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Case Study:  Costco Wholesale in 2008: Mission, Business Model & Strategy
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Case Study: Costco Wholesale in 2008: Mission, Business Model & Strategy

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Case study from the book: Strategic Management, 18th edition, Thompson and Stickland

Case study from the book: Strategic Management, 18th edition, Thompson and Stickland

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  • Costco CEO Jim Sinegal invented the wholesale club concept in 1983, and a new industry was born. Wholesale clubs were a revolution in retail. They quickly spread throughout the United States, Canada, and Mexico and are quickly expanding into other countries. By the end of 2008, there were 550 stores in 40 states and 7 countries, with 54 million members. By offering quality merchandise at a low price, they attract mostly affluent shoppers.
  • Costco CEO Jim Sinegal invented the wholesale club concept in 1983, and a new industry was born. Wholesale clubs were a revolution in retail. They quickly spread throughout the United States, Canada, and Mexico and are quickly expanding into other countries. By the end of 2008, there were 550 stores in 40 states and 7 countries, with 54 million members. By offering quality merchandise at a low price, they attract mostly affluent shoppers.
  • From the beginning Jim wanted Costco to be on a first-name basis with everyone. Costco is about giving customers the best value possible.
  • Business Model: Profit at very low margins is the name of the game. Low prices + Limited selection (around 4000 items) + Wide range of merchandise categories (tires to baby wipes) creates the rapid inventory turnover. Volume purchasing + efficient distribution + reduced handling of merchandise + no-frills warehouses = Operating efficiencies. Low Cost/Low PriceLimited selection of top quality merchandiseWide range merchandise categories“Treasure Hunt” shopping environmentNo frills, self-service warehouseRapid inventory turnoverVolume purchasingOperating efficiencies
  • Driving Forces: e-commerce is still relatively new for Costco and only accounts for 3% of sales. While the domestic market is increasingly saturated, the international arena is wide open. Rising costs are a big concern for an industry that is always striving to cut costs.: Costco faces a tax proposal in Montana. The recession is affecting everyone’s lifestyle. Consumers are concerned about the environment and they want to shop at stores that are environmentally friendly.
  • Key Success Factors: Internet sales are increasing. Vast network of retail locations with efficient distribution system, No Frills warehouse, Cost cutting efforts, only stock bargains, Treasure hunt merchandise, No-hassle return policy, word of mouth advertizing.
  • Employment Objectives: First, hire great people. Jim said, “If you do right by the people working for you, they will build you a successful business.”
  • Management objectives: Always promote from within.Training happens at all times, not just in the classroom. Model the behavior you want from employees.
  • Business Objectives: Don’t try to be too much to too many, you’ll dilute your business model and lose focus. Know on what level you compete – For Costco they compete on quality and price. They want the highest quality merchandise for the best value. Probably why they attract the more affluent shoppers.
  • Growth Objectives: Run the business for long term sustainability. Sinegalwants Costco to be here long after he’s gone. Open 50-60 new locations per year. Keep Internet sales growing.
  • Marketing Objectives: Jim believes that word of mouth is the most powerful marketing tool there is. It sounds better when somebody else talks about you than when you talk about yourself. Costco still has no PR department and probably never will.
  • Ethics Objectives: Obey the law, Treat customers right, Treat employees right, Treat suppliers right
  • At the end of 2008, there were 550 Costco’s in all. Costco is in 7 countries. One of their next goals is to expand into Europe. There are plans for 20 more Costco’s in Mexico. Costco’s expansion outside the United Stated is financially successful. Because in the case, over years, it shows a steady growth over years in sales and operating income of Costco’s warehouses which are outside United States.
  • Strengths: low price, strong brand name, excellent merchandise, exceptional employees, huge membership base, economies of scale, efficient distribution and operation. Weaknesses: CEO will soon be gone, burden of high wages and benefits, plus low margins.Opportunities: Costco has become a clearance for other retailers who can’t sell their goods (like jewelry), so more bargains for Costco buyers. More people joined to save money. There are tremendous opportunities in expanding foreign markets, such as China and India. Threats: Fierce competition, price competition from other retailers, cannibalization due to domestic market saturation, possible political complications in foreign markets.
  • “I want to retire here. I love it here.”- an employee of Costco said like that.
  • The size of circle is based on revenue. Costco has the highest revenue. A lower operating margin equals a lower markup on merchandise. A lower operating margin is consistent with charging lower prices and running a leaner (no-frills) operation. Costco has the lowest operating margin and Sam’s club has the most locations.
  • Inventory turnover is a biggy in the wholesale club industry. Costco has the best. Costco has a good ROI and growth rate. Costco’s goal is very low margins. They got beat by BJ’s. Perhaps because of lower pay and benefits.

