So I’m ready to introduce our special guest
for today. Yuan Cai is joining us. She has done a number of cases. She asked us for a
case that was a nontraditional, hard McKinsey case. So that just should let you know from
the very beginning what kind of courageous, wild person she is. I’m going to give her
a chance in just a second to give her introduction, and to share a little bit about her background,
about how she got to where she is now, and what she is currently in the process of prepping
for. And then I will introduce the case. Great. I think I will just take over. Thank
you, Jenny Rae. So I’m Yuan. I’m a second year masters student at MIT and I’m currently
in the process of preparing for consulting interviews, mostly for summer internships
as I will be graduating one semester later than expected timeframe. But yeah, I’m currently
in the process of applying to summer internship positions for most MBB firms. And in terms
of the like how many cases I’ve practiced through, I believe I’ve currently done like
40 cases-ish with both the case partners at MIT and also the case partners in Management
Consulted. And with Lisa, who was my – who was my how do you say, like the consultant
that I worked with. Yeah. The reason why I want to join, like volunteer for a live case
walk-through is because I really appreciate the chance to work with Jenny Rae and hear
back from her, especially for the feedback that she could give me in terms of the performance
in the position currently I’m in as to like how far I’m in the process and how proficient
or how good I am at casing, especially for McKinsey. I know like I’ve done a bunch
of McKinsey cases, but I’m still not quite confident, especially for some nontraditional
wild case. So that’s why I asked a favor for introducing a nontraditional McKinsey
style case in our casing session. But I know this is like quite a challenge for me, but
I’m really excited to, you know, to go through the case with Jenny Rae. Awesome. So I am excited to introduce the
case. The case today is – it’s based on a concept from another McKinsey case, but
I actually rewrote it to fulfill Yuan’s specific request. She wanted a hard McKinsey
case that was a little bit wild. I also made it COVID relevant, so there is an element
to this that is quite timely for right now. Many of you that are doing cases in the moment
will have a blend between historical performance that’s old, and COVID performance that’s
new that you have to think about. And so some of the things that we’ll need to think about
inside the case our financial, but also operational, practical, and some of those other questions.
I also hope that this case is really fun. The final thing that I want to say is the
cases name is Margaritaville, and I am not in any way specifically affiliated with Margaritaville
the brand, or the song. And so as I am doing the case, I just wanted to make sure that
that’s super clear. This is a semi-fictional case based on real and tangible events, but
it is any public information, or any relationship that I have with the firms. So Yuan, if you’re
ready, will get started. Yeah. I’m also going to start my timer. Yeah, great. Yep, go ahead. I think one more thing that I want to point
out, I don’t know if it’s because like there are many participants that is limiting
the internet span, but I sometimes cannot hear you very well. Like maybe in the case
I will just ask a bunch of questions may be just due to the signal. Exactly. So, well that will be part of the
regular process for what we’re potentially going to be going through. You can always
ask me to clarify if you miss something that I say. Just make sure that if you do it, you
kind of let me know what you didn’t hear, not just asking me to repeat entirely. Awesome. So as you guys know, I won’t be sharing
the case today, but I will be seeing it on my side. I will also be timing us so that
as we go through the case, you’re going to at the end, Yuan, I’ll give you a perspective
on what the timeline looks like. My focus today is to give you this case as though I’m
a partner in a second round at McKinsey. Okay. Great. So let’s get started. Welcome to
Margaritaville. Here’s the background of the case. We’re sitting in Miami on vacation.
Florida has taken a don’t worry, be happy approach to COVID. And while there, you’ve
enjoyed a few different unique restaurants. Cuban American fusion, chill Latin, and a
fantastic Asian sushi place. It’s been great to eat out with a sense of normalcy. Now you’re
looking to mix it up. The weather is post-thunderstorm mild, a perfect fall evening. You decide to
mix it up by adding a new dimension to your dining repertoire and head over to one of
Florida’s finest establishments: Margaritaville. Amid the neon lights, you have an epiphany.
What if you pitched the restaurant chain of Margaritaville diamond restaurants as an acquisition
to a friend who works for a midmarket private equity company. The restaurant sells three
things: food, merchandise, and, of course, margaritas and other alcoholic beverages.
There are 22 Margaritaville’s, all currently in the southeastern United States. What would
make this an interesting acquisition for a PE firm, and should you follow through with
recommending it to your friend. Do you have any questions about the background? Yes. I think one general question is can you
just briefly describe a little bit about the Margaritaville to me because I’m not so
familiar with this restaurant. Sure. It’s a restaurant that serves sit
down food, so it would be kind of similar to a restaurant where you have a waiter, an
Outback Steakhouse, for example. And they have, of course like I mentioned, margaritas
as well, lots of those on the menu. So a standard menu, sit down themed restaurant. Great. I think, yeah. I’ll just go ahead
and I’ll recap the case so that we are on the same page. So our client, I’m assuming
that is Margaritaville which is a restaurant, and currently it’s considering like having
this or considering selling itself to the private equity firm. I think the major confusion
here is like is our client Margaritaville, or the private equity firm? We don’t have a client. It’s just you
having dinner, and at the end of the day the client would be the PE firm if you think that
they would be of interest. But they might not even pay for it. This is just something
that we are thinking about as kind of a fun strategic exercise. Okay, great. So basically the Margaritaville
currently offers in Miami and then it offers where we have different like types of restaurants
around, and Margaritaville is currently thinking of selling the – their firm to a private
equity firm. Yeah. And then the business models, or the operations model is Margaritaville
currently sells three products or services. The first is food, and second is merchandise,
and the third one is the like Margaritaville related products. How do you like – can
you describe a little bit about the Margaritaville? Yeah, totally. It’s just merchandise, right?
