Case Interview Fundamentals: Lesson 6 [Drill: Mattress market in Brazil] — Transcript

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1. 0:00Hey guys, how are you doing? This drill,
2. 0:02we're going to estimate the size of the
3. 0:04mattress market in Brazil.
4. 0:06Remember, it's very important that you
5. 0:08do this drill before you watch my
6. 0:10answer. It's really important that you
7. 0:12get some practice and not only watch
8. 0:14examples. Okay, so
9. 0:17uh the case question is exactly this,
10. 0:19what is the size of the mattress market
11. 0:21in Brazil?
12. 0:22And
13. 0:24come up with any scope clarification
14. 0:26questions you have, then listen to mine,
15. 0:28and then go on and
16. 0:31do the rest of the drill and listen to
17. 0:33my answer and compare it to yours, okay?
18. 0:35So,
19. 0:37what I would like to ask here
20. 0:39is basically are we trying to are we
21. 0:42trying to estimate the market of
22. 0:44mattresses only to consumers or are we
23. 0:46trying to estimate them to organizations
24. 0:48too? Cuz it comes to me that
25. 0:52there might be a relevant market in
26. 0:54selling
27. 0:55uh mattresses to hotels and to
28. 0:57hospitals.
29. 0:58And in this case, we're going to focus
30. 1:00only in consumers. If you want, you can
31. 1:05do your estimation and consider hotels
32. 1:08and hospitals too. It would be a good
33. 1:10idea, okay?
34. 1:12Now,
35. 1:13let's move on to structure. I'm going to
36. 1:15structure my problem here.
37. 1:17Um only watch this after you've done
38. 1:19your full estimation. So,
39. 1:22the mattress market
40. 1:24uh in Brazil in dollars per year should
41. 1:27be the number of beds sold times the
42. 1:30average price per bed. And the number of
43. 1:32beds sold is the number of beds in use
44. 1:36times the replacement rate and the
45. 1:39growth rate of the number of beds in
46. 1:41use. So, what does this mean? The
47. 1:44beds are only sold
48. 1:46either to replace old beds that are
49. 1:49there or to get new beds for people who
50. 1:52either didn't have beds before or used
51. 1:55to share a and now won't share a bed
52. 1:57anymore. Uh let me let me just draw this
53. 2:00so that I can give you a clear example.
54. 2:02If you were doing this to the
55. 2:04interviewer, you could draw it to him if
56. 2:06you wanted. So,
57. 2:08this rectangle is the number of total
58. 2:10beds in use.
59. 2:12And
60. 2:13some of those beds are going to be
61. 2:15replaced and thus they are going to be
62. 2:18sold to these consumers who are
63. 2:20discarding their beds. So, those are the
64. 2:22beds that are going to be replaced and
65. 2:25X% here is the replacement rate of old
66. 2:27beds. But, there's also growth. So,
67. 2:30people who did not have a bed before
68. 2:32will now have a bed. Either those people
69. 2:34didn't exist and were now born or were
70. 2:36babies and they were now grown-ups or
71. 2:38they were too poor to have beds or
72. 2:40anything like that. Okay?
73. 2:43And so,
74. 2:44all that painted area is the market, the
75. 2:47beds that are going to be sold and the
76. 2:49gray rectangle or the white right rect-
77. 2:52white rectangle are the beds in use
78. 2:55today. Okay?
79. 2:57Uh just one more thing that you should
80. 2:59be aware of.
81. 3:00When if you're doing an estimation and
82. 3:02it comes to you that using the
83. 3:05replacement rate and the growth rate
84. 3:06would be a good idea, don't just use
85. 3:09these terms like the interviewer is
86. 3:10going to know them. They they're
87. 3:12something that we created. Uh of course
88. 3:15they make sense, but they won't make
89. 3:17sense to anyone unless you explain them.
90. 3:19So,
91. 3:20you can use those terms, you can just
92. 3:22use different words, but do explain them
93. 3:24thoroughly if you're using anything like
94. 3:26this. Okay? Now, moving on. The number
95. 3:29of beds in use today
96. 3:32are the number of people who use beds
97. 3:34times the number of beds per person.
98. 3:37And the number of people who use beds
99. 3:39are the population times the penetration
100. 3:41rate of beds.
101. 3:43So,
102. 3:44now that we've gotten this out of the
103. 3:45way, it's time to start choosing
104. 3:47assumptions.
105. 3:49If you don't know the Brazilian
106. 3:50population, that's 200 million, You
107. 3:53could have asked the interviewer, they
108. 3:54would have told you, you could have
109. 3:55researched since you don't have an
110. 3:57interviewer in front of you while you're
111. 3:58doing this drill. Um the penetration
112. 4:01rate of beds, so
113. 4:03I believe that very poor people
114. 4:06won't have mattresses or won't change
115. 4:08them at all.