Transcript

  • 1. Case 2 In 2008: Mission, Business Model, & Strategy
  • 2. Our Presentation at a Glance • About Costco Wholesale, Mission & Vision • Costco’s Business Model, Driving Forces, KSFs • Costco’s Strategies & Objectives • Industry Analysis-SWOT, Porter’s 5 Forces, Life Cycle • Competitive Analysis- Strategic Group Map • Financial Analysis • Recommendations
  • 3. Presented By: Group -A • • • • • Sunanda Sarker Md. Iftekhar Alam Nurul Afsar Md. Foysal Ahmed Md. Hasnat Khan Rezvi - 161201 161202 161203 161204 161205
  • 4. Purpose of this Case Study To examine Costco’s business structure and strategy and how those relate to industry success
  • 5. Case Summary • End of 2008 – $71 Billion in Sales – 550 stores world-wide • 54 million members - Avg yearly income $70,000 • Quality merchandise • Low price • Rapid inventory turnover
  • 6. About Costco Wholesale • Eighth Largest membership retailer in the world and Fourth largest retailer in the U.S • CEO: James Sinegal • Headquarters: Issaquah, WA • Inception: Seattle, WA 1983 • Founders: James Sinegal & Jefferey Brotman
  • 7. Vision & Mission of Costco Wholesale Mission: Continually provide our members with quality goods and services at the lowest possible prices. Vision: • “Our business is to give the customer the best value we can.” – Jim Sinegal,CEO & Founder of Costco • “We're going to be a company that’s on a first-name basis with everyone.”
  • 8. Costco’s Business ModelAppealing or Not Low prices Volume purchasing Limited selection of quality merchandise Efficient distribution +Wide range of merchandise categories Rapid inventory turnover Reduced handling of merchandise +No-frills, self-service warehouse Operating efficiencies Rapid inventory turnover +Operating efficiencies Profit at a very low gross margin
  • 9. Driving Forces • Internet • Technology – green technology is a concern • Market saturation • Legislation- proposed tax on big-box stores • Rising costs • Recession
  • 10. Key Success Factors • Internet sales • Vast network of retail locations – cross-docking • No-frills warehouse • Ongoing effort to cut costs • Only stock bargains • Treasure-hunt merchandise • No-hassle return policy • Word of mouth advertising
  • 11. Corporate Strategy • Cost strategy – Penetration Pricing – Below the Line Promotion – No frills • “Diversion” Buying Strategy – “Treasure hunt" shopping experience
  • 12. Chief Elements of Costco's Strategy • Low prices • Limited product lines and selection • Treasure hunt shopping environment
  • 13. Employment Objectives • Hire great people • Treat them well • Give them good jobs • Do right by them
  • 14. Management Objectives • Always promote from within • Training happens constantly • Grow our own talent • Model what you want from your employees
  • 15. Business Objectives • Don’t try to be too much to too many • Know on what level you compete • Know your customers – why they do business with you • Stay focused on your core business
  • 16. Growth Objectives • Run the business for long-term sustainability • Open new stores – 50-60 new locations per year • Keep Internet sales growing
  • 17. Marketing Objectives • Word of mouth only • No PR department, ever?
  • 18. Ethics Objectives • Obey the law • Treat customers right • Treat employees right • Treat suppliers right
  • 19. Costco’s Geographic ExpansionSuccessful or Not Costco opened 127 new warehouses in fiscal years 20052008
  • 20. Industry Analysis • SWOT Analysis • Porter Analysis • Life Cycle
