Waterlogic
Author: Lan Ruixian (’21J), Winner of BCG Case Competition 2021 (3rd place)
Case Information
Difficulty level – Quantitative 4
Difficulty level – Creativity 4
Difficulty level – Structure 2
Case led by Mixed
Case type Profitability
Industry Consumer Electronics
ICC Casebook 2021 Copyright © 2021 INSEAD Consulting Club (ICC) 34
Waterlogic
Author: Lan Ruixian (’21J)
Case Prompt
Our client is LAVA, a licensed distributor of Waterlogic water purifiers in Southeast Asia. They obtained exclusive rights to distribute water purifiers within the region 4
years ago.
While they enjoyed huge growth in the past 3 years when they first entered the market, sales have slowed, and they are now in a loss-making position. Management
has called us in to diagnose the key issues as well as turn the business around. How would you advise them to proceed?
Information to be used to answer clarifying questions
Geography: Thailand, Malaysia, Indonesia, and Vietnam
Business model: B2C, involves the local sales team travelling door to door to sell the products and services. Products come with 1 year warranty. We sell yearly
service packages as well. The HQ team sits in Singapore and does everything out of a 10 pax office.
Product: Our products are top of the line in quality and are manufactured in US. We have not changed our product lineup in the past 4 years. Product life is about 5
years.
Competitors: LAVA’s closest competitor is Cuckoo water purifiers. Their technology is less advanced than LAVA’s, and they serve different markets.
Goal: To maximise profit, no generic time nor target amount
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Waterlogic
Author: Lan Ruixian (’21J)
Sample Framework
Market is being crowded out by competitors
Number of customers
Market is being saturated
Decreased sales
Customers are switching to cheaper models
Spending per customer
Customers are not buying service packages from us
Profit
Fixed Costs HQ costs have risen
Increased costs
Distributorship contract has become more restrictive
Variable Costs Sales team salaries have increased
Servicing costs have increased
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Waterlogic
Author: Lan Ruixian (’21J)
Guide to interviewer
Start off with a typical profitability framework
Allow candidate to produce an initial framework of diagnosing the profitability issue before giving any exhibits or data
Push the candidate to brainstorm issues considering context. Push for specific hypotheses as to why volume has fallen or average spending per customer has
fallen, etc.
Candidate needs to know we sell both the product AND the servicing from the second year on
Guide for use of exhibits
Exhibit 1 Exhibit 2
Hand out if candidate asks for breakdown of profit Hand out exhibit if candidate asks for breakdown of Thailand and Indonesia (key
markets)
Key Insights:
a) Profit decrease from Thailand and Indonesia (key markets) Key Insights:
b) Growth potential in Malaysia and Vietnam a) No changes in margin for 4 years
b) Not all that bought our products choose us as service agent
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Waterlogic
Author: Lan Ruixian (’21J)
Exhibit 1 – Profits across geographies
Profits by country
5000
4000
4000
3100
3000 2500
2000 1600
1300
1000
250
0
2016 2017 2018 2019
-1000 -650
-2000 -1400
Thailand Indonesia Malaysia Vietnam
*LAVA only started operations in Malaysia and Vietnam in 2018, profits are not material
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Waterlogic
Author: Lan Ruixian (’21J)
Exhibit 2 – Gross profits for Thailand and Indonesia
Thailand Indonesia
2016 2017 2018 2019 2016 2017 2018 2019
Volume sold
Water Purifiers 20,000 18,000 15,000 12,000 12,000 10,000 8,000 7,000
Service Package - 5,000 10,000 10,000 - 5,000 7,500 7,500
Gross Margins* (USD 'mil)
Water Purifiers 20.0 18.0 15.0 12.0 12.0 10.0 8.0 7.0
Service Package - 1.0 2.0 2.0 - 1.0 1.5 1.5
20.0 19.0 17.0 14.0 12.0 11.0 9.5 8.5
*Gross profits are calculated net of COGS that is paid to Waterlogic
Total estimated market size for LAVA is 100,000 units for Thailand and 50,000 units for Indonesia
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Waterlogic
Author: Lan Ruixian (’21J)
Guide to interviewer
At this juncture the candidate should realise:
1. Market is becoming saturated as we have been in this market for 4 years already and we have not changed our product lineup for 4 years
2. Not all customers who buy water purifiers from us are buying service packages
3. Unit profit / contribution has stayed constant over the last 4 years
Ask the candidate to brainstorm how to increase gross margins based on the data what we have so far. Push for more until they talk about B2B market.