116. 4:09So, I think I will use
117. 4:13the population below poverty line in
118. 4:16Brazil as the population who does not
119. 4:18have mattresses. So, 5% of population is
120. 4:21below poverty line, 95% is the
121. 4:24penetration of beds. Now, two beds per
122. 4:27person. So,
123. 4:29of course, some people are poor and will
124. 4:31share bed or something like that, but
125. 4:33I'm going to uh disconsider those. I'm
126. 4:35going to consider they are
127. 4:37uh among the 5% that don't have beds or
128. 4:39don't change beds.
129. 4:41And I'm only going to think about
130. 4:43uh couples and
131. 4:46um
132. 4:47single beds and and couples. So, and
133. 4:51double beds. So, I think that around 50%
134. 4:55of the population is in stable
135. 4:56relationships. So, 50% of the population
136. 4:59has half a bed each person and 50% has a
137. 5:04full bed for themselves. Of course,
138. 5:06there are people who might have more
139. 5:07than one bed because they have a spare
140. 5:10bed in their in their house or they have
141. 5:12a spare house or a spare room or
142. 5:13whatever.
143. 5:14Uh I'm not going to consider those
144. 5:16people, too.
145. 5:17So, I'm going to go with 0.75 beds per
146. 5:21person. Now, replacement rate and growth
147. 5:24rate. I'll start with the replacement
148. 5:25rate. So, this is exactly uh one over
149. 5:29the average lifetime of the mattress.
150. 5:31So, if a mattress lasts 5 years, you
151. 5:34were changing 20% of your mattress every
152. 5:37year or more specifically, 20% of the
153. 5:39mattresses are being changed every year.
154. 5:42And I know that I change my bed probably
155. 5:45every 3 years. I believe I do that more
156. 5:47often than average. So, I'm going to go
157. 5:49with an average lifetime of mattress of
158. 5:524 years. So, 1 / 4 is 25%
159. 5:56and the growth rate uh I'm going to go
160. 5:59with only the population change. So,
161. 6:01that's 1% and there's something that I
162. 6:04want you to notice here.
163. 6:06Uh the drivers for the growth rate are
164. 6:09the changes in the all the
165. 6:13assumptions in the number of beds in
166. 6:15use. So,
167. 6:17the change in beds per person is only if
168. 6:20the population suddenly has
169. 6:22uh less couples, more single people,
170. 6:25we're going to have we're going to be
171. 6:26selling more beds to those people. So,
172. 6:30there would be a growth in the total
173. 6:32beds in use. If the penetration of beds
174. 6:34grew because people got out of the
175. 6:36poverty out of poverty and bought beds,
176. 6:39then we would have growth in the number
177. 6:40of beds in use. And if the population
178. 6:42grew, that same thing was going to
179. 6:44happen. Since I'm assuming none of those
180. 6:47two happen, beds per person and
181. 6:48penetration of beds, those didn't
182. 6:50change.
183. 6:51Uh I'm just going to assume the change
184. 6:52in population of 1% as the growth rate.
185. 6:55So, I have a replacement rate plus
186. 6:56growth rate of 26%.
187. 6:59Now, to price per bed. So,
188. 7:03there are two different
189. 7:05uh effects that I want to consider here.
190. 7:08One is that we have single beds and
191. 7:09double beds and double beds are more
192. 7:11expensive than single beds and the other
193. 7:13is foam and spring mattresses.
194. 7:17So,
195. 7:18from my experience buying mattresses, I
196. 7:21know that a foam single mattress costs
197. 7:24around $100
198. 7:26and a double bed will cost around twice
199. 7:29the price.
200. 7:31Uh I know that a spring spring mattress,
201. 7:34double or single, will also cost around
202. 7:37twice the price.
203. 7:39And I said before in beds per person
204. 7:41that there is a two to one single to
205. 7:44double ratio in beds. So, that gives me
206. 7:46around 130 in average price only
207. 7:49considering single and double. And
208. 7:52assuming that there is a four to one to
209. 7:55one foam to spring ratio given that
210. 7:58spring is much more expensive, so less
211. 8:01people be able to buy them.
212. 8:03Uh that gives me an extra 20% in price.
213. 8:06So, this brings me to 156 on average.
214. 8:11Uh I'm just going to round this up to
215. 8:13160 if the interviewer allows me and in
216. 8:15this case the interviewer allows me.
217. 8:17So, now let's go to the calculations.
218. 8:20Uh
219. 8:21200 million times 95%
220. 8:24I really don't want to do this right now
221. 8:25cuz it's just
222. 8:26it's just going to complicate my life in
223. 8:28all other calculations. So, I'm going to
224. 8:30leave this 5% behind, so I have 20
225. 8:32million
226. 8:33200 million minus 5%. So, 200 million
227. 8:36times 75% will give me 150 million minus
228. 8:405%.
