A brewery had annual sales of approximately £50 million and was suffering long term decline. The company had around 1,000 people in the brewery, warehouse and managed estate. They also had tenanted pubs. Their wholesale wines and spirits division, which accounted for sales of around £10 million, operated in a highly competitive market.
Although margins overall were shrinking, management suspected that some parts of the business were performing worse than others. But the gross margins of the different product groups and customer segments, as reported in the management accounts, and used as their key performance measure, all looked fine. Managers suspected that gross margins had become an inadequate measure of profitability, masking hidden costs. The company needed to understand its net margins - for all its products, for all its customers.
The objectives of the project were to create an ABM model of net product and customer profitability, train the company's staff in the principles and techniques of ABM and in model-building, and to draw conclusions from the results.
For each product, the contribution to profits was calculated by subtracting from its revenue all costs that supported it or that were driven by it. The results were presented graphically (as shown right) by sequencing the products by size of contribution, biggest on the left, and plotting the cumulative contribution of them all. Although a number of products were highly profitable, about 40% of them provided close to zero contribution - the flat part of the graph.
The last 28% were marginally losing money.
A similar exercise was carried out for each customer.
The result was a shock:
Only around 40% of their customers were profitable.
The rest were losing the company £875K.
100% of the profit delivered by only 15% of the customers
Further analyses showed up other interesting results, some of which were a real surprise.
The analyses in the model, showed management where specific actions would lead to healthy gains in profitability in the short to medium term. Further refinement of the model then delivered many pointers to subtle changes in the business that helped it continue to build a growing and robust bottom line.
This approach made all the difference. It uncovered where profits were being made or lost. It showed the underlying reasons for losing money and what we needed to do to turn unprofitable business around. And it gave management the confidence to drop whole segments of unprofitable business when there was no hope of turning it to profit.
The company needed to understand its net margins for all its products and for all its customers.