Because the students have switched from buying higher margin coffee more often to lower margin snacks et cetera that might serve as dinner? That might explain higher sales, but lower profits?
I don't know, I'm new at this.
overcrowding by students buying low margin products have turned away the stores older clientele that buy higher margin items
Both solaris and terp26 got the gist of the idea.
To do this properly during a case interview, though. You need to talk through the problem in a structured manner. So the way to do this in a case interview is say something like this.
Well, there are three buckets of reasons that profits can decline:
1. Lower sales
2. Higher costs
3. Product/sales mix shift
(Or a combination of the three)
Let's investigate all three. [Now you would ask questions to the interviewer]
1. Has the shop's revenue gone down despite the new business?
[In this case, the interviewer would probably say no or tell you it doesn't matter]
2. Moving on, have the costs of the shop gone up? Maybe it takes more people to serve the extra people?
[In this case, the interviewer would probably tell you that yes, the costs have probably gone up, but those costs are negligible]
3. OK, then there must be a product mix shift. Perhaps customers are buying lower margin products?
[Most likely, the interviewer here would push you further and get you to zero in on the specific problem, but you've essentially cracked the case at this point]
So the specific answer in this case was...
The coffee shop was selling very high margin drinks before the strike. After the strike, people have started using it as a diner, and food such as sandwiches are very low margin. Hence, the lower profits.
Depending on the firm, the case would either be over at this point. Or the interviewer may ask you to brainstorm ways of solving the problem. Again, doing this in a structured manner is the key -- revenue, costs, product mix:
1. How do you increase revenue w/o raising costs?
2. How do you decrease costs w/o lowering revenue?
3. How do you drive customers to higher margin products?