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Read the following scenario and answer the THREE questions that follow.

Sundaram Stores operated in a gated community, situated about 30 Kilometers away from the main town. The store owner Mr. Sundareswaran Pichaimuthu, or Sundaram as he was called by everyone, secured a space in the gated society through a competitive bidding process. The residents’ association, led by Mr. Thangamoorthy Selvaganapathy, selected Sundaram over three other bidders, based on his willingness to pay the highest rent. Desperate to augment his post-retirement income, Sundaram agreed to pay a very high rent, banking on the prospect of generating exceptional revenue from the gated community.
Sundaram was awarded the contract to establish the store, with provisions for a review every three years. Feeling elated during the meeting with the residents’ association to finalize the contract, he enthusiastically committed to offering a 15% discount on all groceries and stationary, cementing goodwill and reinforcing the partnership established through the contract. The association was delightedly taken aback by his generous assurance. Sundaram hoped to make up the difference through volume.
Although his sales were strong during the initial months, he soon realized that the SUV-owning residents of the gated community primarily made their purchases at large, branded retail chains in the main town. These stores offered deeper discounts, which he could not afford to compete with. However, gradually, Sundaram store became their go-to store for daily essentials and occasional urgent big purchases such as replacing a broken mixer-grinder.

Question 1 : While reviewing his monthly accounts, Sundaram realized that he was barely breaking even, primarily due to the substantial rent he was paying to the residents’ association. He realized that while his sales were stagnated, the rental costs were contractually scheduled to increase every three years. He was determined to do something to increase his profits.

Which of the following will be the MOST sustainable way to increase Sundaram’s profits?

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Video Explanation

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Explanatory Answer

Sundaram is barely breaking even; his sales have stagnated and we are looking for an option which is the most sustainable (able to be maintained over a long period of time). Removing all discounts and selling at MRP will help him increase his profits, and this strategy is sustainable as well.

Removing “all” discounts seems a bit severe, especially from a customer perspective. However, note that customers use his store mostly for daily essentials and urgent big purchases where discounts usually don’t play a big role. Additionally, the branded retail chains that the SUV-owning residents are visiting already offer deeper discounts, which he is not able to compete with.

A – This is not sustainable for Sundaram because of the repeated transportation costs involved in meeting residents’ demands.

B – This option can be quite appealing and makes the question tricky. But the chances of the association lowering his rent are very low because he won the contract in a competitive bidding process based on his willingness to pay the highest rent. Hence, this option is ruled out.

C – Providing further discounts will make matters worse for Sundaram, who is trying to increase profits. Further, going from a 15% to a 40% discount is a big difference and can significantly reduce his profits.

D – Sundaram’s problem of low profits is not due to lack of awareness. The set does not imply in any way that people in the gated community are not aware of his store.

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The question is " Which of the following will be the MOST sustainable way to increase Sundaram’s profits?"

Hence, the answer is 'He should remove all the discounts he was offering and sell at the maximum retail price.'

Choice E is the correct answer.

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