T-shirts, cups, plaques and signs that are funny that have silly signs on them. And so
it’s kind of like hokey, folksy types of merchandise in the gift shop. So Margaritaville is actually a singer, or
like a people? Yeah, there is actually a song, there is a
song, “Wasting Away Again in Margaritaville” that it’s based on from a theme. But it’s
a totally separate enterprise. It’s just based on that theme from the song. Okay. However, if you go, it’s guaranteed that
you will hear that song. Okay, great. Awesome, good to know. Because
I was like who is Margaritaville, or what is Margaritaville. And you mentioned some
numbers here. Like currently it has like Margaritaville has 22 restaurants or operations in southeastern
US. Yes. 22 different restaurants, all the same
theme. Okay. Good to know. And our target is to understand
whether or not this is – or how we should sell this business to a private equity firm,
or what should we do, or is that correct? That’s right. Okay, great. Just what should we do. What should they do,
right? What would you – you are trying to maybe think about it just as a thought exercise
and then connect the dots if you think it makes sense. Yeah, ultimate strategic question
is would you make the call. Would you call a friend and say you should buy this company. Great. Basically is this firm worth investing. Yep. Okay, great. Awesome. So yeah. I think I’ve
got all the questions I’ve answered. Can I have a one minute or two to gather my thoughts? Yeah, take your time. Great. So in order to identify if, you know,
this is an attractive business or worth investing business, I would want to have a look at three
major buckets. The first one is the overall attractiveness of such margarita-based food
restaurants, like how people are willing to, or how people are interested in such theme
restaurant, with this restaurant. And a second is basically our – the target, which is
the restaurant itself. How, like what is its financial status and how profitable it is
performing in this current situation. And then the third one is definitely the clients,
like the people that is willing to acquire this business. How experienced or how experienced
they are in acquiring this food like the restaurants. And do they have the culture that is compatible
with margarita, which is the target. So within the first bucket, I want to look at the first
like how attractive the market is based on the historical trend or growth of this luxury
food – food restaurants in general. For example, how – how, like how people are
willing to purchase the food, how attractive it is among the customers, and then who are
the major customers. We know that it is – it has a theme like a major theme of how people
are feeling about this theme, and second is we know it is operating mostly in the southeastern
US. We might want to identify the potential opportunities in other locations as well.
And then fourth, the third question would be like do we have any competitions within
this current area, or the area with the of future expansion. Do we have the competitors
that have the similar theme, like restaurant chains that is similar to us. And that’s
basically what I want to consider in the market bucket. And then in the second bucket which
is the margarita restaurant itself, I want to look at the financial status of the company
to see how much of a prophet it is making in terms of, you know, from concerning the
different revenue streams that we talked about in the introduction. Basically how much money
we make from the food itself, or how much money we make from the merchandises and other
associated products. And then what is the cost structure of this giant food restaurant
chain. And from the third bucket, which is a client, as I mentioned a little bit previously,
does our client, the potential client who wants to purchase this company have the experience
in running a food, like a restaurant with specific theme. Does it have a culture that
is compatible with the margarita’s culture. And with its own operations, like is there
any synergy that we can achieve if the company is acquired. Yeah, that’s basically the
three major buckets that I want to discuss. If you don’t have any preference, I might
want to look at the first bucket which is the market. If we have more information about
how welcome people feel about this specific theme restaurants in the southeastern US. I do have a preference, but more than anything
what I want to know right now is what you think. Is this going to be a yes or a no?
Are you going to make the call or not? You mean how – how like people feel about
this restaurant? No, what you recommend – like will you make
the call to your friend who works for the private equity firm and say you guys should
think about buying this. Do you think it would be a good investment, or do you think it would
not be a bad investment. Yeah, I think – I think based on my like
thoughts, I would say that this is probably an attractive business given that this restaurant
has a specialty, like it has a theme related to margarita, which is a song, which is really
special, and it’s different from the other restaurants like the luxury restaurants that
probably don’t have any specific, you know, merchandise products or specific affiliation
with other songs or themes. So that might be like a potential interest to a lot of,
you know, people who listen to the song and who’s been a fan of the song, or something
like that. So is that a yes or no? Yeah, I would say it’s yes. Okay. Just double checking, okay. Awesome.