229. 8:41150 million times 26%
230. 8:46should give me
231. 8:48something around mhm
232. 8:53Uh well, it's going to be close to 1/4
233. 8:56of 150 million. So, that should be
234. 8:59around 37.5%.
235. 9:03Uh
236. 9:04plus 1%
237. 9:05that will bring me to 39% 39 million.
238. 9:10Uh
239. 9:10okay, so 39 million minus 5%. I want to
240. 9:14round both round this up not exactly
241. 9:16round this up, but change this to 40
242. 9:18million minus 75%.
243. 9:21So, if I take those two and a half
244. 9:22percent out of 40 million, I'll go back
245. 9:24to 39. So, I'm not really rounding, I'm
246. 9:26just changing the way I'm doing this
247. 9:28math.
248. 9:29And now the last step is 40 million
249. 9:31minus 75% 7.5%
250. 9:34times 160.
251. 9:36So, that will
252. 9:38bring me to 40 million.
253. 9:41Time Oh, let's do 40 million times 150.
254. 9:44That would be
255. 9:466 billion.
256. 9:48Um
257. 9:49Now, this is my ballpark. I know this is
258. 9:51my just my reality check. I'm going to
259. 9:53do this
260. 9:54uh
261. 9:55more precise right now. So, 40 million
262. 9:57times $100
263. 9:59100 Brazilian reais will bring me to 4
264. 10:02billion.
265. 10:04Uh 40 million times 50 will bring me to
266. 10:072 billion. And 40 million times 10
267. 10:10.4 billion. So, this should be
268. 10:146.4 billion. 6.4 billion minus 7.5%.
269. 10:20So, 7.5% of 7
270. 10:22will be
271. 10:24.5 around .5. And of 6.4 shouldn't be
272. 10:28much different than that. So, I'm just
273. 10:29going to use that value if the
274. 10:31interviewer is okay with that.
275. 10:33And so, I'm going to go with 5.9
276. 10:36billion. So, this is my final answer.
277. 10:38And just before I really state this as
278. 10:41my final answer, let me just make a
279. 10:43quick check and see if this makes sense.
280. 10:46Okay. So,
281. 10:47what uh I want to do here is see how
282. 10:50much of how much this is of the
283. 10:52Brazilian minimum wage. So,
284. 10:55uh 6 billion divided by 200 million is
285. 10:58$30. So, that would be around .25%
286. 11:02of the yearly minimum wage. So, that
287. 11:04sounds pretty reasonable to me.
288. 11:06Uh doesn't really sound too little cuz
289. 11:08there are so many other expenses that
290. 11:10that the people need that people have.
291. 11:12So, sounds quite reasonable.
292. 11:15If in this case you didn't know the
293. 11:16Brazilian minimum wage, you could have
294. 11:19just said
295. 11:20uh
296. 11:21oh, I would like to compare this to this
297. 11:23these 30 Brazilian reais to the
298. 11:26Brazilian minimum wage and see how much
299. 11:28that represents of it. Cuz if it's too
300. 11:29much, then obviously this is wrong.
301. 11:33Uh
302. 11:33if it's way too little, honestly I don't
303. 11:36think you'd really be able to tell.
304. 11:38Like this 0.25% could be too little or
305. 11:40it could be reasonable, and I'm not
306. 11:42really sure. But that's at least one way
307. 11:44of doing this.
308. 11:45Uh now I want to show you uh common
309. 11:48mistakes that could have happened here.
310. 11:50They happen all the time when I was
311. 11:51coaching candidates, and they happen all
312. 11:52the time in interviews. So, the first
313. 11:55one would be saying something like, "I
314. 11:57might replace my mattresses much more
315. 11:59often than the average consumer." So,
316. 12:01this might be overestimated by around
317. 12:03150% maximum.
318. 12:05And the problem here is that there is no
319. 12:07comparison. There's just an indication
320. 12:09of the most sensible variable. The same
321. 12:11thing would have been the most elaborate
322. 12:13candidate who would have made a mistake
323. 12:15saying,
324. 12:16"The assumption most sensible to the
325. 12:18final result and most liable to error is
326. 12:21the replacement rate in this case. So, I
327. 12:23dig deeper into that to reach a more
328. 12:25precise estimation." So, what those two
329. 12:27candidates are doing is not doing a real
330. 12:29reality check at all. They don't even
331. 12:31know
332. 12:33if this is wrong or if this number is
333. 12:34wrong or not, but they're saying, "This
334. 12:36is how I check if this number uh
335. 12:39this is how I would correct this
336. 12:41number." They don't even know if it's
337. 12:42wrong. And another common mistake here
338. 12:44would be to say, "Uh I've checked all my
339. 12:46math, and there doesn't seem to be
340. 12:48anything wrong with it. If you want, I
341. 12:49can check again, but my numbers are
342. 12:51correct, so I'm sure of my answer." And
343. 12:55like I said in the step-by-step, this
344. 12:57could be a candidate that actually
345. 12:59thinks that the interviewer wants you to
346. 13:00check their math. This could be a
347. 13:01candidate that just wants to show
348. 13:02confidence. That's not what you're
349. 13:04supposed to do. You're supposed to do a
350. 13:05reality check here. Okay? And you didn't
351. 13:08really say anything.