  • 21. SWOT Analysis S O Strengths  Low Prices  Strong Brand  Operating Efficiency  Exceptional Workforce  Strong membership Opportunities  Appeal to conscientious shopper  Expand into foreign stable markets  Mergers & Acquisitions  Massive supplier pool W T Weaknesses  Burden of high wages paid to workers  CEO’s retirement  Low price margins  E-commerce activities  Small Marketing budget compared to discount retailers Threats and Super Markets  Aggressive price competition by rivals  Political complications in foreign markets  Cannibalization due to domestic market saturation
  • 22. Porter’s Five Forces Model for Costco Substitutes Strong threat •Good substitutes everywhere •Price not significantly higher •Comparable product features •More variety of features •Low switching cost Suppliers Weak bargaining power •Many suppliers •Low switching cost •Many substitutes exist •Large quantities are needed Competing Sellers Fierce competition •Costco is on top •Quality is slightly better •Buyer demand is growing •Buyer’s switching cost is low Potential New Entrants Low threat •Small pool of entry candidates •High barriers to entry •Expanding market •Attractive profits Buyers Weak bargaining power •Some switching costs •Large membership base •Costco has the best value
  • 23. Life Cycle of Costco – Maturity Stage • Costco is in the mature stage • Though profitable, slower growth in sales • Strong brand awareness • Shares market with established competitors
  • 24. Competitive Analysis • Costco's main competitors are Sam's Club, BJ’s Wholesale Club, Other retailers. They share a similar business model, selling high volumes of merchandise at low prices in a membership-only warehouse club. Each company sells a similar array of general merchandise, including food, apparel, and gasoline. • Sam's Club operates 591 warehouse clubs nationwide and earned $44.4 billion in revenue in 2007. • BJ's operates 177 warehouse clubs across 16 states in the eastern U.S. In 2007, the company earned $9.0 billion in revenue. FY 2008 Costco vs. Competitors Company Costco Sam's Club BJ's Wholesale Club Comparable Revenue Net Income Operating Store Sales (Billions) (Billions) Margin (Decline) Locations $70.9 $1.3 2.7% 6.0% 512 $46.8 N/A 3.4% 4.8% 602 $10.0 $2.3 2.3% 9.4% 180
  • 25. Competitive Analysis • Greater benefits for Costco employees – Wages: $17/hr on average – Health Insurance : 90% premium coverage • Lower price margins
  • 26. Costco’s Strategic Group Map P Pricesmart Inc. Operating Margin Higher Sam’s Club BJ’s Costco Lower Few Many Number of Locations Note: Circles are drawn roughly proportional to the sizes of the club chains based on revenue
  • 27. Financial Analysis • Costco earned $71 Billion in revenue in 2008 – 12.5% increase from 2007 • In 2008, Costco’s operating margin reached 2.77% • Costco’s net income in 2008 was $1.28 billion dollars – an 18.5% increase from 2007
  • 28. Financial Analysis FY 2008 Costco vs. Competitors Company Comparabl Net e Revenue Income Operating Store Sales Location (Billions) (Billions) Margin (Decline) s Costco $70.9 $1.3 2.7% 6.0% 512 Sam's Club $46.8 N/A 3.4% 4.8% 602 BJ's Wholesale Club $10.0 $2.3 2.3% 9.4% 180
  • 29. Financial Analysis-Key Ratios Inventory Turnover (TTM) Costco ROI 5 Yr Avg Sales 5 Yr. Growth Rate Gross Margin 5 Yr Avg Net Profit Margin 5 Yr Avg 11.93 11.01 11.24 12.40 1.54 Industry 2.47 7.59 15.11 24.66 2.74 Wal-Mart 8.73 13.80 9.41 23.37 3.59 10.27 11.11 8.42 10.37 1.41 Target 6.64 6.48 9.10 30.90 4.23 Best Buy 6.61 19.74 12.89 24.29 3.29 Sears 3.36 7.17 15.00 27.54 2.23 Pricesmart 9.20 14.12 15.54 16.14 0.40 BJ’s
  • 30. Recommendation & Conclusion • Accept food stamps • Acquire BJ’s Wholesale Club • Keep expanding overseas • Be more ethical • Continue to add services • Industry Leader strategy – Better promotions • Improve e-commerce • A little good PR better than no PR
  • 31. Any Question?