So you said that you wanted to look at the attractiveness of the business. I actually
have really one deeper dive question that I want to look at first before we go into
some of that information. Specifically, in light of COVID and general restaurant industry
dynamics, I don’t know where you’re sitting right now, but there – my guess is one of
the first questions that a PE firm would ask you is why a restaurant, why now. What would
you say to that? Yes, that’s a good question. If we’re
sitting in the situation of a COVID, I believe that I’ve sort of previously discussed like
why the restaurants, right? So this restaurant has a specific theme and it has a specific
target customers and then can be expanded in the future. So that’s sort of the reason
why I want to – I would like to, or this restaurant has a high potential to be acquired,
or has a high attractiveness to the client – to the client. However, in terms of the
actual timing of the acquisition, I would see currently COVID has imposed a huge stress
or burden on the restaurants, or other retail services. And a lot of people just – restaurants
just close down due to the COVID situation. So it might be a difficult time for this restaurant
to like dig into a normal operating operation mode. However, we can definitely come up with
some strategies in light of the COVID situation. We know there’s a lot of like different
types of services is that restaurants are currently offering to the customers, not just
limited to the food itself. And we just noticed that a lot of restaurants are opening up like
for take-out food or for other services, and especially for this specific margarita firm
we are not only offering food, but also the merchandises and other associated products.
So I would say that this restaurant would be a traditional restaurant. And that we can
definitely develop some strategies to provide different level of services in light of COVID
that is attractive to the customers. So let me ask just one more time. Why this
restaurant, why now. Can you just summarize what you think? Yes. I think the reason why I would recommend,
my hypothesis I would recommend that our client should purchase this company is because the
margarita firm, the margarita restaurant has a special theme that is really attractive
to the customers. So we have a large customer base and then why now is because you know
even if we are facing the COVID situation, we can definitely develop some strategies
that provides not only the food services, but also the different types of services like
the merchandise that we mentioned, and other related – like margarita related products
to the clients, or to the customers so that they are still going to be attracted to the
restaurant itself. Okay, awesome. Okay, right now I’ve got
revenues on a per store basis and I want to estimate it as we’re sitting here about
to order our drinks and our food. So I’ve got some data for you, and let me know if
this is sufficient for you to calculate the revenue. Okay. First of all, the average cost of a menu item
is $18, and the average cost of a drink for those who order one is $12. The two main items
are signature margarita glasses and T-shirts in the merchandise sure. Store. The average
price for those who buy those is $20. The capacity of this restaurant that we’re sitting
in is 200 people. The average turn time per table is one hour. The restaurant is open
for operation to seven days a week from 11 AM until 11 PM and is open 350 days a year.
Can you calculate the revenue per year of one store for Margaritaville. Great. So since you’ve described a lot of
data to me I would just recap all of the data so we’re on the same page. So average cost
or average price for each item in on their menu is $18, and then the drink is $12. And
I would assume that the average purchase of the people. Is that correct? Exactly. So $18 for the menu item, $12 – 12
is for the average cost of a drink, but just for those who order them. Okay, so that’s for the, okay, great. And
then the average purchase for merchandise is $20. Yes, again for those who buy them. Great. So the restaurant has a capacity of
200 people at a time, and then a turn time – turnaround time is one hour, and assuming
that each group of people who will stay in a restaurant for on average for an hour, and
then they will leave, and then the next people would come in. Correct. And operating hours is seven days within a
week, and 11 AM to 11 PM, and that the restaurant operates for 350 days. So you want to calculate
the revenue of the – the annual revenue with this specific restaurant. Correct. And then I noticed that when I was recapping
the case, the numbers coming you stressed the point that the cost for per menu item
and per drink, and then the merchandise is actually describing the average cost for those
who bought them. So I’m actually curious like do we have the number or the percentage
of the customers who actually ordered a drink or order the merchandise? We do, yeah. 10% of the patrons purchase merchandise,
and 25% have a drink. Okay. Great. And then for the menu, for the
products or the others on the main menu, we’re assuming that every single people would order. Correct. $18. Yes. Everybody would order, some order an
appetizer, but some ordered three things. The average food per person would be $18. Yes. And you – we also described the capacity
but, you know, the actual plate, like how many people are present in the restaurant
might be different from the capacity. Do we have the specific information on like how
the different capacity, or what is the present rate for of the customers from 11 AM to 11
PM in those seven days. We do. Absolutely. So yeah, there are sometimes
when we’re not as busy, other times we have a line out the door. Our average utilization
on the balance of the year is 80% on average. 80%. Okay. 80. 8-0. Okay. Great. So I think I’ve got all the
information I would like to know to proceed to the revenue calculation. Yeah, can I just
have maybe a few seconds to lay out my structure? Sure. Just make sure you come back and walk
me through it again. Yes, great. All right, you ready? Yes, yes. I’m ready. So since we’re going
to calculate the annual revenue from – for this company, what I want to do is I will
first proceed to calculate the daily revenue, and then multiply the number of like 350 days
in a year. So in order to calculate the daily revenue, I would like to break down the revenue
into three categories. The first one is the revenue that we received from the main – like
the food from the in the main menu. And the second is the drink, and the third is the
merchandise. So accordingly I will also calculate the volume of consumptions in each category,
sorry, and I multiplied the volumes by the price to get the total revenue for each category.