352. 13:10Um so, now
353. 13:13before
354. 13:14uh I'm done with this, of course, I want
355. 13:16to do a follow-up question here. Let's
356. 13:18assume that the interviewer asked you,
357. 13:20"Uh we did some research and found out
358. 13:22that the actual market size is 12
359. 13:24billion Brazilian reais. What do you
360. 13:26think is causing this difference? So, I
361. 13:29said 6 billion, the interviewer said,
362. 13:30"No, it's actually 12 billion." Where is
363. 13:33the problem? The first thing I'm going
364. 13:34to do here is get my structure.
365. 13:36And I want to look at it and see what
366. 13:38assumption is like the second candidate
367. 13:40who actually made a mistake in this in
368. 13:42their reality check.
369. 13:44And find the assumption that is most
370. 13:46liable to error and
371. 13:49that would change the most the result.
372. 13:52And in this case, it would be the
373. 13:53replacement rate.
374. 13:54So,
375. 13:55it is possible the replacement rate is
376. 13:58higher than that. Um
377. 14:00it's the it'd be hard to think of a
378. 14:02replacement rate of 50%.
379. 14:05So, I don't think this would explain
380. 14:07everything. We'd have to find something
381. 14:10in beds per person probably and probably
382. 14:12in price per bed, too. Maybe I
383. 14:14underestimated the price of a single uh
384. 14:17foam mattress or even one of those uh
385. 14:21ratios that I did. Okay?
386. 14:24Now, uh before I finish, I want to
387. 14:29remember remind you of three lessons
388. 14:31that you could have seen in this
389. 14:32estimation other of course than
390. 14:34practicing all of those skills and steps
391. 14:37that we've seen. So, number one,
392. 14:39uh
393. 14:41the driver of sale of durable goods is
394. 14:44replacement rate and growth of usage or
395. 14:47growth of used goods.
396. 14:49So, the
397. 14:52the
398. 14:53driver of sales of tires, for example,
399. 14:56is the replacement of tires in use. The
400. 14:59driver of sales of uh window frames is
401. 15:03the replacement of the window frames in
402. 15:05use. Same goes for cars and everything.
403. 15:08And then all durable goods. Okay, so
404. 15:10be aware of that and be aware of growth
405. 15:12rate, too, because
406. 15:14uh if you're building if uh specific
407. 15:17city or country is building several new
408. 15:19apartment buildings or something like
409. 15:20that, then there is going to be a growth
410. 15:22rate in the number of window frames, not
411. 15:25only a replacement rate, okay?
412. 15:27Now, number two, the growth drivers are
413. 15:30the same drivers for the total in total
414. 15:33of whatever in use. So, as I said, the
415. 15:37growth drivers for mattresses are the
416. 15:38changes in beds per person, population,
417. 15:41and penetration rate of beds. And the
418. 15:43same goes for all other durable goods.
419. 15:45So, if you have
420. 15:47uh
421. 15:48if you want to find the growth drivers
422. 15:50for
423. 15:51uh cars,
424. 15:52it they are the same the changes in the
425. 15:54drivers for the number of cars in use.
426. 15:57And same goes for all others.
427. 15:59And number three,
428. 16:01uh this is regarding the reality check
429. 16:03that I said in the in the ending, and
430. 16:05I'm going to repeat myself, but this is
431. 16:06really important. There must be a
432. 16:08comparison in the reality check. Don't
433. 16:11just check your math. Don't don't just
434. 16:12say what variable could be wrong.
435. 16:14Uh you need to have an actual comparison
436. 16:18of a number with another to make sense
437. 16:21of a value and to say whether it's might
438. 16:23be too large or might not. So,
439. 16:26do all possible efforts to come up with
440. 16:28a comparison. If you can't find a value
441. 16:31to compare it to, at least find a
442. 16:33figure. So,
443. 16:34uh the
444. 16:36you can say a number that you don't
445. 16:38know, but you would like to compare it
446. 16:39to, like I said. But actually do try
447. 16:42comparing something because if you
448. 16:44don't, you're not reality checking at
449. 16:46all. Okay? Well, I hope this video
450. 16:48helped you guys, and I'll see you in the
451. 16:49next one.