Then move on to an estimation of the margin uplift from the B2B expansion into Thailand
Increase number of customers Increase margin per customer
Explore B2B market (KEY) Introduce new products with higher margins
Expand into new geographies Educate on servicing importance
Educate on differences between our product and inferior Cuckoo to fend off Identify servicing poachers
competition
Negotiate better terms from distributorship
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Waterlogic
Author: Lan Ruixian (’21J)
Estimation
Our client is LAVA, a licensed distributor of Waterlogic water purifiers in Southeast Asia. They obtained exclusive rights to distribute water purifiers within the region 4
years ago.
While they enjoyed huge growth in the past 3 years when they first entered the market, sales have slowed, and they are now in a loss-making position. Management
has called us in to diagnose the key issues as well as turn the business around. How would you advise them to proceed?
Illustration - Estimation of margin uplift from expansion into B2B in Thailand
Small Medium Large
Number of businesses 100,000 20,000 6,000
Percentage who own offices 50% 80% 100%
Number of offices 50,000 16,000 6,000
Number of units needed 1 2 5
Percentage captured in first year 2% 2% 1%
Number of units in first year 1,000 640 300
Margin per unit $1,000 $1,000 $1,000
Margin uplift $1,000,000 $640,000 $300,000
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Waterlogic
Author: Lan Ruixian (’21J)
Guide to interviewer
Above is for illustration only, but help the candidate see that:
1. We are interested in helping LAVA break even next year and hence, only water purifier sales should be considered and not servicing
2. Different sized companies have different likelihood of having a corporate office (B2B)
3. Different sized companies need different number of units
4. We can capture different percentages of different markets
5. Margin per sale of $1,000 is derived from Exhibit 2
Push the interviewee to explore all issues, not just revenue, but cost cutting measures as well. Nudge the interviewee to ask for cost breakdown.
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Waterlogic
Author: Lan Ruixian (’21J)
Exhibit 3 – Thailand and Indonesia Cost Structure
Thailand Cost Structure Indonesia Cost Structure
16 0.5 10
0.5 0.3
2.0 1.4 9 0.3
14
1.2 0.9
8
12
7
10
6
8 11.5 11.5 5
7 7
6 4
3
4
2
2
2 2 1
0 1 1
2016 2019 0
2016 2019
Servicing costs Sales team salaries
Sales team commissions HQ and other SG&A 10% of gross margins are paid as sales team
commissions
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Waterlogic
Author: Lan Ruixian (’21J)
Guide to interviewer
Key insights are as follows:
1. Company is very fixed cost heavy
2. Even though sales has dropped by close to 30% for both Thailand and Indonesia, total Sales team compensation has only dropped about 5%
3. Sales team is very unmotivated to work as variable portion takes up a very small percentage of their compensation
4. Rest of the costs are relatively stable
Nudge the interviewee to arrive at the recommendation to variabalise sales costs and tying the sales team compensation closer to the performance of the
company. Also nudge for the risks surrounding fully variabalising the sales costs – impact to the team etc
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Waterlogic
Author: Lan Ruixian (’21J)
Sample Solution & Recommendations
Profits have fallen because:
1. Sales have stagnated due to market saturation
2. Customers are not purchasing service packages
3. Sales compensation has not changed much despite the decrease in sales (Sales team compensation is not motivated to sell due to large fixed compensation)
To turn around the company, we will need to pull both sales and cost levers. We can consider:
1. Expanding into B2B ($1.94 mil GM increase for Thailand) or other countries
2. Increase spending per customer via better products
3. Variabilise sales team comp and tie their salary to the fate of the company
Risks:
Communication to sales team new scheme and managing their expectations
Next steps:
Investigate why consumers are not buying servicing packages from us
Quantify sales uplift and margins for Indonesia as well
Replicate business model in Malaysia and Vietnam
ICC Casebook 2021 Copyright © 2021 INSEAD Consulting Club (ICC) 45
Waterlogic
Author: Lan Ruixian (’21J)
Guide: Good vs Great Case
A good candidate will cover these points: A great candidate will cover these points:
a) This is a combination cost and revenue problem and not lose track of either a) Quantify and keep track of the possible uplift along the way and incorporate
that data point in the final recommendation
b) Realise that the markets LAVA is in are saturated and there’s not much we
can do b) Go beyond the obvious and realise that subsequent demand for service
packages is lower than cumulative water purifiers sold. There is a serious
c) Think of ways to expand revenues via B2B or via the other geographies problem with this.
d) Consider reducing the compensation of the sales team in general c) Realise a large portion of sales compensation is fixed and it should not be the
case, suggest to variabilise compensation.
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