Yeah. So now I will proceed to calculate each term, yeah, within this revenue list. So for
the food, we are seeing that average price for food is $18, and within the day, the occupancy
rate is 80% and then capacity is at 200, which means on average we have 160 people coming
into the room, coming into the place. And then we have – we run 12 hours within a
day. So that gives us a total of people coming into our restaurant to for food ordering.
So this gives us 160 multiplied by 12, this gives us roughly 1,920 people coming into
– into our restaurant. And then for each people on average they pay $18 for food. So
I will be able to calculate the revenue we receive from the food. That’s going to give
us roughly $334.6k. That’s the revenue received from the food on a daily basis. And then we
basically do the same thing to drink and then to the merchandise. So we know that 12 – sorry.
One quarter of the people would actually order the drink, so that’s going to give us nine,
19, 20, 20 multiplied by one quarter, one fourth which is 480 people would actually
order the drink. And then each drink costs $12. Which gives us a total revenue roughly
equal to $5.76K. And then for merchandise, we know only 10% purchase the merchandise,
so this gives us 192 people in a day that is purchasing merchandise, and then each merchandise
costs – costs $20. That would give us roughly 3.84K. So I will add the three numbers that
I calculate from food, drink and merchandise together to get the total revenue that we
receive daily. Do you mind if I do some roundup? Yeah, get me close. Okay. I would say the total revenue for the
daily basis would be 44.2 K, and then if we multiply by 350 days, I just rounded up to
44. 44 multiplied by 350, that’s going to give us around – I’m sorry. That’s going
to give us in total of $15.4 million on a yearly basis for the revenue. Yeah. Great. What you think about that? Yeah, so I think it’s really hard to comment
on like the exact of revenue without considering the cost of the operation of business. So
I would say currently it seems okay to me, but as I don’t have like – I don’t have
a specific knowledge about what is the annual revenue that one restaurant should gain, but
I would suggest that we look into the cost structure to see how much profit that this
company is currently making. Awesome. So I think we should. Let’s look
at the cost. I’ve got them for you. You ready? Yes. Good. So are variable cost, the food and merge
costs are 30% of revenues. For staff, we have 10 bartenders, 10 cooks, 40 waitstaff, and
a manager. Each member of the staff has a seven hour shifts. They either work from 10
to 5, or from 5 to 12. The staff cost per location are $3.5 million a year. Additional
costs, including marketing and insurance and facilities costs are $650,000 a year. So what
are our – what’s our annual profit? Great. So I actually lost the connection a
bit. I couldn’t catch most of the numbers. So I know it’s that the variable cost for
food is on average 30%. So I would assume that includes the variable cost for food,
for drink and for merchandise, if that’s correct. Yep. And then for the labor cost, I cannot quite
recall how many people do we have currently within the restaurant. Sure. 10 bartenders, 10 cooks, 40 waitstaff,
and a manager. And a manager, okay. As well as a manager. Okay. So that’s going to give us, you know,
40 – actually 60 workers and one manager in total. Okay. And on average I’m assuming
that’s the manager and then the workers who have the same working hours, which is
seven hours of work, and then they have the rotation from – from 10 till five and then
5-12. Okay. And you mentioned there is some relocation costs, which is $3.5 million if
I understand correctly. What is that for? Yeah, that’s the staff costs. Staff costs. So that staff cost is different
from the – the labor cost that we just mentioned? Or it’s the same? I didn’t mention labor costs. That is the
labor cost. Okay, that is the labor cost. Okay. And then
there’s costs associated with marketing and administration, or operations. But I missed
that number. Great. $650,000. Sorry, 650,000. Yes. 6-5-0. 6-5-0. $650,000. Okay, great. So yeah. I think
with this number, with this information I should be able to calculate the profit. So
that’s a marketing cost is actually annual costs, annual fixed cost. That’s right. Okay. So- So walk me through this part of the process. Yes, yes, yes. So for the variable cost, which
is 30% of I’m assuming that’s the – 30% of the revenue, and that the revenue I just
calculated is 15.4 million. So the total revenue costs would be 30% of that number, which is
going to give us roughly 40 – sorry, $4.62 million as the variable cost. And then for
the staffing costs, we have the staffing number which is $3.5 million. And then for the marketing
we have $.65 million. So if we add these three numbers together, we should be able to get
the total cost, which is around $8.8 million. And then we know the revenue is 15.4 million,
and the cost is $8.8 million. That gives us the profit of $6.6 million. And then also
we are going to – we are making a profit margin of, you know, roughly I would say 40%.
