A client in the retail sector has seen steady revenue for the past three years but their profit margins have been shrinking. How would you diagnose the root cause?

Situation

In a mock case with a Bain associate, I was given a scenario of a mid-sized clothing retailer in Metro Manila whose revenue flatlined at PHP 800M annually while net profit dropped from 12% to 7% over two years.

Task

I needed to outline a structured approach to identify the profit leakage, focusing on costs and revenue components without jumping to conclusions.

Action

I first clarified with the interviewer that 'profit margin' meant net margin and asked if revenue was steady in both volume and price. Then I built a simple profit framework: Revenue (Price x Volume) minus Costs (Fixed and Variable). I hypothesized that since revenue was flat, the issue was likely on the cost side. I requested data on COGS, especially raw material and labor costs, as well as operating expenses like rent and logistics. I mentally segmented costs: are they rising per unit or are there new fixed costs? I also considered subtle revenue mix shifts, e.g., lower-margin products growing. I did quick mental math: if COGS went from 50% to 55% of revenue on PHP 800M, that's PHP 40M profit loss exactly matching the margin decline. I then proposed verifying with store-level P&L and supplier contracts.

Result

The interviewer confirmed my hypothesis was correct: the client had switched to a more expensive supplier without renegotiating volume discounts. My structured approach and mental math impressed them, and I received positive feedback on my clarity.