successful and is g
going
g online to expand
p
its g
geographical
g p
reach and to
target new clients. To assess the attractiveness of such a move, please evaluate the impact of
establishing an online presence on profitability and determine whether they should implement an
online marketing program or not
Assessment of the impact of movingg a business online
In concrete terms, you are asked to answer the following questions:
What would be the annual earnings of the newly established online business?
• Use the data provided to build a projected Profit and Loss Statement (P&L) for the online
business (only consider the online business
business, so excluding the revenues from the physical shop)
• Specifically, what are the resulting net sales, gross margin, EBIT and EBIT margin for the online
business?
How many additional clients can the online business attract through an online marketing
campaign using Google AdWords?
• What level of daily online marketing spending results in the maximum profit for the online
business?
What
h iis the
h annuall earnings
i
off the
h business
b i
after
f
implementing
i l
i the
h optimal
i l online
li marketing
k i
campaign identified above?
• As before, what are the resulting net sales, gross margin, EBIT and EBIT margin for the online
business?
• How does implementing the online marketing campaign impact the profitability of the online
business?
Assumptions and gguidelines: business case of going
g g online (I/III)
In question 1, you will create a projected P&L for year 1 of the online business. To do so, adapt the
p
below and include the cost of offering
g a deliveryy service via a single
g e-bike and of
the template
providing an in-store pick-up point. Today, the shop's financials look as following:
Year 1 P&L (€)
Net sales
Delivery fee
Shrink1
COGS
Manufacturing employee
Raw material
Production facility
Gross margin
SG&A
Selling & logistics
Cashier cost
Delivery costs
Marketing
Online marketing
Other marketing
IT
Payment system
Subscription
Fee per transaction
Others
EBIT
Physical shop
199,680
0
9,984
111,587
48,000
49 920
49,920
13,667
78,109
52,878
36,000
36,000
0
10,000
0
10 000
10,000
600
1,478
283
1,195
4,800
25,231
Cost drivers
# online orders delivered
Net sales
# items
Net sales
Fixed
Dedicated computation
Dedicated computation
Fixed
Fixed
Fixed
Fixed
# transactions
Fixed
1. Shrink is the money that a store loses because not all items purchased by the store can be sold to clients (e.g. because the items are damaged, beyond expire date,...)
Assumptions and gguidelines: business case of going
g g online (II/III)
In question 2, you will take a closer look at Google AdWords. This online marketing tool provides a
q opportunity
pp
y to expand
p
a client base through
g Internet marketing
g
unique
In short, Google AdWords works as follows: Google publishes an ad on one of its pages depending
on tthe
o
e ta
targeted
geted content
co te t (this
(t s iss called an
a "impression"),
p ess o ), then
t e the
t e Internet
te et user
use may
ay or
o may
ay not
ot click
cl ck
on the ad (# clicks / # impressions is called the "click through rate") to be redirected to the
advertized web link. In the case of an online shop, not all users who click on the ad will make a
purchase (# clients coming from people clicking on the ad / total # of people clicking on the ad is
called
ll d the
th "conversion
"
i rate")
t ")
In order to determine the optimal daily budget, please compute the gross margin gained from each
client
li
obtained
b i d via
i Google
l AdWords.
d
d This
hi is
i computed
d as follows:
f ll
gross margin
i = Net Sales
l – (Cost
of Sales + Google AdWords Cost). Note that for this online shop the cost of sales is expected to be
51% of the net sales generated
In calculating the daily profit, consider only the initial purchase that is driven by Google AdWords
for each client, not the subsequent purchases from the online shop
Assumptions and gguidelines: business case of going
g g online (III/III)
In question 3, you will compute the impact of implementing the optimal online marketing
p g from q
question 2 for the full year
y
(365
(
days)
y ) on the financial p
performance of the online
campaign
business
Assume
ssu e tthat
at tthe
eo
online
l e bus
business
ess w
will
ll attract
att act both
bot tthe
e cl
clients
e ts o
of tthe
eo
online
l e bus
business
ess identified
de t ed in
question 1 and those attracted through the online marketing campaign (without overlap between
clients with and without the campaign)
Assume that the same cost drivers exist for each cost item as in question 1 with the exception of
online marketing and delivery. For the sake of simplicity, please use delivery costs of €36,000 in this
question
How can Google
g help support SMEs in expandingg online
After having sized the Belgian digital consumer spending and having acquired some experience
g management
g
asks yyou to formulate three innovative
with the economics of online SMEs,, Google
ideas on how they can support the Belgian online economy
The
ea
aim o
of you
your tthree
ee recommendations
eco
e dat o s sshould
ould be to help
elp Google in suppo
supporting
t gS
SMEss to
successfully establish an online presence. In addition, these ideas should eventually boost Google's
profit. Consider both launching innovative new lines of business and leveraging existing Google
products for your recommendations
Each idea should be described with the following qualitative details
• Description of the idea
• Benefit for the SMEs
• Benefit for Google
Additional practical information and guidelines
g
Throughout the exercises, we expect the following:
•Do not round any numbers in the calculations until the final answer
•Round final answers to the closest integer, except for figures to be expressed in k€ and B€
where you are expected to round it to the second decimal
•Only consider the P&L elements from question 2
2, there is no need to look into investments or
financing
All information you need to solve questions 1 and 2 should be included in the datapack
datapack, there is no
need to look for additional data on the internet
Pl
Please
use the
th ffollowing
ll i formula
f
l
#
1