So I would say like a profit margin of 40% is actually a big deal for a food or restaurant
– restaurant services. And I would say just by looking at the profit margin, I would say
this is a really promising business that we should probably go for, but there’s definitely
also some other considerations that we need to take into account, as you mentioned, currently
we’re in this – like in the COVID situation, and I believe that the business model, or
business structure would probably need to be changed. And the consumption rate, or the
type of services that we are able to provide might change as well. So these are all the
factors that we need to consider, aside from just the profit margin number. Good. Okay. So now we want to get a valuation
so we can pitch how much capital the company would need. How do we value it? So yeah, can I just maybe take a couple of
seconds to think about it? Go ahead and tell me what you’re thinking
about here. Yeah, sure. So I think this – since we are
considering the acquisition in the special time of COVID, I think normally we would just
say consider the valuation based on the previous revenue, or previous profit, and then evaluate
how promising, or how profitable that business can bring us to. But since we’re considering
this acquisition in currently, I think, it is important to see how – what is the projected
revenue we are able to earn after, or during this COVID period. And then how much – how
much change that we are going to make so that the company, or the restaurant should be able
to obtain itself to this new situation. Specifically we want to look at what are some of the, or
how flexible this restaurant that is able to adapt to the situation, and what other
products or services that they are offering that they are going to offer to the customers
in addition to just the food, or their traditional services. And we also want to look at the
customer response. Basically are people willing to still go outside and consume, or go to
the restaurants to experience this luxury experience in person, or if they want to stay
at home and then do whatever they want to without going to this luxury like restaurant.
So that’s more towards the marketing. And yeah, so I think the three major categories
I want to look into is definitely what is the projected financial conditions that are,
that Margarita restaurant chain is able to make in the future, and then what is the markets
– the customer’s response in the COVID situation. And then the third one is what
type of new services or products that this company is able to carry out in the situation
in light of the changes in customer behaviors and change of other practices. So Yuan, we did a valuation, we think it’s
about $1.2 billion. How is the owner of the private equity firm, how would they make money
back? How would they make a return on their investment? $1.2 billion, sorry. Yep. Is that 1.2 billion. Okay. So that’s, $1.2
billion is for the total 22 firms, 22 restaurants? Yes. Okay, that makes sense to me now. So assuming
that we all – all the 22 restaurants have the same structure and expected profits, or
revenue, we are seeing that – Do you remember the question? Yes. Like how should our client or the private
equity firm actually make money. Make a return. Yeah. How do they get return
back for what they spend. Yeah, that’s a good question. So we – I
just calculated back at the profit that each firm, or each restaurant is making is $6.6
million. And if we multiply by 22, we get the total profit for all these 22 chains,
right. And I was just concerning or estimating that the net profit that we are able to gain
from these 22 firms. But it seems that this is a – there is still like even with 22
restaurants, there are still a big gap between the amount of money that we invest and the
amount of profit that we are able to gain in the next few years. So yeah, I would say,
so the total profit for these 22 firms are around $130 million. And then the investment
is $1.2 million sorry, $1.2 billion. So if we want to have – well, if we want to have
a return on the investment, that would actually take us like six or like, sorry, it’s actually
like nine years, or eight years to have the – to have the return on investment, which
is quite long. So the question is how should we make – I’m assuming that how should
we make this period horter, less than eight years if I understand correctly. Yep. But more importantly, just right – understanding
that a private equity firm usually has a five or sometimes under year timeline. How do they
generate a return so that their valuation is going to be higher at sale? That’s – that’s a good question. Because
I’m not so familiar with like how this private equity firm actually works. Like, you know,
they want to purchase the firm and then sell it within five years, if I understand correctly. Five is usually a target. They want to sell
it when they can sell it for more, if it’s one year, they’ll sell it for more in a
year. If it’s five, they’ll sell it for more then. Yeah. So currently, yeah, some strategies. How do you make it more valuable? I would say to evaluate the profitability
of the business we can look into several major buckets. The first one is how attractive,
or how attractive or how many, or how much or how big is the customer base that this
business can attract. For example, how people are attractive, attracted to this, to this
restaurant with this specific theme. So basically, if we want to expand its customer base, then
we can potentially have more chain stores in other locations other than southeastern
US. So that we can have a larger impact across the nation. And then second is about the products
and the services that we offer. Currently we are offering the food, and the merchandise,
and the other margarita theme related products. So I was wondering if we can have our restaurants
launch different sorts of products. For example, organizing like events, like with music, songs,
you know, invites – invite singers to play live events so that people with like who are
the fans of this song could actually enjoy more music related themes at this specific
place. And then the third one is actually to increase its profitability from the financial
standpoints. So if for example we would want to have a higher profit margin by increasing
their product, or the price of the products and the services that we offer, and then reducing
the cost at some point, then the total profit margin we are going to make is going to increase,
which would further attract, or which would further increase the evaluation of this target
firm. Great. We’re almost out of time, and the
CEO of the PE firm, your friend just called you. So you decided to just let them know
what you’re thinking either way. What do you think? Should you tell them about the
deal, or should you just tell them where you’re sitting and you’re having a good margarita.
Which way are you going to go, and why? So I would recommend our client, or my friend
actually purchase or acquire this margarita chain restaurant for the following reasons.
First is based on the financial analysis, we are seeing that the firm or the margarita
restaurants is making on average 40% of the profit margin, which is really promising number
in the restaurant chains. And, and this and the second reason is because the margarita
restaurant is not only a traditional restaurant that only offers food services, but it also
has this specific theme of that is attractive to a specific group of customers. That said,
this restaurant itself has a specialty in it, and it’s different from the other restaurants
like other luxury restaurants that we are aware of. And a third one is even if with
this COVID, current COVID situation that’s have created a lot of burden on retail services
or the restaurant services, I believe that if we are able to launch different products
and launch different services to remote consumers, we are able to maintain this profit margin
around 40%, which is really promising. And at the same time, we can offer design different
strategies to encounter the COVID situation. So however we do have to consider some risks.
For example, the COVID situation is definitely a risk, like at the level of flexibility that
the company is able to, you know, is able to adapt to the situation would be the key
issue in our consideration. And the level of services that we are going to offer and
then change it that we are going to make in this organization is definitely the key consideration.
For the future, for the future I would suggest that if our client, or if my friend wants
to pursue the acquisition, then I would suggest that you look into the possible like consumer
changes – like changes in consumer behaviors in a COVID situation. For example, if no people
want to go dine out in a luxury restaurants anymore, or if they still want to do that.
And some of the products and services that this – that our friend can design for this
margarita restaurant to encounter this COVID situation. Amazing. Okay Yuan, thank you so much. You
can relax. How is that? Was that what you wanted? Was that hard enough, and was it interesting
enough? That was interesting in that I was not totally
sure about, you know, like what the restaurants were. Or actually margarita, what is that.
So I was a little bit stuck at first, like I don’t know what’s that for and then
I don’t know how it is really to do the case. Yeah. Absolutely. Yeah. And when I – And when you go home after the case, you should
definitely look up Margaritaville. You’ll see it – you’ll see it. And I don’t
know how many people on the call, do you guys want to just throw up your hands if you’ve
ever been to a Margaritaville? The last time I went to one was maybe like 15 years ago.
So as you can tell I was feeling a little spicy this morning when I was writing this
case, making it super fun. Yeah, yeah. So Yuan, I want to give you some feedback,
but you know what, I thought that from a mechanic’s standpoint, you are so strong. So I actually
pushed you into the nuance pretty quickly inside the case. And if I had to bifurcate
the performance, I would say strong mechanics, nuance missing. And I really wanted to talk
about how to add that nuance. I also just have some tactical pieces that I think could
be really helpful. You asked at the beginning in our pre-call conversation, you want to
be a little faster, you want to make sure that you’re moving through things quickly.
And I have two ideas for how you can do that. So I just want to go to the case and give
you some of that feedback, and then you can ask me afterwards if there’s anything in
particular you want me to elaborate on a little bit more. Great. So first of all, in your opening, you took
5 ½ minutes to open the case, and I think part of that was that you didn’t want to
ask, but you did want to ask like what is Margaritaville, right? And so here’s the
way that you ask a question like that. I, you know, you mentioned that it was a restaurant.
When I think of restaurants, there is a couple of different kinds, right? There’s fast
food, there’s fast casual, and then there is full service dine-in, and I’m thinking
that this is – and just pick one, even if it’s the wrong one. But I want you to kind
of right away try to get to the point at the beginning of the case. Sometimes you guys
are going to know exactly what it is. And some of you are like Margaritaville, got it.
And some of you were probably like no idea what she’s talking about. And so depending
on the case situation, that’s going to be you. So just, you know, right away ask that
question. However, the other thing that you did is you started asking me questions before
you recapped for me, and I felt like that it didn’t get you into the flow enough,
where you could just tell me what you heard, and give yourself a little more time. So just
reorder that, right? Recap first, even when you’ve got to this big looming fact question,
and then come back to me afterwards and asked me all the questions. Okay? Yeah. So that needs – that timing needs to be
I a max of four minutes, and that 5 ½ minutes just started eating into your time right there
at the beginning of the case, which made me uncertain about you, and made me feel like
I wasn’t sure what was going to happen next. In your structuring, you nailed it. Two minutes
to build the structure. I thought your structure was really good. I think we could make it
from a B+ to an A with just two small tweaks. Number one, I think your first category was
too large. You had overall attractiveness in that category. I kind of regrouped it into
like demographics and competition. I honestly think that competition for restaurants is
kind of a weird thing because it’s a very, very highly fragmented market. Competition
also includes at home cooking, and a lot of other things. So I didn’t love that section.
If I was going to eliminate one piece of it entirely, I would’ve done that. So I think
you could’ve presented me less, first of all, or presented that in a bigger chunk at
the beginning – or sorry, smaller chunks from the bigger chunk at the beginning. The
second thing is that I felt like you lost your communication of the structure after
the beginning. And so in a virtual environment, I need an incredible amount of detail where
you’re saying like in the first category, I have three things that I want to look at.
The first thing is, the second thing is, the third thing is. And so you just kind of start
listing out and explaining. I wasn’t sure where the list was starting and the explanation
was beginning. And so it came across, even though at the beginning you told me you had
three categories, I had actually – I didn’t even know when we were moving from category
to category. And that took you 5 ½ minutes. So that should be two. So I need a much more
direct communication of your structure right at the very beginning, especially for McKinsey,
okay? Yes. So those were two places where right at the
beginning where I felt like gosh, we could have gotten 4 to 5 minutes back, and also
gave – sorry, given a stronger impression right at the very beginning. Okay. Then the
first question I asked you was a creative question. That is your weakest part of the
case. Those are the places where you need to practice. Thinking on your feet and talking
through the thinking on your feet. So what you did is you kind of rambled for a while,
barely came back in structured, and then I had to ask you actually in both situations,
that one and at the end of the case, like okay, what are we doing. What is even on your
paper right now what’s happening at the moment. And so I really, really wanted a lot
more clarity from you. So the question I asked you at the beginning was why this restaurant,
why now. And you – like and I get it, but that’s not an immediate easy question to
ask. But what I’m asking for is I’m looking for your like strong gut instinct, right?
And that is why I asked you at the end of the structure yes or no. Which way do we go.
And by the way, in a yes or no case, in a market entry case, profit scenarios case,
or and M&A case, you always would want to have it that ready to go. And state that at
the beginning. But yeah, I think that part, and the last part, my recommendation for those
would just be start out by categorizing like what you would think about, and then go back
and fill out your categories. And write while you’re talking. So give yourself the pause
of the time when you’re writing to collect your thoughts a little bit. Because you came
up with good ideas. You said special theme and timing at the beginning. In the end, I
actually wasn’t sure exactly when you are moving on from one thing to another, but it
was like increased profitability, open new stores. There were a – like you kind of
got to where I was wanting her to go, but again, it wasn’t just communicated super
clearly. So I would go through reps on those creative questions. Like just have somebody
ask you hey, what’s your gut feel. Why should we do this, what are three things we should
be thinking about. Like really pushing you. And do an hour of those kind of questions
and I think you’ll breakthrough that really quickly because the substance of what you
came to is fine. It was just the process lsst again in the process. Yeah, I think I – I think – I think in
the beginning I missed the part that you want to consider acquiring this business at this
moment. So that’s why I said yes. But you said at this moment I said no. At this moment
I probably should say no. No, no, I liked the yes. Actually, most M&A
cases bias yes so if you’re ever not sure just pick yes. It’s a great way to start.
So that wasn’t a bad choice. It was more that I – what I was pushing you for there
and throughout the case was just more clarity, right? Yes, no. I was looking for that kind
of like I know you have a gut feeling here and I don’t want to go through all of the
mechanics of the math right now. Speaking of math, wow. Well done. You were flawless
in terms of your calculations, and you gathered all the data, you caught everything that I
was trying to hide away from you. And so I thought the math was really a strong suit.
You do have a speed thing though when you’re collecting the data. So when you’re doing
the math, there were one or two shortcuts that you could have taken to make them a little
bit simpler. Anytime you are repeating like multiplying three things by something, just
add those things up in the beginning, or weight to them whatever you need to weight them by
and then get those calculations summed together. But that wasn’t – that for me wouldn’t
have made the difference. But if you at the beginning had just kind of gotten to the point
a little bit more quickly, and also – I’ll just give you one emphasis point here. Like
give me an interpretation as you’re repeating the data. So for example, I told you after
you asked, right, 10% of people purchase an item of merchandise. Tell me whether you think
that’s low or high, right? Immediately this data is giving you the opportunity for the
next thing, increasing the chance for the future. So one of the options is get more
people to buy merch, right? Get more people to buy drinks. Get more people to buy multiple
drinks. And so I have like a very long idea list of the way things they said they could
drive some of that kind of behavior. And the data at the beginning gives you that. So if
you can make the connection between the data and insight before you even start the math,
that’s kind of it A candidate tactic there. Throughout the math, again, I really felt
like you were in control and understood it, thought the profit was good, gave me good
reasoning. The final thing on the math is just I felt like your insights could’ve
gone a little bit deeper. Like this looks amazing. You even mentioned like I feel like
the profit is really good. It is, it’s great for restaurants. You know, there are a lot
of things that I felt like you kind of did but could have just gone a little bit deeper
on in terms of insight. But we already talked a little bit about the second creative question,
and then your last – the closing of the case was about two minutes and 40 seconds.
Too long at the end of the case. And here’s where I felt like the nuance was missing the
most, right? It was your friend calling. I think you could’ve been structured but shorter
and made it a little more informal. And that was like a complete – this is the CEO situation,
and I was actually intentionally in the case looking to break you out of that and try to
see you in a more natural sense how you would communicate. So the risks and the other things
at the and, like they are nice to have’s, but in this case I probably would have truncated
those. Okay, what questions do you have for me? I – I think, yeah. So initially you probably
need to draw my hypothesis on – on my intuition, whether or not I would suggest my friend to
acquire. But what if like in the end, initially I thought it was yes, or it was no. Like at
the end, I would just realize it’s no. So does it matter like I just turn around my
answer? You change your mind? Yeah. No. But you – you’ll need to just defend
it, right? There’s three parts at the end. It’s the recap and the recommendation, as
well as the next steps. So your recap in your recommendation you can put together. You can’t
be like we found out that it was a great profits, and there was a lot of upside, and then I
say no. Right? Like that would really come out of left field. So you would need to explain
that. I think there’s – part of why I make cases like this is I do think there’s
an interesting case for this being a no. One of the things that you’ll find that’s
actually nuanced about Margaritaville that you may or may not know is that it’s a very
tourist-centric kind of – you know, it’s at Universal Studios, and on Miami Beach,
and like in places that are very heavily tourist affiliated. They don’t have a lot of repeat
business. Right now tourism is really slammed in COVID. What does that mean. So, you know,
I would just want you to justify whatever you said. And the stronger you are, the more
I’ll push back on you. So if you had been a little stronger throughout the case, I would
have pushed back even more to really understand why you thought about what you were thinking.
So I kind of – I backed off a little bit because I didn’t want to throw you into
too much of a tailspin. And when you feel the interviewer doing that, you know that
you’re – you actually need to ramp up your clarity, ramp up the directness of it. Yeah, correct. Yeah. I think I was – while
I was doing the case as soon as you pointed out that we want to do this, or my friend
wants to do this business at this current time, then all of a sudden I feel like I probably
should say no, and then even at the very end of the case, I was like yeah, even if we have
this – even if we have this good profit margin and historical like good numbers, I
still wouldn’t say that I would recommend a friends to buy this business. This is too
risky, and especially it’s my friend, then I probably don’t. So I was a little bit
hesitant like doing it like speaking out my gut, yeah. Well, I actually – I think it’s a great
business. I really like it. I’m not a big restaurant fan, but I was – when I was doing
some of the research for the case, restaurants get about a 10X multiple. I actually haircut
it because of COVID to an 8X multiple. You know, money is really cheap right now and
one of the big strategies here would be opening more stores. So if you can get that, you know,
6.5, I think $6.5 million per store and just opened 10 more stores, your evaluation goes
up 1.5 times. What does it cost you to open up a store? I don’t know. That would be
another part of the evaluation that you need to think about. If you can drive more merch,
if you can do – there was, by the way, I don’t know if you are watching it, but there
was a flurry of interest that was coming in through the chat bar of people that were coming
up with cool ideas. One of them was why don’t you sell Margaritaville stuff inside grocery
stores. Like give people a sense of like the beach at home, and there were a lot of really
cool ideas that I think are actually outside opportunities for an organization that, you
know, what they do is like they take cheap money and they – they do something. They
take the leverage out. They take the money and they pour it into the growth of the business,
and in a situation like this, opening new stores could be great. Opening new stores
where other restaurants may have closed because of COVID challenges would also be great. You
know, there are some opportunities. But again, you can say yes or no. I just think that there
were some things to talk about there. The final things I just want to say is I did actually
have a valuation number for you if you had said that. So I had an EBITDA multiple if
you said that you wanted to do a multiples valuation, which should always ask for inside
cases because it’s a very simple multiplication. You just take the number that you already
had, and then you multiply it times the multiple that I give you. And so that multiple in this
case was eight, which is how I got that $1.2 billion number. I also had a cash flow discount
rate model for this, and my rate of – of the, sorry, the discount rate was 10%, and
the growth rate was 2%. So the net of that was .08. And so you would’ve had to divide
the cash flow or what we proxy was the EBITDA by .08 which gives you $1.1 billion as the
estimate. And so I was actually in that situation looking for something a little bit more tactical
but just in case people that are listening or watching if you wanted that information
inside the case, that was what I did. Great. All right, so let me – do you have any other
questions, otherwise I’ll open it up to the rest of the audience. I think just one last question. In terms of
like delivering a clear structure or a structured answer, what suggestions would you – yeah,
what suggestions would you have for me. Structured at the beginning, or structured
at the end? I would say like structure in the creative
question. Oh yeah. So for the first one, the first question
was just like why – why a Margaritaville, why now, right? So I would start with is I
said yes. So I’m to go off of that and say what makes this yes now. And that’s what
we’re going to test for inside the case. And then I would’ve gone specifically into,
right, what kind of locations are we in. But it would have just been the first three things
out of the brain. When I think about what’s being hampered for, you know, can we do take
out, what is our utilization now, what kind of locations are we in. Are they – are tourists
there. Are people still going to restaurants, do we have to reduce our capacity. Like there
are a lot of questions that we could’ve asked, but the way that I just asked them
isn’t how I want you to ask them. What I’d want you to do is come with one, write it
down, right? Think about it. Come up with the two, write it down. And then recap for
me however many you come up with. Usually three is the target for something like that.
And then in the end, same thing. Okay. So how do we make a return. Gosh, I’ve never
thought about that before. But if I were an investor, how do I – how do I make a return.
I create more value for the company. Which means more profit. So let’s just talk through
how we would make more profit for the company. First, you went for top line. Great. So here’s
how it would grow the revenues of the company. And then here’s how I would the cost of
the company, and then there’s kind of another which is just like same store openings, right?
So opening new stores in new places. But yeah, just the same thing. Write down one thing,
think about it for a second, and then go on to the next thing so that it appears a little
bit more organized. Okay, sounds good. Yeah, I think these are
all the questions I have. I really appreciate this time. Like your time. Amazing. So you are more than welcome to stay,
but I know that people might have questions either about the case, or about my feedback,
or about your performance. But the last thing I just want to say is thank you so much. I
really enjoyed that. I think that with a couple of these tweaks, like I mentioned I thought
your process was super solid, you remained controlled and optimistic throughout the case.
It seemed like you were having fun solving it. All of those things are a really big deal
to me as an interviewer. And so just keep that enthusiasm as you are working on refining
your final process. Great, thank you. Good luck.
